Economic Growth -Beyond GDP
Author: Simon Kettleborough - Aephoria Partners
( Article Type: Sustainable Development )
Economic growth has for decades been the darling of modern political process. High growth is cause for national celebration and pride. Low or negative growth provokes accusations of government incompetence in developed nations and outpourings of pity for developing countries.
Since the beginning of the so-called ‘financial crisis’ in 2008, every major world leader has affirmed that their overriding objective is to “get the economy moving again”. Just a few days ago, my own home nation’s Prime Minister, David Cameron, promised a “forensic, relentless approach” to British future economic growth and a similar pledge has come from most major economies in recent months, including South Africa. Indeed, of all global leaders only Nicolas Sarkozy, in commissioning Jo Stiglitz et al’s 2008 Commission on the Measurement of Economic Performance and Social Progress, has come close to acknowledging the need for a wholesale revolution in mindsets and values upon which the future of life on Earth now depends. This shift in consciousness is critical because it is now clear that economic growth has failed to deliver on its promises. Our inexorable pursuit of growth through debt-fuelled turbo consumption has caused us to drown in our own shallowness, fall into significant deficit with the Earth and its resources and turn a blind eye to unacceptable levels of rising inequality between and within nations. Indeed, there is now increasing evidence to suggest that much of the growth, certainly in ‘developed’ nations, actually accumulates ‘illth’ faster than it generates wealth and is decidedly uneconomic.
Yet it is not entirely mysterious that the concept of growth has become something of a fetish for humankind. Just like the department store baubles on which it depends, growth has been beautifully packaged and sold to us as the silver bullet, the panacea that will create endless wealth whilst expelling societal ‘illth’. Unemployment on the rise? Economic growth will create jobs! Millions caught in a ‘poverty trap’? Growth will rescue the poor! Can’t afford to cut emissions? Growth will drive efficient technological solutions! Crippling inequality levels? The nectar of growth will trickle down!
But on closer interrogation of the hard evidence, we discover that in the UK for example, GDP has doubled in the last 30 years yet most measures of subjective well-being have remained the same or dipped. In the US, real incomes have increased by 400% since 1946, yet there has been no increase in levels of well-being. This is a common theme in most developed nations, where growth-fuelled Selfish Capitalism is now driving unprecedented levels of stress, debt, insecurity, unhappiness and mental illness, whilst at the same time destroying the very things that actually do increase human well being such as communities, family life, neighbourhoods and relationships. Compounding this tragedy is the fact that developing nations such as South Africa and Brazil are not far behind on the same calamitous path of materialistic addiction.
So, despite higher incomes from economic growth, we are less happy or fulfilled than ever before. And because the measure we use to track growth, the GDP, has become a catch-all measure of progress, the true costs of the more corrosive outcomes of growth are constantly hidden from us.
Mis-measuring human progress
Faced with having to change our views or prove that there is no need to do so, most of us immediately get busy on the proof.
So how has this come to pass? To consider this question, we must go back to the original foundations of the Gross Domestic Product.
The GDP aggregates the value added of all money-based economic activities. It is based on a clear methodology that allows comparisons to be made over time and between countries and regions. GNP is a similar measure to GDP, but it includes the value of the income earned by citizens of that nation living abroad and excludes any income earned by foreigners living in that country.
Criticism of GDP is not new news. Eminent economists such as Daly, Sen and Galbraith have all questioned the validity of a perceived correlation between income and welfare on a number of fronts. Progressive politicians too have queried its purpose; more than 40 years ago, Robert F Kennedy eloquently remarked that “[GNP] measures everything in short, except that which makes life worthwhile”. And 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”.
Yet today our politicians, economists and policy makers make exactly that inference. And so, therefore, do we.
The problem 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, we equate this with rising well-being. 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 measure unpaid housework or care giving, however if a cleaner or professional nursemaid is hired, these activities do contribute to GDP
• GDP does not tell us what mix of goods and services benefit or harm society because it assigns equal weight to products of the same price, whether enriching or detrimental to human flourishing
• 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.
And then consider some of the farcical, real-world outcomes of such shortcomings:
• The clean-up of the recent oil spill in the Gulf of Mexico will have had a hugely positive impact on US GDP. The environmental, social and human costs of the disaster will remain unaccounted for.
• When a nursing home looks after someone’s sick father, it has a positive impact on GDP. But if a daughter takes care of her sick father, her work does not figure in national accounts.
• The sale of an assault rifle and a musical instrument of equal price is deemed to be of the same value to the well-being of a nation as measured by contribution to GDP.
• GDP generally falls when people get married because they end up spending less money. On the other hand, every divorce or separation that causes one parent to pay maintenance to another to look after the children raises GDP. In other words, growth goes down when we love each other and goes up when we fall out! Writing in 1865, John Stuart Mill asked, “Towards what ultimate point is society tending by its industrial progress? When the progress ceases, in what condition are we to expect that it will leave mankind?”
As we move ever closer towards a natural, spiritual and ethical bankruptcy, it seems that we are conducting an empirical experiment with the planet and its inhabitants to find out the answer!
What are the alternatives?
Do not quench your inspiration and your imagination; do not become the slave of your model.
- Vincent Van Gogh
So if GDP isn’t the way to measure progress, then what is? Other options are broadly divided by economists into two main categories according to their defining objective to either modify or replace GDP.
• The Measure of Economic Welfare (MEW) was the work of William Nordhaus and James Tobin from Yale University and was one of the first indicators calling for a view predicated on consumption rather than production and it proposed the inclusion of elements previously excluded from national accounts such as household work, pollution and spending on crime.
• The Index of Sustainable Economic Welfare (ISEW) was developed in 1989 by Herman Daly and John Cobb, and attempts to make explicit the link between the economy, the environment and society. It accounts for private spending on defence (a negative), domestic housework (a positive), the costs of environmental harm (a negative), and it also corrects for income inequality.
• The Genuine Progress Indicator (GPI) was developed in 1995 by Redefining Progress, a private research institute based in California. It arrives at its Genuine Progress Indicator by taking GDP figures and then adjusts them to take into account economic, social and environmental factors such as income distribution, crime statistics, the loss or increase of leisure time and unemployment data. It adds points for household and volunteer work, and subtracts points for negatives like pollution, car accidents and environmental degradation. It is interesting to note that in the U.S., the last 30 years have seen stagnation on GPI despite a significant increase in GDP.
• The Human Development Index (HDI) is the work of the United Nations Human Development Report. It calculates an annual HDI that ranks the world’s countries on their achievements in three main aspects of human development: health (life expectancy at birth), knowledge (as measured by literacy rates and school and college enrolments) and standard of living (as measured by GDP per capita based on purchasing power parity.) For 2007-08, Iceland was in first place, Canada was fourth, the U.S. 12th, and Sierra Leone was last, in 177th place.
• The Happy Planet Index (HPI) is the brain-child of the London-based new economics foundation to, in their own words, “show the relative efficiency with which nations convert the planet’s natural resources into long and happy lives for their citizens.” The most recent HPI ranking puts Vanuatu, Colombia and Costa Rica first, second, and third respectively. Canada is in 111th place (just below Benin), and the US comes in at 150th.
• The Gross National Happiness (GNH) indicator emerged in 1972 when the King of Bhutan declared that he felt it would be more in tune with his country’s Buddhist values to measure happiness rather than economic growth. As a result, moral and ethical values have been placed at the core of Bhutan’s economic strategy to affect better living standards, housing, access to and quality of healthcare, education, biodiversity community vitality, diversity, emotional well-being and governance.
In truth, the solution may not be to replace or adapt GDP but instead to adopt a dashboard of indicators that delivers three main outputs:
• A more forensic and transparent analysis of true economic performance (which should include externalities, wealth distribution and household consumption).
• Inclusion of well-being indicators as part of our national accounting systems to report on health, education, quality of governance, political participation and current and future environmental conditions.
• Careful consideration of the wider impact of economic activity on the sustainability of human, natural, social and physical capital.
Where to from here?
For the first time in history the physical survival of the human race depends on a radical change of the human heart.
- Erich Fromm
The concept of ‘Lock-in’ describes a situation where parties have invested in deeply embedded systems or processes, the complexity of which makes change extremely unlikely. Today we are ‘locked-in’ to the erroneous myth that GDP growth means progress, a myth that must be unpacked, made conscious and dispelled if we are to affect change.
Change will come from the most fearless of politicians, those who dare to suggest that GDP growth should not be considered to be inevitable, who are brave enough to deconstruct decades of intellectual and emotional investment into the GDP construct and who are prepared to admit that it only influences us because we have all been duped into believing that it matters.
Change will come from the most progressive of economists, those who acknowledge that enshrining GDP growth as humankind’s overall welfare strategy is fundamentally flawed, who are ready to silence the rebuttal that welfare and happiness have no place in economics and who can see that their profession’s role to rid the world of market failures must extend to the removal of imperfect measures of progress.
And change will come from every other human being who can finally awaken from the hypnotic clutches of economic growth, ready to embrace a different model; a model centred on Connection rather than Separation, on Planetary rather than Monetary and on Being rather than Having.