Reimagining GDP: bridging the gap between economic progress and well-being
Exploring Economics and Governance in a New World (7)
As the world is witness to the ongoing war in Ukraine, it’s time to take a close look at a metric which was developed during the time of the Great Depression in the 1930s and which with World War II on its doorstep, was used by the US and UK as an indication whether the country could afford to go to war.
That metric, known as Gross Domestic Product, or GDP for short — for the first time enabling governments to track any increase or decrease in their nation’s wealth as represented by the value of goods and services produced — has in the decades following WWII become a shorthand for measuring a country’s prosperity and well-being.
Simon Kuznets, chief architect of the United States national accounting system, who helped develop GDP in 1934, already cautioned against equating GDP growth with economic or social well-being. In wartime, it might be reasonable to concentrate on the production of goods needed to win, he pointed out, however in peacetime this was merely a means to a higher end. As he noted: “the welfare of a nation can scarcely be inferred from a measurement of national income”.
This sentiment was echoed by US president Robert F. Kennedy who in a famous speech in 1968 stated that “GDP measures everything [..]…except that which makes life worthwhile”. In more recent times, French president Nicolas Sarkozy warned in 2009 against the widening chasm between GDP growth and citizens’ perception of their country’s well-being: “A gulf of incomprehension between the expert certain in his knowledge and the citizen whose experience of life is completely out of sync with the story told by the data… nothing is more destructive of democracy.”
Nonetheless, GDP continues to hold a strong reign on countries’ assessments of their economic progress and prosperity, with its dominance cemented in 1944 by the Bretton Woods Conference. The conference brought together the leaders of the 44 allied nations aimed at avoiding a recurrence of the instability that had contributed to the outbreak of WWII. The laudable intent of the meeting was to “speed economic progress everywhere, aid political stability and foster peace”. Growing the economy was seen as the main path to economic well-being, which was considered key to creating lasting world peace; and GDP was the tool of choice to track such growth.
Amongst its successes, GDP’s dominance on macroeconomics has seen millions lifted out of poverty, however this fixation has also taken a devastating environmental and social toll. Vast tracts of the natural world have been wiped out in the name of boosting GDP, carbon emissions continue to climb year after year as GDP grows, and the drumbeat of ‘goods and services’ has for decades been driving global inequality.
In doing so, GDP continues to be misused as a scorecard for national well-being, even though it was never designed for this purpose and doing so is not merely inaccurate but can be harmful as well. Per capita GDP is frequently used to compare quality of life in different countries, governments commonly use changes in GDP as an indicator of the success of economic and fiscal policies, and high rates of GDP growth is often seen as the main or even only solution to solving poverty.
Notwithstanding this, GDP merely tracks economic activity, leaving out many considerations while ignoring liabilities that determine whether such activity actually results in greater well-being. GDP for instance does not track the distribution of income generated by economic growth. Neither does it account for the environmental externalities of economic gains; in fact, it may even encourage natural resource depletion as this will translate as a positive gain in a country’s GDP.
GDP as a measure of progress also suffers from the ‘threshold effect’: beyond a certain point, GDP increases are offset by increasing costs and negative side effects such as income inequality and natural capital depletion, as well as people’s perception of human happiness which may manifest for instance as lower community cohesion or a loss of a sense of purpose.
The inadequacy of GDP as a single measure of prosperity is therefore increasingly clear. Take the UK, where continued GDP increases have been accompanied by greater income inequality while ratings of life satisfaction and happiness have deteriorated. Or France, where in a 2017 survey only a third of citizens had a positive perception of the economy, even when GDP growth was positive.
With the major challenges and critical decisions we’re faced with in the current times, the world urgently needs more than a 20th century (post-)war metric to inform how we’re going to transform our economies. This growing realization has led to a host of initiatives to develop new or complementary means of measuring an economy’s true prosperity, feeding ongoing debate as to whether the GDP metric should be improved on, replaced, or supplemented.
A case can be made for relying on measures that improve GDP because it would be rather straightforward to rearrange countries’ national accounting protocols. Nonetheless, there’s compelling evidence of a widening gap between economic growth and true well-being, indicating that, over time, more and more economic activity may be self-canceling from a welfare perspective.
Navigating the trade-off between having single figure indicators for clarity of messaging, while being as encompassing as possible in going ‘beyond GDP’, has also led to the development of a range of new composite indicators, combining several different measures into a single number. By using a single indicator we can simplify reality while capturing the main relevant dynamics at play, although this approach is also vulnerable to oversimplifications and shortcomings. Given the complexity of challenges confronting humanity, a single indicator is unlikely to be sufficient to inform real-time policy-making.
A third approach has been to develop indicator suites, which would see governments reporting on many indicators separately. A downside is the judgement call that is subsequently expected of readers in terms of ‘what does this all mean?’, while very wide scoreboards can also be exposed to cherry-picking by decision-makers looking to showcase positive achievements.
Although every approach has its benefits and shortcomings, we shouldn’t let perfect become the enemy of better. Having a dashboard or basket with a select and very small set of indicators to offer insightful complementary information alongside GDP may be the preferred compromise for time being. These indicators should be released synchronous and in conjunction with GDP figures to create greater understanding of underlying dynamics and trigger necessary policy debate.
Having said all this, the dominance of the “growth is good” paradigm — a belief that GDP growth will eventually solve all major economic problems — continues to hold a firm grip on politicians, business leaders, and the media around the world. In combination with a lack of political leadership and vested interests that make a shift away from GDP dominance considered unnecessary or undesirable in many countries — after all, a new indicator set may paint a much less rosy picture of the state of an economy — makes this a battle not yet won.
Moving forward, we need to see greater recognition that in the end our economic system is a tool for improving well-being rather than something to grow mindlessly for its own sake, even if such growth is labelled ‘green’; and with that, that GDP as its main indicator can no longer be deemed fit for purpose.
The world has already shown a capacity for reaching international consensus on new global goals, as has been demonstrated with the Sustainable Development Goals as well as the Paris Accord. Adopting new measures of economic progress and prosperity however will require a fundamental change in our collective understanding of what truly constitutes desirable economic development. Moving beyond GDP therewith means setting our sights on an alternative horizon: one that instead of rewarding economic output consistently rewards human and planetary well-being.
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Afternote: since 2019 I’ve been involved in efforts to better measure transition and impact in the circular economy (CE). For a landscape study of how governments are using or developing CE metrics, as well as an assessment of the vibrancy and maturity of the CE measurement field, check out this April 2021 report on Circular Indicators for Governments from my hand.
