In a previous column I suggested that Wellington was New Zealand’s richest region and Northland was the poorest. How we measure wealth and well-being in regions and countries is complex and a topic of much debate. The debate is gaining increasing attention worldwide as various alternative measures of well-being are developed, especially those which incorporate the notion of sustainability.

Traditionally economists have focussed on economic output as measured by gross domestic product (GDP) per capita, or the incomes of households, as an average measure of material well-being. As measured by GDP per capita Wellington region is somewhat better off than the country’s largest region, Auckland, which in turn is better off than Canterbury and Waikato.

But there are growing concerns with the use of GDP as a measure of well-being. The concern is that governments focus too much attention on a narrow, materially-based measure of economic welfare that does not capture many dimensions of happiness or well-being. For example, GDP does not take into account environmental degradation resulting from economic expansion and does not capture the value of work done in the home or volunteer work.   Perversely can rise after a catastrophe such as an earthquake or oil spill.   Economic output in Christchurch is likely to have fallen in the aftermath of the earthquakes but as the rebuild gathers momentum the region’s GDP is likely to rise above the levels it would have reached without the earthquake.   Yet it would be impossible to argue that the wellbeing of the Garden City’s residents will be higher than in the absence of the earthquake.

In response to the discomfort with GDP the Genuine Progress Indicator (GPI) has been promoted internationally as an alternative.   A growing number of regions in New Zealand have commissioned studies to estimate a GPI for their region.

The GPI attempts to measure whether the increase in production of goods and services leads to an actual improvement in well-being.  Unlike GDP, the GPI can incorporate the contribution of work done in the household and in the community and is adjusted upwards or downwards for social and environmental factors which are deemed to improve or detract from well-being.  An increase in air pollution, for example, might result in a downward adjustment of the region’s GPI.

As attractive as it sounds the GPI has major shortcomings. There is considerable discretion in the design for any specific GPI measure.   As a result, the GPI requires its compilers to make value judgements. Implicit in the GPI is that increasing inequality is undesirable.   But who decides how much value we put on inequality?   A change in political regime may result in increased emphasis on inequality and pressure to change its importance in the calculation of GPI resulting in a revision in the GPI value.   Different policy-makers will attach different priorities and weights to different aspects of well-being.

There is no nationally or internationally accepted standard for developing well-being measures such as the GPI.  This makes comparisons of the index across time or with other regions extremely difficult.

In addition, there are a number of technical difficulties related to measuring some dimensions of well-being, which means that some data will be included in the GPI just because they are available while other data will be excluded just because they are unavailable or unable to be measured with any accuracy. Unlike in other countries the GPIs developed in New Zealand typically do not include the costs of alcoholism, drug abuse and child abuse.  The list of factors which we could include is endless.   Where do we know where to stop?

Finally, for all the effort put into developing a GPI, it is not obvious that they ultimately add much value.   For example, the GPI measured for Auckland region over the period 1990 to 2006 showed that there was an extremely close correlation between GDP growth and GPI growth. GPI grew at a slightly slower rate but this is hardly surprising as we know that there has been a deterioration in many of the components that contribute negatively to GPI such as air pollution and inequality.   A study by economists Kassenboehmer and Schmidt showed that in Germany there might be such a strong correlation between GDP and other softer measures of well-being that it is impossible to justify the cost and effort spent on the new measures.

GDP is not intended to be an all embracing measure of well-being.   However, it remains a fundamental indicator of well-being as the proceeds of economic growth can help fund many aspects of a better life including improved health care, education and accommodation.

To understand well-being, we need to measure and monitor allots dimensions.   We can monitor them separately and acknowledge that we are making progress in some dimensions but losing ground in others.   We don’t need to collapse them all into a single summary indicator with all the associated measurement issues.

New Zealand’s regions and districts should ensure they have a good handle on all the dimensions of economic well-being in their region, including GDP, before they embark on expensive exercises to estimate GPI.