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20121.1 gain without growth

e-briefing: shifting to gain without growthSent Wednesday, January 11, 2012





Brazilintel e-briefing Jan '12 1.1

 Gain without growth

Lower GDP growth, overtaking the UK economy and inflation ending 2011 at a 7-year high call into question the usefulness to Brazil of GDP as a measure of prosperity creation. This e-briefing looks at how Brazil should think about measuring its real wealth if it wants to truly leap forward.


 
 
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011 ended with 2 pieces of GDP related news that were rather at odds with each other. The first came in November: Q3 GDP growth slowed to a 0.4% quarter on quarter increase - rather frightening for a 'fast growing' country. The second came right at the end of the year as Brazil overtook the UK to become the 6th largest economy in the world. Then, 2012 began with the news that the inflation for the previous year was exactly on the upper limit of the Central Bank's target at 6.5% - the highest it has been since 2004.

You might think that compared to crumbling neighbours up above the Darien Gap and across the Atlantic, Brazil had it pretty good in 2011. For fans of never-before-breached low benchmarks that might be the case. But with a growth rate for the year expected to finish at around 3.0%, the bubbling Great Recession still casts a shadow over a country which, while making gains, should be firing on more cylinders.

But looking ahead to 2012 and beyond, to what a fragile, uncertain global economy will throw up to its constituents, these bits of news might provide a nice inflection point for questioning the logic of a country like Brazil adhering to the Bretton Woods-baked yardstick of GDP as its go-to prosperity measurement tool of choice.  

After all, around the world lower than average growth for the coming year or so seems to be the order of the day. Probable causes might be anything from a slowing China, to a fragmenting Europe or a dysfunctional US. Any which way the prognoses, while not horrendous for emerging economies, are certainly less bombastic. But from whichever direction the GDP brake may be applied, should Brazil be concerned? And should this gloom mean that all attention be focused on efforts to prime the GDP pump and its other working parts? Maybe it's time to rethink what material, meaningful improvements look like - particularly for a country like Brazil looking to make a leap forward.

The traditional response might be that the GDP growth chase fits a country like Brazil which still has ground to make up in terms of reaching advanced nation standards of living. Pumping up economic activity raises all boats, no? Well, not exactly. In fact, despite unemployment levels at a record low at the end of the year, Brazil ranked 74th in the World Bank's inequality adjusted Human Development Index (IHDI) for 2011 (which adds distribution of health, education and income to the standard HDI measure for which it came 84th)

In a recent piece, economist Ken Rogoff wrote of modern growth theory that 'there is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations.'*

Rogoff's point boils down to this -should we at least question whether we are getting enough of a welfare gain bang for our GDP growth buck? So with lower growth on the horizon, should not a country like Brazil be champing at the bit for ways to enhance how it measures and manages prosperity creation over the growth-alone obsession?

Perhaps, despite the gloomy forecasts, this focus on growth is actually stopping the world from making the most of its potential. And taking Brazil as an example, is this really an ossified-at-best moment for the global economy? After all, millions of citizens over the passed decade have moved out of poverty to become the engine of Brazil's modern consumer economy. A generation of hooked-in youth are growing up connected to the world as truly global citizens with aspirations to create, make and build a better future for themselves and their peers. What's more, the seemingly intractable problems related to urban issues, environmental degradation, education and health will owe their resolution not to an extra percent of growth at the end of the year but to proper structural fixes. Taken together, if correctly nurtured the country has here the keys to a more serious, long-running prosperity boom the likes of which will far outweigh any incremental fillip (and its accompanying downturns). 

What is it about GDP?

So what is it about GDP that makes it fit for purpose? After all, GDP - a flow of economic output - is a sum of consumption, investment and net exports in an economy. And that is about it. It fails to add the costs and count the gains that might truly matter to a country looking to create a society fit for the 21st Century.

For Brazil, prosperity is about the quality of jobs, education, health and infrastructure that make it fit for 21st century economy. It is also about making and creativity, and equipping people with the tools they need to flourish. Arguably, the GDP runes, while being able to tell us whether things are moving or not, cannot give us critical information on how much better a country is because of this movement.
If Brazil wants to truly catch up - or even leapfrog - other countries and create the conditions for its citizens to thrive, GDP in its current guise isn't going to be the yardstick that does it.
The fatal error for so-called emerging nations is to think that this broader type of wellbeing measurement is for the national statistics offices of advanced economies alone, where wealth gains and per capita income, having moved beyond providing basic needs for citizens, then - though still rising - fail to materially improve their quality of life.

But wellbeing, or quality of life, measurement should be but a part of an updated prosperity measurement toolkit. To make the required leap, countries will need an updated version of GDP that includes more of the costs and benefits that are currently absent from the standard equation. More critically, they will need a statistical grasp of the stock of wealth across many forms of capital that the nation possesses.

Measuring wealth

In 2010 economists Ken Arrow, Partha Dasgupta and colleagues, building on work done at the Word Bank, explored in an NBER working paper how a nation's wealth might actually be calculated. For them:

'Wealth...includes not only reproducible capital goods (roads, buildings, machinery and equipments),  human capital (health, education, skills), and natural capital (ecosystems, minerals and fossil fuels); but also population (size and demographic profile), public knowledge, and the myriad of formal and informal institutions that influence the allocation of resources.'**  

Using data for the above forms of capital Arrow and his team analysed a number of countries from 1995 to 2000, including Brazil, to calculate whether their total wealth had improved. They found that over that period Brazil had marginally increased its per capita wealth by only 1.32%.

But for this to become real, their visionary work needs to be hardwired into both national statistics offices and national conversations taking place between politicians, business, the media and citizens.

In a recent e-book essay, Betterness, economist Umair Haque has also explored the need for a national balance sheet, placing particular emphasis on higher order capital which he sees the most significant components a nation will need to nurture if it is to thrive. His version of what national wealth might look like is as follows:

W = N+F+I+H+S+E+O


He writes: 'It says: real human welfare equals natural capital, plus financial capital, plus intellectual capital, plus human capital, plus social, emotional, and organizational capital.Not all these kinds of wealth are created equal; I'd suggest that higher-order wealth, to the right, is scarcer, stickier, more enduring, and more productive.'***

This neat summary adds some of the things that we know are central to creating a modern, thriving 21st century economy. With this formula, we can see how real world problems for Brazil like, for example, quality of education and ease of doing business are mission critical to national wealth and should not be outside of any conversation about how well the country is doing.

A 2014 anniversary?

As GDP growth in Brazil fades from its highs, and even if it doesn't, tough institutional fixes are no longer avoidable. A national balance sheet can provide a new toolkit for policymakers, business and citizens, outlining how sustainable a footing the economy really is on and highlighting with precision what needs to be done and where.

This year brings to Brazil the Rio+20 Conference. 20 years on from the the original Earth Summit, the natural world has taken a kicking and is in need of serious rescue. 2014 marks 20 years since the Real Plan was introduced which laid the foundations of the modern Brazilian economy. Perhaps its 20 year anniversary could act as a target for Brazil to have made the first steps towards creating a national balance sheet of its own, allowing the country to understand its real wealth and helping it truly leap forward.

* Rogoff, Rethinking the Growth Imperative, Project Syndicate, Jan 2012
** Arrow, Dasgupta, Goulder, Mumford & Oleson, Sustainability and the Measurement of WealthNBER working paper, Oct 2010
*** Haque, Betterness: Economics for HumansDec 2011 
 
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