Global agenda: Richer than thou

Measuring wealth is always an objectively difficult and subjectively touchy issue.

By PINCHAS LANDAU
February 24, 2006 02:02
3 minute read.
money 88

money 88. (photo credit: )

Goldstein, an elderly Jew who for decades had been running a small shop, one day fell down the rickety old stairs from the gallery, where he kept his stock. He broke his leg quite badly and was clearly in considerable pain as they wheeled his stretcher to the ambulance. "Mr. Goldstein, are you comfortable?" asked the concerned young paramedic accompanying him. Quick as a flash, albeit through clenched teeth, the old boy shot back: "I make a living." Measuring wealth is always an objectively difficult and subjectively touchy issue - and not just for individuals. Figuring out which countries are better off than others, let alone why and how, is even more difficult. Indeed, economics started as a serious discipline with Adam Smith's "The Wealth of Nations" in 1776. In the intervening 230 years, it has become far more complex, but above all, far more numerate. There is endless data about everything imaginable, and then some. In the specific context of national economies and international trade and investments, the single most important set of data are those relating to GDP, or Gross Domestic Product. This is supposed to represent the total output of goods and services of the country in question and is cited by all economists - and anyone else pretending to be economically literate - as the most basic item of information about a country. Thus, just as if you want to relate to a country's size, you will note that it is "x" square kilometers and, with regard to its population, it is "y" millions, so, with regard to its economy, you will say that its GDP is "z" billion. That gives you a handle on the scale of a nation's economy - but does that make it a rich country? Not necessarily. In China, the "z" billion is a very big number, whilst in Singapore it is much smaller, but Singapore is far richer than China. Obviously, the trick is to divide the size of the economy by the number of people to get a new number, called GDP per capita, or per person. The higher this number is, the richer the country is. That's the standard approach, but it's clearly riddled with big problems. Let's start with "z." "z" what? US dollars? But that means converting the GDP measurement made in local currency into US dollars, which means that currency adjustments cause sharp swings. The usual solution to this is to convert all currencies to PPP - purchasing power parity - which is supposed to standardize the buying power of the currency to the local price structure. For instance, in India most prices are much lower than in the US, so a dollar's-worth of rupees goes much further than does a buck back home. This is nice on paper, but exceedingly difficult in practice. There are many other issues involved, which most economists have tended to glibly assume away, as is their wont with problems they don't want to, or can't, face up to. However, that dissatisfaction with, not to say criticism of, this attitude - and the simplistic policy prescriptions deriving from use and abuse of GDP data - is becoming more widespread. The strongest evidence of that is that the "Economist" magazine has homed in on this subject two weeks running. First, a full page article headlined "Grossly distorted picture" (GDP, get it?) reviewed a recent critique of the problems and some possible solutions, from so mainstream an entity as the OECD. Its conclusion was as uninspiringly two-handed as economic analysis can be: "GDP is clearly not the best indicator of [national economic] well-being, but the OECD concludes that for most purposes it is the best that is available on a timely basis. However, GDP needs to be complemented by other measures to give a full picture." Quite. The following week, a half page article noted that American GDP data are consistently adjusted downward in the quarters and years following their original publication, whilst data from Europe (especially the UK) are consistently adjusted upwards - and "it is unclear what lies behind the consistent direction of these revisions." The result, however, is very clear: The reported gap between American and European economic performance is actually much smaller than the headlines consistently suggest. And, as the first article showed, since Europeans prefer less work and more leisure than do Americans (a perfectly rational choice), adjusting GDP per person data for leisure - which is an economic "good" that orthodox GDP measurements fail to capture - also results in a significant narrowing of the American advantage over Europe in terms of GDP per person. In short, national economic data offer a great deal of flexibility in measuring relative wealth - on condition you are comfortable to start with.


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