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POST TIME: 21 May, 2019 11:11:31 AM
The future of GDP
Development used to be equated with the increase of the gross national product of a country and its per capita income: to some extent, this is still the case
Mohammed Abul Kalam, PhD

The future of GDP

The pursuit of growth over social justice, which has been the defining credo of classical economists, has brought prosperity to most developing societies. But it has also created huge inequalities. The argument that economic growth is the road to social justice has been relentlessly advocated for a long time, with several wrong consequents for poor societies (Shamim Iqbal, The Independent, May 8, 2019).
Officially speaking, Gross Domestic Product, or GDP, is the sum of all goods and services that a country produces, adjusted, to make it comparable to previous years, for inflation. In many ways, though, it has become much more than that. It has become the barometer of a country’s progress, an indicator of a land’s prosperity, and the ultimate yardstick to assess living standards. It has, in effect, become the statistic to end all statistics.
When growing (at expected rates), politicians refer to it as proof of the success of their policies. And when rates are not met, or, God forbids, GDP slows, it’s weaponised by those for whom it’s politically expedient. It has both elected governments and brought them crashing down. Rarely is it far from the lips of those in power.

Development used to be equated with the increase of the gross national product of a country. And it’s per capita income: to some extent, this is still the case. Although GNP is an index of overall national wealth, it nonetheless bears little resemblance in many of the developing countries to what is actually happening to the population. There are countries in which 20 – 30 per cent of the population consumes 70 – 80 per cent of the national wealth; where an increase in GDP simply widens the gap between rich and poor.

From a simple health point of view, one may define development as the organization of society in such a way that the basic essentials of health and life with dignity are assumed for the generality of the population. This would include adequate housing, adequate food, adequate health coverage in time of need, and education as well as job opportunities, for the major population of the people. This in its turn implies that the index of development need not be measured by per capita income or gross national product, but should be a weighted index which takes cognizance of how the gross national product is distributed among the population as a whole.

However, in these troubled economic times, it’s increasingly unclear whether GDP remains an appropriate measure. After all, it ignores inequality, still rampant across the Western world; it doesn’t take into account the earth’s dwindling natural resources, and it fails to recognise the rapidly deteriorating environment. With such glaring omissions, should it really be trusted to measure the success of our economies, and by proxy, the quality of our lives? Here we take a closer look at the measurement’s history, the charges it faces, and its future, all in an attempt to better answer the question: is it time to bin GDP?

Russia-born economist Simon Kuznets first developed GDP as an idea in the early 1930s. His design was made at the behest of the US government that, during the Great Depression, was seeking a more accurate way to measure economic activity to help guide a more interventionist governmental policy. It was, thus, in the context of an economic crisis that GDP was born. During the depression and the war that followed, GDP was fine-tuned and proved it a valuable asset. Particularly during wartime GDP became indispensable. John Maynard Keynes reinforced just how important aggregate economic statistics were in his book How to Pay for the War, explaining that without them it was impossible to know exactly what was available for a country to mobilize - essential to any credible war planning. It was here that GDP first made its name.

Interestingly, in the 1934 report Kuznets delivered to US Congress, he warned against the use of GDP as a measure of economic welfare and placed emphasis on maintaining a strong and clear distinction between the quantity and quality of growth. Economic welfare, he thought, could only be ascertained if the personal distribution of income is known – something GDP does calculate. In his own words: ‘goals for more growth should specify more growth of what and for what’.

A further concern is what boosts GDP. Human suffering is particularly adept at doing so. Take, for instance, crime. Few in their right mind would make the case for the crime being a signifier of a healthy, progressive society. Yet, when it comes to GDP, our most frequently turned to the indicator of these traits; crime can be very helpful indeed. Consider the scenario: inequality is spiralling (incidentally, unacknowledged by GDP), increasing the number of people with little material wealth, which in turn prompts an increase in crime. For GDP this bears no burden; in fact, it is welcomed. A smashed window is not seen as irritation or violation of basic social rules; it is seen as an opportunity for a glazier to make a new window, turning a profit and paying tax in the process. This logic holds for much crime and extends to the employment of police, lawyers, judges and prison guards that are tasked with dealing with it.

It doesn’t stop there either. Catastrophes, too, are consistently excellent means of boosting GDP. World War 2 helped drag the US out of an economic crisis, and countless natural disasters - like the Japanese earthquake in 2011 - have boosted economic growth in all corners of the globe, often increasing production and increasing employment.

The environment foots the bill: In our age of climate deterioration, the relentless pursuit of GDP growth, the occupation of most politicians, also comes at a great environmental cost, one that, in the developed world, far outweighs the benefits it brings. The conversion of trees into lumber, of farmland into shopping malls, and most devastating, of fossil fuels into CO2, all underpin GDP growth, contribute to global warming, and are anathema to a sustainable way of living. If the planet is to be preserved in any recognizable state, reliance on GDP as a gauge of progress, welfare, or even health of the economy, will have to be tempered. The question is, do we have alternatives at hand?

Genuine progress indicator (GPI) is one of the leading candidates to replace GDP and differs in that it also takes into account social and environmental factors. Perhaps unsurprisingly given the above, it, therefore, defines what we currently consider ‘healthy’ economic growth completely differently. An illustrative example is Canada’s oil-rich province, Alberta. According to a study by the Pembina Institute, between 1961 and 2003 it experienced GDP growth of 500%. During the same time period, GPI performance steadily fell, as a response to growing inequality, rising household debt, and an increase in greenhouse gas emissions. Exactly how different the governance of the province would have been if GPI had informed policy instead of GDP is obviously an unanswerable question. It’s safe to say, though, it would have diverged radically. The Index of Sustainable Economic Welfare (ISEW) has also sporadically been used and includes inequality, crime, pollution and volunteer work in its estimates. How much traction these metrics will gain remains to be seen.

What is certain is that the management of the world's economies needs transformation. Given the scale of the problems we face, failure to do so can only end in calamity - and time is now tight. Perhaps one of the first steps towards change could be following through on Joseph Stiglitz’s call - made a decade ago - to put an end to 'GDP fetishism'. And if this is to happen, economists’ better get working, because as firebrand historian Rutger Bregman has declared, we will need 'new figures for the new era.

The writer is Former Head, Department of Medical Sociology,

Institute of Epidemiology, Disease Control & Research (IEDCR) Dhaka, Bangladesh. E-mail: med_sociology_iedcr@yahoo.com

SHK