Alternative Social Welfare Measures

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“Alternative social welfare measures justify alternative welfare doctrines”
Bojan Radej, Slovenian Evaluation Society
http://www.sdeval.si; bojan.radej@siol.net;
January 2011

At present, gross domestic product (GDP) is the most methodologically elaborated indicator of social welfare. Its methodology has been developing since early 50s by UNSTAT and is presented in a manual of more than 700 pages. In part such extensiveness point to ever mounting methodological problems linked to aspiration to produce uniform measure of economic progress. Two criticisms are in particularly devastating for application of national GDP per capita also as the leading indicator of social welfare: (1) GDP p.c. is one dimensional measure incapable of expressing multi-dimensional concept of welfare. (2) GDP p.c. measures economic progress which is decreasingly relevant even in materialistic societies with already achieved high income per capita where non-economic aspects of social welfare become the main drivers of welfare progression.

To account for these two functional failures of GDP, an alternative indicator of social welfare has been proposed by UNDP – human development indicator (HDI). HDI measured by countries distinguishes from GDP in two important respects: (1) it is constructed as a compound indicator from three sub-indicators measured in volume terms, GDP p. c., education of population and life expectancy at birth; (2) GDP p.c. has been initially standardised relative to the threshold value at approximately 16,000$, beyond which income growth assumingly decreasingly contributes to overall HDI (methodology changed so they use the logarithm of income now, to reflect the diminishing importance of income with increasing GDP).

HDI is thus a compound indicator obtained as a simple average of three sub-indicators. When one compares country rankings by GDP per capita and by level of HDI considerable differences can be observed. Rich countries do not rank the highest in HDI when their social and human achievements lag behind their economic achievements. HDI then clearly induces countries to forward more balanced social welfare doctrine between its materialistic, social and human part. Basically the same methodological approach to construction of compound social indices has been applied extensively in various areas of welfare statistics. Some other notable examples with elaborate success in broadening our discussion on alternative social welfare doctrines are happiness and quality of life indices – such as those combining (composite) indices in the field of “having, loving and being” as conceptualised by Allardt, 1972) – their introduction as a primary welfare measures has been officially announced recently by France and Germany. One of the most criticised aspects of composed indicators applied as a synthetic social welfare indicator is linked to observation that they usually lack serious theoretic justification for the selection of sub-indicators as representative components of social welfare measure. Are three sub-indictors of HDI equally relevant for social welfare in every of 150 countries covered by the HDI? In the case of happiness indices serious objections have been raised concerning their strong subjective bias which rule out indications on objectively achieved welfare in a society. These measures (HDI, happiness indices) are problematic also because they are produced as nonnamed measures; they are not expressed in terms of money, years of life etc. but in an abstract term of index points. This directly exposes them to scientific and political manipulation (forget not that happiness indices are proposed as a substitute measures by politicians!). In this regard, GDP fares much better as it is more directly related to welfare and sufficiently complex that it is more independent on political interference. GDP methodology provides that only comparable

(monetary) qualities are summarised in the aggregate indicator, while HDI...
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