Follow Us:

The GDP Paradox~I

Since GDP is a gross value, the implications of the negative factors which erode the actual value don’t get netted, and hence there is a distortion.

MOIN QAZI |

While a global pandemic has been a looming risk for decades, Covid-19 sent shockwaves through societies, economies, health systems and governments around the world. The pandemic has revealed both the fragility of our social security and welfare delivery systems and the need to come up with resilient, long-term solutions and more robust systems. It has exposed fundamental weaknesses in the current economic models, namely the fact that they do not benefit everyone equally. This has been true for a very long time, but apathy allowed those that benefit from the current system to stand by as spectators to growing global inequality. The idea of globalization has changed on its axis with some of the largest outwardlooking economies now becoming inward-focused. The crisis has exposed how many people, even in some of the world’s richest countries that boast enviable gross domestic product (GDP), live in inadequate housing, without reserves of cash or food and face difficulties in accessing government assistance.

In developing countries that have been stuck with stagnating GDPs, poor village women have turned out to be highly resilient in coping with the crisis as caregivers, breadwinners and frontline health care and social service responders. They carry the greater burden of nature’s cruelties but also seem to have the emotional range to come up with amazing responses. The idea that women are “greener” than men, have a special bond with the planet and have a lower carbon footprint has been around for several decades. But these realities are not factored into the variables that add up to GDP. It is now being widely argued that GDP is far from a robust indicator of social welfare (progress), and we need to seriously reappraise it. Amid extraordinary challenges and uncertainty and countless personal tragedies, it is time for us to reimagine our current development architecture. What might be the silver lining in the crisis, and how might leaders use this moment to build a more prosperous, equitable and sustainable world? We should now aim for a new economic world order that is humane, inclusive and sustainable. Our models have become too growth-fixated, which is not allowing growth to lift all sections of people equally.

The basic challenge of our times is to ensure that wealth creation is not only tempered by equity and justice but is buttressed by the goal of removing poverty, ignorance and disease. The goal should be to create an economy that supports the health and wellbeing of every person on the planet, as well as the health of the planet itself. In an economy that treats the gross domestic product as the ultimate end, people and the planet are mere means, and much of the work that sustains society is ignored entirely. This status quo is not only pathological, unsustainable, and bad for our health; it is also entirely unnecessary. Equity should in reality be instrumental to the pursuit of long-term prosperity in aggregate terms for society as a whole. This can ensure that the economic benefits of growth are broadly shared. All this calls for research on the relationships between growth, inequality, poverty and health. We need to ask hard questions rather than assume the answers. We have believed that aggressive growth can generate wealth at the top, and this will trickle down to the deeper ranks that most of the poor inhabit. But this has not helped put them on the track out of poverty.

Many are arguing that we need to find a new measure to assess the health of our economies and more importantly, the people living in them. There is a need for a broader metric of national economic success that corresponds better to society’s bottom-line measure of economic progress which is broad-based living standards. Equity and justice are not simply moral issues: they are a practical societal requirement ~ a prerequisite for social survival. No society can be good for long ~ for either the rich or the poor ~ if the most deprived and marginalized are unable to live with dignity and fulfilment. An equitable, participatory and just society is essential both for economic and social progress but also for the ecological system that supports the human superstructure. Dubbed as one of the greatest inventions of the 20th century, GDP has long been a closely watched metric for politicians, administrators, policy doctors and journalists alike.

But it is no longer lionized, and our love affair with GDP may be coming to an end because, as economic historian Adam Tooze says, it is “a narrow and somewhat arbitrary slice of reality.” Economic indicators such as GDP were never designed to be comprehensive measures of prosperity and welfare. Initially used to measure the effectiveness of the United States’ economy during World War II, the concept quickly became a universal measure of economic health and progress. When we use GDP as a lens to observe economic development, we focus on what is measured and ignore those things that are not measured. GDP merely measures the size of a nation’s economy. Yet policymakers and economists often treat GDP as an allencompassing unit to signify a nation’s development, combining its economic prosperity and societal well-being. Joseph E. Stiglitz, a Nobel laureate in economics, argues that “GDP is not a good measure of well-being.” “What we measure affects what we do, and if we measure the wrong thing, we will do the wrong thing,” he adds. “If we focus only on material well-being ~ on, say, the production of goods, rather than on health, education, and the environment ~ we become distorted in the same way that these measures are distorted; we become more materialistic.”

There is a long history of people criticizing the GDP measure as incomplete, including a famous speech by Robert F. Kennedy when he said that GNP (a close cousin of GDP more common at the time) “measures everything in short, except that which makes life worthwhile.” A polluting factory or an inefficient bureaucracy contributes positively to GDP, while activities that provide leisure and improve mental health technically contribute nothing to the national accounts. There is no place for leisure time, inequality, pollution, public health and political freedoms in the GDP equation. GDP growth is best understood as a top-line measure of national economic performance, in the sense that it is a means (albeit a crucially important one) to the bottom-line societal measure of success: broad-based progress in living standards.

Since GDP is a gross value, the implications of the negative factors which erode the actual value don’t get netted, and hence there is a distortion. However, since the depreciation of capital assets is not counted, GDP doesn’t represent the correct value. For instance, if a wetland is drained to make way for a shopping mall, the construction of the latter contributes to GDP, but the destruction of the former goes unrecorded. If the social worth of the mall were less than the social value of the wetland, the economy would have become poorer (wealth would have declined). Consequently, this depreciation across the social value across the present and future generations would decline, but GDP would signal otherwise.