Whenever politicians promise to deliver ‘growth’, they are often exclusively referring to Gross Domestic Product (GDP). But economies are complex – they are made up of individuals and institutions each with their own interests. Can this one indicator accurately reflect all that complexity?
The concept of GDP emerged from the 1930s Great Depression. Influenced by the work of John Maynard Keynes, the incumbent President Roosevelt was keen to increase government spending to revive the US economy. But first, Roosevelt wanted to improve his understanding of the state of the economy. The only data available, though, were sketchy figures on stock indices and freight car loading. So economist, Simon Kuznets and his team developed the first set of national income accounts, akin to what we now refer to as ‘GDP’.
Gross Domestic Product is the total value of goods and services produced within an economy, in a given period of time. The measure is simple, easy to understand and allows for (historical) comparison between countries.
However, among the first of its drawbacks is that it doesn’t take into account the economic effects of environmental degradation. Take Kenya, in 1963, its land cover by forest was 10%. By 2006, this had dropped to 1.7%. This deforestation created huge amounts of valuable timber. Using GDP alone, the selling of this timber would indicate an increase in ‘growth’.
But Kenya’s economy relies heavily on agricultural exports (e.g. tea and flowers) and eco-tourism. Deforestation increases the risk of soil erosion and desertification, damaging Kenya’s ecological health. Consequently, agricultural yields could be reduced, leading to a loss of income for farmers. Eco-tourism revenues could also be diminished because of the destruction of Kenya’s physical environment. So, overall, deforestation is likely to have a negative economic impact on Kenya. And, that is before we even consider the possible economic losses resulting from global warming, fuelled by deforestation. But GDP alone suggests that deforestation results in a net economic benefit, highlighting the simplicity of the indicator.
Another issue is that GDP tells us nothing about inequality. GDP per capita tells us what life would look like if all the GDP in a country were shared equally among its population. However, this is a purely hypothetical situation. Thus, GDP may increase, but it might only make a select few better off. Inequality matters for growth because it can weaken future economic growth prospects.
Politically, a growing divide between rich and poor can fuel anti-globalization sentiments, as shown by the EU referendum result. Social and political instability of this kind makes countries less attractive in terms of foreign direct investment. But worryingly, it can also fuel the resurgence of dangerous economic nationalism as demonstrated by the rise of Trump and his rhetoric of “American jobs for American people”.
This brings us to the question, what do we want GDP for? Do we simply want to know how much output was produced in an economy? Or, do we also want to understand something about the average citizen’s experience of life, in the economy? It is a remarkable paradox that despite being the world being richest and most technologically advanced it’s ever been, global levels of happiness are low.
Longer working hours and the pursuit of money can reduce leisure time and increase anxiety, particularly in developed economies. Countries such as Sweden, are taking strides to tackle the issue of wellbeing. They introduced a six-hour work day to try to improve the work-life balance of workers.
Importantly, wellbeing does matter to the economy. Stressed individuals are likely to be less productive. They are also more likely to be ill, both mentally and physically, leading to higher healthcare costs. Thus, some scholars have suggested that development indicators should reflect levels of happiness.
There might never be a perfect indicator of development. Measuring happiness is difficult and highly subjective. Estimating the economic losses from environmental degradation is also not easy. Attempting to measure multiple dimensions of society in one indicator is an impossible task. But, GDP is far too simplistic to be used on its own. So, policy makers must stop placing so much emphasis on this one indicator and wheeling it out at during election time.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of The Social Jungle.