Business Day: ‘The value of an endlessly expanding GDP is doubtful’

Published in Business Day, 24 April 2014

THE speed at which a country’s gross domestic product (GDP) is growing has for the past 60-70 years come to be considered the most important measure of whether a country is succeeding or failing. But what if our most cherished notions about what makes a nation successful are wrong? What if economists who lead the obsession with this metric are, in fact, charlatans?

There have been some very prominent critics of our obsession with GDP growth.

In 1968, Robert Kennedy noted that GDP includes the costs of air pollution, road accidents, managing crime, militarism and environmental destruction, but does not include the “decency of our factories and the safety of our streets alike … the beauty of our poetry, or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials”. He concluded that GDP “measures everything, in short, except that which makes life worthwhile”.

Former French president Nicolas Sarkozy pointed out in 2009 how GDP figures have come to be widely misused: “GDP statistics … are increasingly thought of as a measure of societal wellbeing, which they are not.”

Sarkozy appointed the eminent economists Joseph Stiglitz and Amartya Sen to head a commission whose task was to devise new measures of social and economic progress. Stiglitz explained the issues: “If we have poor measures, what we strive to do (say, increase GDP) may actually contribute to a worsening of living standards. We may also be confronted with false choices, seeing trade-offs between output and environmental protection that don’t exist. By contrast, a better measure of economic performance might show that steps taken to improve the environment are good for the economy.”

Perhaps the most striking critic of the misuse of GDP statistics was the man who devised them in the 1930s, the economist Simon Kuznets, who later emphasised that “the welfare of a nation can scarcely be inferred from a measure of national income”, and that “goals for more growth should specify more growth of what and for what”.

There are perhaps four key problems with the use and misuse of GDP figures.

First, the implicit idea that growth is automatically good and can or should continue indefinitely is magical thinking on a par with the most egregious frauds perpetrated by quacks and some New Age thinkers. We live on a finite planet, with limited, increasingly overexploited resources and natural systems. We are alarmingly close to exhausting the economically retrievable portions of key resources such as oil, coal and phosphorus. But GDP measurements imply a universe of inexhaustible resources. Astonishingly, GDP does not account for depleted mineral resources, nor even for infrastructural degradation, much less for environmental damage, ignored as “externalities”.

“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist,” observed systems thinker Kenneth Boulding.

Second, the growth obsession obscures the real extent to which we are succeeding or failing as societies. Growth figures tell us nothing about equality, human rights or fundamental quality of life.

The immense human and environmental costs of China’s runaway economic growth are visible to everyone who visits there — yet do not show up in GDP statistics.

This leads us to the third problem — that growth can become uneconomic — destroying real prosperity even as it purports to create it. Former World Bank economist Herman Daly writes: “Uneconomic growth occurs when increases in production come at an expense in resources and wellbeing that is worth more than the items made.” This already holds true at a global level. The Global Footprint Network estimates that at some time in the 1980s, humanity pushed the earth into net environmental deficit — exploiting nature beyond its capacity for self-renewal.

“For years, statistics have registered an increasingly strong economic growth as a victory over shortage — until it emerged that this growth was destroying more than it was creating. The (global economic) crisis doesn’t only make us free to imagine other models, another future, another world. It obliges us to do so,” said Sarkozy.

Why is this? Perhaps because the heedless pursuit of growth is (fourth) inherently destabilising to economies. An example: in the years up to the 2008 crisis, the US Federal Reserve kept interest rates at unprecedented low levels to maintain US economic growth. The Fed’s efforts succeeded, but the growth that followed was funded not by national savings, but by debt — not least in the subprime mortgage market, which, as everyone knows, collapsed, creating the global economic crisis and immense human suffering.

So what are the alternatives to our obsession with GDP and growth?

We must distinguish between healthy and unhealthy growth and stick to the former. In nature, there is no such thing as healthy endless growth. Runaway growth in ecosystems ends in overnight population collapses. Medically, we call it cancer.

We can distinguish between healthy and unhealthy economic growth. Unhealthy growth is unequally distributed, fuelling inequality. Unhealthy growth is excessively dependent on debt (financial or environmental) and is unsustainable because it invariably leads to financial and environmental collapses. Unhealthy growth is unjust and undemocratic — it defers the full costs of development to future generations. Unhealthy growth occurs without checks and balances, such as regulation.

We need new measures of wellbeing that include social and environmental dimensions, that do justice to the dignity and unlimited value of life. Some believe a single but more inclusive metric can supplant GDP. Others fear that simplification might introduce new distortions and say we must pay attention to a full “dashboard” of indicators, as Germany has since 2010 with its 10 W3 Indicators. With three target dimensions — economy, ecology and social wealth — the W3 Indicators are “GDP, income distribution, and government debt”; “greenhouse gases, nitrous oxide, and biodiversity”; and “employment, education, health, and freedom”.

We need new priorities, as these W3 indicators suggest. Few developed countries need to expand their economies further to meet the real needs of their citizens. Efficiency, equality and sustainability are more important for them. Developing countries, including South Africa, may need further growth in some dimensions, but must stop considering growth a proxy solution for all our problems — it is madness when these problems, such as poverty and inequality, are barely dented by growth. It is good that our government talks about “inclusive growth” — but GDP does not measure inclusivity.

We must ditch the misleading language of growth and recession. During Japan’s “lost decades” of low growth or contraction, its “recessionary” economy continued to meet people’s real needs far better than do many “growing” economies.

The methodology for calculating GDP was published by the United Nations Statistical Office in 1993. It is not to blame for the misuse of GDP figures, but the methodology should be updated to produce something closer to what people imagine it means — an integrated reflection of the progress of nations.

Last, we need a new habit — never cheering reflexively when we hear that there has been growth, but instead always (echoing Kuznets) asking: “Growth of what, for whom, and at what cost?”

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Published by

David

I am an environmental writer, journalist and speaker living in Cape Town, South Africa.

One thought on “Business Day: ‘The value of an endlessly expanding GDP is doubtful’”

  1. Saw this earler – brilliant David!

    Did you see NewYorker copying your justebikes blog post last month?

    xxj

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