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Measuring Social Well-Being: GDP Is Neither Accurate Nor Fair

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Abstract

Governance at every level should aim to improve the well-being of all citizens within its span of concern. But present GDP measures, based primarily on commercial financial transactions rather than social well-being, significantly limit the power of economic theory to explain or justify broad social policy. The chapter reviews major international reform programs including adoption of accrual basis accounts by many governments, and recent work on Integrated Reporting (hereafter, <IR>) by the International Integrated Reporting Council (IIRC) that significantly broadens the concepts of capital and value creation or diminution for both corporations and government entities. The chapter proposes systematic introduction of an integrated standards-based program to establish government balance sheet approaches and to introduce <IR> standards, combined with a revised and coordinated international program on government and enterprise accountability and risk management.

Keywords

  • Well-being
  • GDP
  • Value creation
  • PFM
  • Accrual basis
  • Integrated Reporting
  • Balance sheet
  • Accountability
  • Transparency
  • Risk assessment

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Notes

  1. 1.

    Generally derived from sample surveys on a quarterly basis.

  2. 2.

    Evidence for this statement is derived mainly from newspaper reports in Australia (and elsewhere), and the well-established, legally condoned practice of so-called ‘pork-barrelling’ by Congress in the United States.

  3. 3.

    IPSAS standards are set by the International Public Sector Accounting Standards Board (IPSASB) covering both cash basis and accrual basis accounts for public sector entities; IFRS standards for private enterprise accrual basis accounts are set by the International Accounting Standards Board (IASB). IPSAS accrual basis standards are derived from relevant IFRS standards taking into account requirements specific to or not relevant to public entities.

  4. 4.

    See GFS Manual 2014 Para 2.58: The general government sector consists of resident institutional units that fulfill the functions of government as their primary activity.

  5. 5.

    However, <IR> should have considerable application in developing PBB reporting and making more effective use of output and outcome information currently seen as ‘non-financial’ with accounting reports of spending. An important objective for both advanced and developing countries is to integrate financial and non-financial information to assess the social value of public activities. Some work along these lines could be initiated at any stage of the PFM reform process.

  6. 6.

    One can argue that, as discussed in Chap. 3, the GFC came about because of hubristic belief in the financial market’s ability for self-correction, and ignorance on the part of the Federal Reserve and the commercial banking sector of the potential catastrophic risk from the shadow-banking sector.

  7. 7.

    Although packaging in some instances improves the keeping qualities of fruit and meat and so reduces wastage. Establishing the chain of costs and benefits in any detail would be difficult; perhaps analysis of aggregate waste composition could give a reasonable guide as to the cost and source of waste.

  8. 8.

    Gleeson-White cites several examples of ‘new kinds of corporations’ that assess their impact on society and the environment as setting exemplary standards. They include: The Centre for Tomorrow’s Company initiated in 1996, which proposed a ‘dynamic relationship between the economy, society, and environment’; Richard Branson and Jochen Zeitz’s B Team, “founded in 2012 under the banner ‘people, planet, and profit,’ to ‘catalyse’ a better way of doing business for the good of people and the planet”; Corporation 20/20; and several other initiatives that recognize the need to reconcile commercial profit and social impact (see p. 237). In contrast to the IIFC, she gives high priority to promoting corporate uptake of <IR> principles.

  9. 9.

    In this context, the IIRC Newsletter of March 2017 records that around 1500 global companies have adopted <IR>, and the IIRC has launched a worldwide call for feedback on its implementation (http://us4.campaign-archive2.com/?u=b36f6aeef75cea67e62812844&id=38c045e559&e=4ac0e9ad50#Review )

  10. 10.

    See for instance OECD (2010)

  11. 11.

    Masood (2016) strongly supports this view, based mainly on the failure of ‘dashboard’ solutions proposed by many highly distinguished economists (pp. 169–172). He does not, however, refer to the IIRC initiative.

  12. 12.

    See discussion of several <IR> entity studies in CIPFA/World Bank Group (2016, pp. 30–40). The Crown Estate has explored monetization; its Total Contribution Report 2017 http://www.thecrownestate.co.uk/ applies an economic value to the performance metrics of all forms of capital, but these are not consolidated in its financial statements. Part of the reason for not doing so is the huge amount of data that needs to be collected and run through the Total Contribution model within a short timeframe. A high-level government and professional recognition of the importance of calculating value creation or diminution from non-traditional sources of capital would be necessary to ensure that these important sources of well-being are appropriately recognized.

  13. 13.

    The history and weaknesses are well described both by Gleeson-White (2014) and Masood (2016). The latter describes in considerable detail the course of development of GDP, the roles of major players Kuznets, Keynes, Mahbub ul Haq, Amartya Sen and many others. His Epilogue, Unfinished Revolution (pp. 161–178) points to the formidable task of changing GDP and the ongoing work of introducing environmental indicators to GDP (now in the satellite accounts).

  14. 14.

    Masood (2016) attributes a significant part of its lack of impact to the lowering of US ranking from top spot to 19, as well as the elevation of Cuba (see pp. 95–100).

  15. 15.

    See http://www.oecdbetterlifeindex.org/

  16. 16.

    For instance, in Australia the Australian Bureau of Statistics produces annual Measures of Australia’s Progress (MAP) surveying17 “headline dimensions of progress which cover major facets of Australian life”. The Herald/Age Lateral Economics (HALE) Index of Australia’s Wellbeing adjusts GDP to take into account the changes in value of the nation’s stock of physical, environmental and human capital and adjusts for changes in health, inequality and job satisfaction. Its aim is to provide a better measure of national well-being than traditional economic measures; it is reported regularly in the ‘progressive’ Fairfax press. Neither of these measures, however, have had a discernible impact on government policy discussion or decisions.

  17. 17.

    See http://unstats.un.org/unsd/envaccounting/seearev/Chapters/SEEA_CentralFramework_Ch1-6.pdf and Masood (2016, pp. 86–87). Notes on Australian work towards Environmental-Economic accounts are given in http://www.abs.gov.au/ausstats/abs@.nsf/PrimaryMainFeatures/4655.0.55.002?OpenDocument, which includes a quote from the Stiglitz Commission: “[W]e often draw inferences about what are good policies by looking at what policies have promoted economic growth; but if our metrics of performance are flawed, so too may be the inferences that we draw.” (p2 of 12)

  18. 18.

    The IMF’s efforts in this area have been extensively reviewed by the IEO, the Independent Evaluation Office of the IMF (see IEO 2014 and 2016). The technical range and complexity of these reforms are described in some detail by David Robinson (2014). Emily Poole (2015) gives an overview in line with that of IEO including an emphasis on the need that IMF advice be seen as even-handed, since the worth of its surveillance lies in its power to change domestic policies in countries being surveyed. IEO (2016) emphasizes the importance of establishing reliable country data and notes the practice of IMF surveillance teams to use staff estimates where member country data is found to be inadequate or inconsistent, as well as the need for better integration of country data within the Fund as it is between area departments and the Statistics Department.

  19. 19.

    The Organisation for Economic Co-operation and Development (OECD) (developed from the Organisation for European Economic Cooperation (OEEC), established in 1948 to run the US-financed Marshall Plan for reconstruction of Europe) was established in September 1961 to help foster a new era of European cooperation. It now has 35 members, drawn mainly from advanced Western economies, but also includes Japan and Korea and some emerging market economies, Chile, Turkey and Mexico, and it provides technical advice on budget and accounting management to a range of developing countries. See http://www.oecd.org/about/history/

  20. 20.

    See Hameed (2005) and Glennerster and Shin (2008).

  21. 21.

    In some cases, where the ROSC was made publicly available, the local press tended to highlight the deficiencies indicated in the report rather than the areas of good performance.

  22. 22.

    The 1998 Fiscal Transparency Code aimed to identify the range of good PFM practices that would establish a flow of information on any government’s fiscal position and prospects to inform policy-makers, the international markets, and the general public on the status of the country’s financial management. The 2001Manual on Fiscal Transparency provided more detailed advice on the importance and scope of each element of the code as well as country examples of these practices.

  23. 23.

    Now under the auspices of a PEFA Secretariat, located at the World Bank in Washington, DC. The Secretariat is supervised by a Steering Committee, comprising representatives of the partner agencies (World Bank, IMF, EU and several bilateral donor agencies (see https://pefa.org/content/history).

  24. 24.

    A useful detailed comparison of approaches up to 2007 is given in http://blog-pfm.imf.org/files/note.pdf

  25. 25.

    For the surveys see http://survey.internationalbudget.org/

  26. 26.

    See http://www.fiscaltransparency.net/about/

  27. 27.

    The CIPFA (2016) two-volume publication Public Financial Management—A Whole System Approach gives a valuable technical oversight of the relationship the elements and components of PFM processes. This chapter focuses on the need for better coordination among international agencies aiming to improve PFM practices, primarily by emphasizing the critical role that progressive improvement of accounting standards should play for all countries.

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Allan, W. (2017). Measuring Social Well-Being: GDP Is Neither Accurate Nor Fair. In: The Last Empires. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-59960-1_4

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