The progress of a country is often measured in terms of economic growth, usually taking Gross Domestic Product (GDP), measured in real terms, as a yardstick. The term ‘domestic product’ refers to what is produced locally (that is, all sales of goods and services minus their import content) and the term ‘gross’ means that the measurement does not take depreciation (roughly meaning loss of value of fixed capital goods) into account.
GDP measures the income, in the form of wages, profits, interest and rent, generated by the economic activity associated with domestic production. GDP also has a number of weaknesses as a measure of economic progress and several attempts were made to replace it with other indices of development but none have managed to displace it to date.
One of the defects of this index is that it does not measure depreciation of capital goods, including machinery, vehicles and others and, therefore, does not really measure net income of economic agents.
If fixed capital deterioration is valued and deducted from GDP, we get Net Domestic Product (NDP), in other words, NDP is GDP less depreciation of fixed capita. Depreciation is one of the Ds referred to in the title of this article. Many economists believe that Net Domestic Product is a better indicator of economic growth than Gross Domestic Product.
I would even go a step further and suggest the inclusion of two other Ds in the measurement of economic progress, namely environmental degradation and social discomfort.
Environmental degradation is not taken into account when using GDP as an indicator of progress. If we were to obtain a suitable measure of the loss of value of environmental assets, such as loss of biodiversity, and the negative health effects of pollution, Malta’s net economic growth would be lower than what GDP indicates and could possibly show economic decline, even when the GDP indicator shows otherwise.
Economic activity may also lead to social discomfort. We have seen many neighbourhoods being destabilised as a result of construction activity. Other forms of social discomfort, associated with construction, include developers damaging and blocking pavements, occupying parking spaces to the detriment of the community living near a construction site and heavy construction vehicles causing traffic congestion.
Another important economic activity in Malta, namely tourism, also causes social discomfort as a result of overcrowding, noise pollution by catering outlets and rowdy behaviour by visitors. If such social discomfort was to be valued, and deducted from GDP, Malta would probably not have registered the growth rates that are reported in the news portals.
Environmental degradation is not taken into account when using GDP as an indicator of progress- Lino Briguglio
The question arises as to whether a value can be assigned to environmental degradation and social discomfort. The answer is yes, using techniques often used for valuing environmental assets and negative externalities, such as pollution.
Although the Maltese authorities are keen to publicise GDP growth statistics, and not so keen to do the same with regard to the negative environmental and social externalities, there is a growing awareness of the social and environmental downsides of economic activities.
Assigning a value to the downsides of social discomfort and environmental degradation using money as a unit of measurement is useful because it enables us to add oranges and apples.
Some argue that degradation and discomfort should not be measured in money terms. Actually, other indices can be used for this purpose but using money as an index would be useful in adjusting the GDP statistic.
Quantifying different things in money terms does not, in itself, carry ideological implications. Over the years, money has enabled humanity to value goods and services and this facilitated exchange.
Another question that arises on this matter is whether Malta should totally give up economic activities that cause environmental degradation and social discomfort. The answer is no… all economic activities generate undesirable externalities. The solution is to minimise environmental degradation and social discomfort as much as possible.
In turn, this requires a serious regulatory framework, unlike the current one which seems to work on the principle of ‘anything goes’, leading to negative effects on our quality of life.
Lino Briguglio is a professor of economics at University of Malta.