Why GDP is out of the true equation

Economics | Ed Zhang

If, as it were, 2013 is the year of the grand plan, seen in the reform program adopted by the leadership's recent Third Plenum, then 2014 should not be a year of continuous celebration, but of action to implement the program in the economy's daily proceedings.

In early December, a plan was announced from Beijing in which GDP is to be no longer used as the only yardstick to measure officials' performances. The plan also promised there would be no more listing of all local governments according to GDP growth. The GDP factor is to be completely abandoned, it said, when it comes to the evaluation of officials in areas that are either unsuitable or restricted for development.

This was a follow-up step of the program adopted by the leadership's Third Plenum in mid-November, which covered reforms in about 60 areas.

"A good move" hailed researchers in public administration and environmental groups. For years, a debate has been going on as to whether GDP should be the criterion for sizing up a local government's performance and, if not, what the alternative should be.

Despite all the pros and cons, GDP remained a sacred cow. Understandably, it was easy to use because it was simply measured by that universal denominator - money. For example, winning a $100 million (72 million euros) investment from a multinational corporation was often cited as strong proof of a local official's administrative competence, much stronger than committing money from the local government's own coffers to such long-term causes as public education and environmental protection.

At long last, this will change, because the central government has made it clear that GDP is not the only criterion, let alone the one universal criterion.

At the same time, however, the question remains as to what standard should be used to measure a local government's economic leadership. What standard can be used to measure the protection or destruction of the environment, the conservation or waste of energy and resources, responsibility or lack of it for citizens' health and welfare?

There should be some new index, also relatively simple to understand and easy to operate, to replace the antiquated GDP. Unfortunately, it doesn't seem likely that only one index will suffice.

A new standard, as some researchers have proposed, should be to measure a local government's performance by looking at its debt in proportion to the size of the local economy or that of the same government's yearly income. Officials responsible for poorly planned fiscal expansion and especially wasteful investment of public funds would risk ruining their careers and perhaps being charged with criminal offences.

The new standard would encourage, on a recurrent basis, the fiscal prudence of every level of the government and help the nation develop a credit rating system for all local governments and the projects they lead.

A second standard, as one would reasonably assume, must have something to do with environmental protection - perhaps by factoring in innovation and use of energy in the country's rapid urbanization process.

Many things can and should be done to improve both living standards and the environment in Chinese cities. An index of environmental quality could make it incumbent on local officials to look for and take on such tasks - and to free themselves from their old habit of building more but taking care of less.

One case in point is that, according to an environmental group's latest investigation, up to 60 percent of housing estates in Beijing do not have basic energy-saving facilities. Nationwide, the amount of waste (which is also a waste of GDP) that could be avoided would be huge.

Indeed, what indexes China is going to use to assess its officials and its economy will have much to do with what kind of development it will create down the road. A timely removal of GDP as the only criterion of success will help create a much more efficient and colorful economy.

The author is editor-at-large of China Daily. Contact the writer at edzhang@chinadaily.com.cn.