A closely watched metric, GDP paradox should be revisited amidst Covid-19

By Moin Qazi*

While a global pandemic has been a looming risk for decades, COVID-19 has 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 outward-looking 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’s (GDP) live in inadequate housing, without reserves of cash or food and face difficulties in accessing government assistance. Conversely, 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 front-line 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.

In the midst of extraordinary challenges and uncertainty and countless personal tragedies, it is time for us to reimagine our current development architecture. What might be the silver linings 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, and benefits all people. 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 is used with equity and justice, buttressed by the goal of removing poverty, ignorance and disease.

Kenneth E. Boulding, an English-American economist and an interdisciplinary philosopher, once said: “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” He added: “Unfortunately, we all are economists.” Boulding made this statement in the 1970s. Sad to say, we still adhere to this illusion.

Growth and inequality

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 among growth, inequality, poverty and health. We need to ask hard questions rather than assuming the answers.

We have believed that violently expansive growth generates wealth at the top and lets that wealth to trickle down to the working poor majority. But this has not helped put them on the track out of poverty. We need to find a new measure to assess the health of our economies and the people living in them; a broader metric of society’s economic success that corresponds better to the living standards of ordinary people.

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 fulfillment. An equitable, participatory and just society are essential both for economic and social progress but also for the ecological system that permits human activity.

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 well-being. 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, and doesn’t reflect a nation’s welfare. Yet policymakers and economists often treat GDP as an all-encompassing 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.”

GDP as a measure of development is narrow in bandwidth and restricted to the wealthy. It is a complete travesty for measuring microeconomic progress. Job creation, per capita income sectorally, fundamental healthcare and education, domestic savings rate etc. should be the basis for assessing economic well-being. Growth and profit is a natural byproduct of this.

There is a long history of people criticizing the GDP measure as incomplete; including a famous speech by Robert F. Kennedy where 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.

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. For example, 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 carrying forward to future generations would decline, but GDP signals otherwise.

An increasing GDP is often seen as a measure of welfare and economic success. However, this fails to account for the multidimensional nature of development or the inherent shortcomings of capitalism, which tend to concentrate income and, thus, power. GDP is not, on its own, an adequate gauge of a country’s development. Development includes not only an economic dimension but also involves social, environmental and emotional dimensions.

The problem is that in a capitalist society the basic premise is profit for the providers of capital. This is largely achieved by keeping the generators of such profit at basic sustenance level or marginally below it. There is also a constant pressure to lower these levels till there is a resistance which could adversely affect the profit. This game is supported by Govts who come to power with the help of the owners of capital but with a promise of poverty reduction which ensures votes for them. The situation is further aggravated by the extension of favours, quid pro quo promised to the very same capitalists who funded the elections.

We should remind ourselves of the memorable poser of Dudley Seers, first president of the prestigious European Association of Development Institutes (EADI) on development: “The questions to ask about a country’s development are: What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality?” The last two decades have seen a phenomenal rise of a market-driven philosophy of growth over state-driven development models that dominated developing countries in the years of decolonisation.

One section embodied the values and principles of the older nonprofits including social movements, mass organizations and community-based groups. The other section was located in the market and technology spaces and got rapidly populated by new-age nonprofits, social enterprises and online collectives. There is a fundamental contradiction between them.

The old nonprofits’ worldview is premised on a systemic approach integrating social sciences in which the complexity, interdependence and interrelatedness of then-diverse factors at work need to be understood and addressed. In the approach of the new-age nonprofits, by contrast, the emphasis is on finding technology-based managerial solutions for these issues. One is empathetic and human-driven; the other is purely symptom-driven and techno-centric.

Poor and rich

One of the dangers of excessive focus on GDP growth is manifested in the tunnel vision it has created among viewers: Issues affecting the poor and the marginalized have been sidelined, and their status quo persists. The rich continue to accumulate wealth, both by legitimate and illegitimate means. The result is a no-brainer: greater inequality.

 GDP growth does not take into account a number of important things such as equity in distribution of wealth or quality of life and well-being. It also does not consider the extent of institutional corruption, which is one of the biggest obstacles in achieving equitable, quality growth and distributive justice. A major example is the miserable state of the banking sector, which is plagued with a gigantic size of non-performing loans and where defaulters are enjoying near-immunity. 

The dominant paradigm of development is focused on the expansion of economic growth, which, according to a top-down approach, would allow resources to trickle down to the poor, thereby improving their social status. Social interventions made with this idea in mind simply focus on improving the efficiency of processes that increase economic growth. However, this dominant ideology has failed to ensure the welfare of those whom this system pushed to the margins, and so has ended up reproducing unequal social systems. True social change involves a transformation in the social structure, which can only emerge if there is a change in the development discourse and mindset.

There are several social economists who believe that inclusive growth has to be grounded in inclusive governance. In the absence of inclusive governance, the people at the grassroots, that is, the intended beneficiaries of social programs are left desperately dependent on a bureaucratic delivery mechanism over which they have no effective control.

Progress means a more just and equitable society. It is very important that this approach to progress should now be on our minds. We judge progress by GDP. That is a purely material way of doing it. We need a much broader definition of the all-round, integrated progress. It is the new definition of progress toward which we should move.

In India, we have made progress despite tremendous problems. But there are still large numbers of people who continue to remain deprived of the fruits of development. When we talk of progress, we have to realize that it is also a multidimensional concept. It is a concept that covers the entire gamut of human life on this planet.

An alternative system would be participatory development, where the people themselves are enabled to build their own future through elected representatives responsible for the local community and, therefore, responsive to their needs. Successful development practitioners have always recognized the richness of this local wisdom.

It is in this context that real development paradigms based on participatory processes argue for the involvement of local communities in all strategies and approaches designed for their development. The development expert, Dani Rodrik, laid major emphasis on the importance of “local knowledge” and argued that standardized “blueprints” must not emphasize at the expense of local learning and local experimentation. Participatory and decentralized political systems are the most effective ways for processing and aggregating local knowledge. By involving local communities in development, we can ensure more equitable and just growth – something which is not captured by GDP.

GDP is a challenge for the credibility of the economics profession or that of the policymakers who rely on it for ideation. GDP was not meant to be an anchor metric for targeting national economic performance or a measure of national well-being. It had several other purposes, but at some stage in its journey, it became a universal indicator of all things.

There are many alternative measures, including the Human Development Index (HDI), introduced by the United Nations in 1990, and the OECD’s (Organisation for Economic Co-operation and Development) Better Life Index, which are far superior measures of the quality of life and well-being. We need to have a broad and integrated view of development, which focuses on well-being and freedom rather than the standard indicators of economic growth.

We need to have a broad and integrated view of development, which focuses on well-being and freedom rather than the standard indicators of economic growth. In the absence of measures for ensuring sustained equitable distribution of its benefits, economic growth has frequently perpetuated the concentration of wealth in the hands of the already affluent. Governments and donors are now realizing that if they have to significantly reduce poverty, they need to promote inclusive growth. There is now a broad consensus that inequality affects the impact of growth on poverty reduction, and it is necessary to look beyond a “growth-first” agenda and focus on inclusive growth.

*Development expert

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