Beyond GDP: The Making of a Sustainable Economy
Issues such as how best to promote economic growth that is socially inclusive, environmentally sustainable and conducive to employment creation are increasingly at the centre of the international debate on how to build sustainable economies. Governments face the complex challenge of finding the right balance between the competing demands on natural and social resources, without sacrificing economic progress. Nigeria is not an exception; considering the nation’s crude production, which has served as the engine of economic growth by GDP since early 1970’s and the significant number of people living below the poverty line, the situation of the country is unpleasantly ironic. Such epileptic development when placed beside the huge crude production, raises a question on the impacts of Gross Domestic Product (GDP) as an economic growth measuring tool.
The GDP of a country represents the total monetary value of all finished goods and services produced by the county during a specific time period (quarterly or yearly). Using Per capita GDP, this economic variable measures economic growth, standards of living of the citizens of an economy, and of their economic welfare by dividing the total output of a country by the number of people in the county. In this context, economic growth occurs when real output increases without adjustment for any change in environmental assets or citizens’ well-being.
Meanwhile, Sustainable Development which is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Brundtland Commission, 1987), seeks to achieve in a balanced manner, economic development, social development and environmental conservation. In this regard, a 15-year sustainable development agenda made up of 17 goals with 169 targets as a universal set of goals, targets and indicators was adopted by the United Nations’ member states on September 25, 2015, to frame their agenda and political policies till the year 2030.
GDP vs. Sustainable Development
The application of GDP as an economic variable for the purpose of maximising and measuring economic performance is in conflict with sustainable development which takes in consideration social inclusion and environmental conservation. This faces the government with the complex challenge of finding the right balance between competing demands on natural and social resources, without sacrificing economic progress.
The incompatibility between sustainable development and GDP was recognised in the set of Rio Principles drawn up at the UN Conference on Environment and Development in 1992 as a framework for stabilising the environment. Principle 16 states: National authorities should endeavour to promote the internalization of environmental costs. “Environmental costs” here refer to the depletion of the earth’s natural capital — ecosystems, biodiversity and mineral resources — and the damage caused by waste pollution. Social costs within contemporary economic models experience similar neglect.
Ironically, the limitations of GDP were first articulated by its own inventor, Simon Kuznets, as far back as 1934 when he stated that “the welfare of a nation can scarcely be inferred from a measure of national income”. The problem however, is that GDP has come to be regarded as a proxy indicator for overall societal development and general human progress because when GDP reports rising income, it is equated with rising well-being.
Nevertheless, this logic is fundamentally flawed, as the following points illustrate:
· GDP growth produces ‘gross domestic by-products’ (dirty air, polluted water, toxic waste, congestion, and noise). The costs of these are not deducted from GDP, neither are the costs considered of the resulting damage to our personal economic and/or social well-being.
· GDP includes what is known as ‘defensive consumption’ without acknowledging the social problems that either cause it or result from it. This type of negative spending that makes a ‘positive’ contribution to GDP includes the cost of increased security due to higher crime rates (our fences, alarms, security patrols), the cost of national defence due to higher perceived threat of terrorism or extra spending to clean up pollution.
· GDP does not show how income is distributed and this makes a big difference to societal well-being. GDP treats every unit of income equally, regardless of who receives it.
Besides, many economists believe that we can replace depleted natural assets with manufactured assets promoted by GDP, for example, using plastic instead of wood. This is a fatal flaw indeed, considering that GDP advocates ignore the fact that natural resources are still needed to produce the manufactured goods that they claim can replace natural resources.
GDP advocates also argue that since prices are a good indication of resource scarcity, there will be no sustainability problem if the prices for natural resources have been fairly stable. But with the concept of sustainable development, price is not a good indicator of the need for sustainability since the market does not include goods and services that are not priced, such as air, nature, healthy populations, and equality. Additionally, markets do not account for the reality of externalities or the real cost of economic activity such as the costs a society bears but does not agree to do. For instance, the construction of a new airport may have a positive effect on GDP but this may contribute to climate change, noise and air pollution, loss of habitat and the increase in inequality (whilst noting that airports benefit only people who can afford to fly).
Among other emerging economies, Nigeria should therefore recognise that even though GDP has been expanding consistently since 1945, it was never originally designed as a measure of the real economy. The real economy is the overall societal well-being such as the natural capital assets and the immensely valuable but non-marketed ecosystem services those assets provide. The GDP growth does not take into account the costs of inequality, environmental damage, and other factors that affect welfare such as the natural capital assets that provide ecosystem services — climate control, water supply, storm protection, pollination, recreation, and many more, estimated to contribute significantly to human well-being.
By GDP standard, periods of economic growth are often triggered by increases in aggregate demand, such as a rise in consumer spending, which also requires an increase in output or resources to sustain the growth. Such rapid growth today may exhaust resources and create environmental problems for future generations. The more economic growth activities powered by GDP, the more are their damages towards the environment and at the expense of the future generation. This is obvious in the case of the United States and European economies which drew heavily on natural resources and depended almost entirely on fossil fuels to reach their current sizes of about $14 trillion and $16 trillion annual GDP respectively. The economic variable that drove this development had serious consequences for the environment, such as the permanent destruction of species and ecosystems and an increase in atmospheric carbon dioxide that most scientists believe is already changing our climate. Disquietingly, Nigeria is not far from this same calamitous path of GDP materialism.
Despite higher incomes from economic growth, the well-being of millions of Nigerians is still below a good standard of living and the environment remains threatened by unchecked human activities. These imply that economic growth alone is not enough for a justifiable development trajectory of any nation because the economic, social and environmental aspects of every action are interconnected. Therefore, considering only a pillar of sustainability (economic) as in the case of GDP, can lead to “unsustainable” outcomes. The GDP focus on profit margins usually leads to social and environmental damages that will cost the society in the long run.
Consequently, massive growth as encouraged by GDP could be responsible for many problems if a short-term increase in wealth comes at the expense of long-term well-being of the society and the environment.
Editor’s Note: This is an introduction to the series on “Beyond GDP, the making of a sustainable economy”. Next week’s edition will focus on “Towards Sustainable Development: Calculating the Real Economy”.
*References are available on: www.sustainableconvos.com
