InternationalVolume 13 Issue # 15

IDI a new metric to judge economic performance

The World Economic Forum (WEF) has come up with a new measure of national economic performance called the Inclusive Development Index (IDI) which focuses on living standards of people in an economic unit.

The IDI measures the economic performance of 103 countries in 11 categories of economic progress in addition to GDP and focuses on three main factors: growth and development, inclusion, and inter-generational equity or the sustainable stewardship of natural and financial resources. The Index has been developed because in the opinion of WEF , there is an excessive reliance by policymakers on GDP as the main metric of national economic performance. But this fails to capture a country’s broad socio-economic progress in areas such as quality of life, employment opportunity and economic security.

To quote the WEF, “Decades of prioritizing economic growth over social equity has led to historically high levels of wealth and income inequality and caused governments to miss out on a virtuous circle in which growth is strengthened by being shared more widely and generated without unduly straining the environment or burdening future generations. Political and business leaders should not expect higher growth to be a panacea for the social frustrations, including those of younger generations who have shaken the politics of many countries in recent years.”

Although, GDP remains a necessary condition for achieving economic progress in living standards, experts agree that more needs to be done by policymakers in this period of global growth to “future-proof” their economies “without unduly straining the environment”. The need is to adopt a more human-centric approach, where people and living standards are put at the centre of government policy.

Richard Samans, managing director and head of global agenda at the WEF, said: “Broad, sustainable progress in living standards is the bottom line result societies expect. Policymakers need a new dashboard focused more specifically on this purpose. It could help them to pay greater attention to structural and institutional aspects of economic policy that are important for diffusing prosperity and opportunity and making sure these are preserved for younger and future generations.”

According to the WEF index, 29 advanced economies had on average stagnated over the past five years in terms of social inclusion, while just 12 managed to reduce poverty and only eight saw a decrease in income inequality. It also found rich and poor countries alike are struggling to protect future generations.

The WEF report’s Intergenerational Equity and Sustainability pillar – which takes into account public debt, carbon intensity of GDP, dependency ratio and adjusted net savings (which measures savings in an economy after investments in human capital, depletion of natural resources and the cost of pollution) actually deteriorated in upper-, middle- and low-income economies since 2012 and improved only marginally (0.6%) in advanced economies.

Significantly, small European countries scored highest in the chart overall, with Australia being the only non-European country in the top 10. Of the advanced economies, the most socially inclusive was Norway, coming second overall for ‘inter-generational equity’ and third for ‘social inclusion’ and ‘growth and development’. Germany topped the G7 economies in 12th place overall, closely followed by Canada (17), France (18), the UK (21), the US (23), Japan (24) and finally Italy, which was 27th.

In total, 64% of the 103 economies measured have seen their scores improved over the last three years, which was due to recent efforts by policymakers to focus on socio-economic issues. This has also been due to gains among upper-middle-income economies, while low-income economies have fallen further behind. The UK, which finished 21st overall, fell behind its peers on a number of dimensions of inclusive growth such as labour productivity, healthy life expectancy and wealth inequality, although the report said these had improved over the past five years.

Interestingly, the above mentioned 11 categories of economic progress in addition to GDP, focusing on three factors: growth and development, inclusion, and inter-generational equity or the sustainable stewardship of natural and financial resources are in direct conflict with the principles of the so-called Washington Consensus, a term that summarizes commonly shared themes among policy advice by Washington-based institutions, such as the International Monetary Fund, the World Bank, and the US Treasury Department.

The Washington Consensus includes 10 broad sets of relatively specific policy recommendations: Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP; redirection of public spending from subsidies towards broad-based provision of key pro-growth factors; tax reform, broadening the tax base and adopting moderate marginal tax rates; interest rates that are market determined and positive in real terms; competitive exchange rates; trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; liberalization of inward foreign direct investment; privatisation of state enterprises; deregulation: abolition of regulations that impede market entry or restrict competition; legal security for property rights.

It may be added here that the Washington Consensus was the direct outcome of the post-World War II attempts by the US to protect its security and prosperity. The centerpiece of this strategy was to create strong, independent allies in Western Europe and Asia and promoting capitalism. In a few years after World War II, the United States had created the major institutions that still define the world order today – an order based purely on capitalism that has long served the United States’ interest in peace and prosperity while at the same time promoting inequality within the US and globally as well.

The United Nations, the International Monetary Fund, the World Bank, the North Atlantic Treaty Organisation, and the predecessors to the World Trade Organisation and the European Union were all launched between 1945 and 1949. The basic idea was to create an American-led order and protect America’s interests. The plan was successful and resulted not merely in a golden age of economic growth for the United States and its beneficiaries but also the creation of enduring transatlantic cooperation. But it also gave rise to inequality that is increasing by the day concentrating global wealth in the hands of a few with the rest sliding fast into poverty.

Clearly, the new IDI metric is based on the concept of democratic socialism as opposed to ruthless capitalism. It remains to be seen how many countries will adopt IDI along with GDP to measure and evaluate their economic performance.