Understanding the Prevalent Use of GDP as an Indicator of Development Progress The Case of Indonesia’s National Development Plan Rahmah Ulfah 860308679100 January 2015 MSc Thesis Environmental Policy Group Supervisor Prof. dr. ir. Arthur P.J. Mol Abstract Gross domestic product (GDP) is an economic indicator that is regarded as one of the most widely known indicators in the world. Criticism and warning towards the use of GDP as an indicator for national welfare and human well being have been around for a long time, almost as old as its inception. Nevertheless, GDP is now being widely used not only to measure economic performance, but also to measure development progress of a country in general. Since the 1970s, numerous alternative indicators have been proposed and developed. However, none of these indicators are able to match the mainstream use of GDP. This study aims to understand the mechanisms and factors that induce the prevalent use of GDP as an indicator for development progress, taking the national development plan of Indonesia (RPJMN) as a case study. In addition to that, this study also aims to understand the inability of the current alternative indicators to challenge the mainstream use of GDP in order to find the opportunities to foster these alternatives indicators to replace or to be adopted and to be used equally alongside GDP. This study uses the socio-technological transition theory as its conceptual framework. The result shows that within the RPJMN, GDP is being used as the operationalization of welfare. Furthermore, the analysis of the positioning of GDP within RPJMN indicates a condition that is referred to as the ‘confusion between ends and means’. It is also found that the prevalent use of GDP and the stability of this practice come from the alignment of several factors and elements that creates a configuration that maintains and reproduces this practice. These include factors related to the production of GDP (such as infrastructure and methodology aspect), the application domain (such as user preference) and the rules that influence and vessel such practice. Wider context, such as the international influence and society concern, also play a role in maintaining this practice. It is also found that the current alternative indicators are unable to challenge the prevalent use of GDP as it still faces several mismatches with these factors or the current configuration. It also reveals that the user needs as well as the functionality of an indicator has not been well addressed in the development of alternative indicators. This study also shows that the establishment of a common framework, improvement in regulations, pilot implementation, synchronization strategies, internalization of values as well as the political will and leadership aspect can be used as the strategies or the leverage points that might help foster the development of alternative indicators. In addition to that, it is also found that in general, the transition theory is found to be helpful in providing a guidance and framework for this study. Key words: GDP, economic growth, sustainable development, transition theory, Indonesia, national development plan. 2 Preface The initial idea for this thesis might have started to emerge several years ago, during a class in my last year of college. I remember that at that time we were discussing about the green GDP calculation and how an early green GDP project conducted at that time faced several difficulties, not only from the technical calculation aspect but also from political aspect. Many years later, the condition of this indicator has not changed much. It always makes me wonder why some indicator, like GDP, can be so popular, while some others remain in the background. Thus, when the time to do my thesis research had come, I decided to propose this topic for my thesis. And to my surprise it was quickly accepted. The research process itself was not an easy process. Not only because I was not accustomed to the research method that I choose and used in this thesis but also many other factors that interfere along the way. Nevertheless, I was able to learn many things during this period. Hence, I would like to express my thanks to those who have been greatly contributed to the completion of this research. I would like to express my deepest appreciation to my supervisor, Prof. dr. ir. Arthur P. J. Mol, for his guidance, advice, and patience during my thesis research. His, encouragements and understanding have helped me through the ups and downs during this research. I also would like to express my gratitude to all the interviewee that participated in this research for welcoming and sharing their knowledge with me. Finally, I would like to express a special thank you for my beloved family and friends, for their support, encouragements, and love. Thank you for providing me comfort and strength to get through all the trouble times. 3 Table of contents ABSTRACT ................................................................................................................................... 2 PREFACE ..................................................................................................................................... 3 TABLE OF CONTENTS.................................................................................................................. 4 LIST OF FIGURES ......................................................................................................................... 6 LIST OF TABLES ........................................................................................................................... 6 LIST OF ABBREVIATIONS ............................................................................................................ 7 CHAPTER 1: INTRODUCTION ...................................................................................................... 9 1.1. Problem description .................................................................................................... 9 1.2. Research objectives ................................................................................................... 11 1.3. Research questions ................................................................................................... 12 1.4. Methodology ............................................................................................................. 12 1.5. Thesis Outline ............................................................................................................ 14 CHAPTER 2: CONCEPTUAL FRAMEWORK ................................................................................ 15 2.1. Overview of transition theory: technological transition ........................................... 15 2.2. Operationalization of the theory .............................................................................. 19 CHAPTER 3: HISTORY AND ESTABLISHMENT OF GDP .............................................................. 21 3.1. Introduction............................................................................................................... 21 3.2. The early era of national income estimates .............................................................. 21 3.3. The emergence of the modern era of national income estimation ......................... 23 3.4. International guidelines and widespread use of GDP ............................................... 29 3.5. Discussion and conclusion ......................................................................................... 32 CHAPTER 4: GDP WITHIN THE NATIONAL MEDIUM-TERM DEVELOPMENT PLAN (RPJMN) OF INDONESIA ............................................................................................................................... 34 4.1. National medium-term development plan of Indonesia .......................................... 34 4.2. Contextual placement of GDP within RPJMN ........................................................... 40 4.3. Analyzing the positioning of GDP within RPJMN ...................................................... 58 4.4 Identifying factors that maintaining the prevalent use of GDP within RPJMN: the configuration that works ...................................................................................................... 63 CHAPTER 5: ALTERNATIVE INDICATORS .................................................................................. 68 5.1. Niche Innovation: development of the current alternative indicators ..................... 68 5.2. Identifying mismatch within the current configuration............................................ 78 5.3. Fostering the development and adoption of alternatives indicators: the required conditions and possible strategies ....................................................................................... 95 4 CHAPTER 6: DISCUSSION, CONCLUSION AND RECOMMENDATION ..................................... 104 6.1. Discussion on the research findings ........................................................................ 104 6.2. Discussion on the application of theory .................................................................. 109 6.3. Conclusion and recommendation ........................................................................... 115 REFERENCES ........................................................................................................................... 118 APPENDICES ..........................................................................................................................