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World Economic Forum

How should we measure a country’s economy? At Davos, mavericks claim focusing on GDP alone is no longer enough

Developed in 1934 by economist Simon Kuznets to help the United States chart an escape from the Great Depression, GDP measures the total value of a country’s goods and services over quarters and years

PUBLISHED : Thursday, 25 January, 2018, 3:31pm
UPDATED : Thursday, 25 January, 2018, 10:22pm

It can topple governments, confer international bragging rights and pretty much obsessed the government of China once the country began its long march back to economic prowess.

But is GDP (gross domestic product) outliving its usefulness as a metric of economic size, and is it stoking social and environmental crisis by encouraging growth at any cost?

Debate about whether it is time to adopt a more nuanced calculator has grown louder in recent years, and featured anew during discussions at the World Economic Forum (WEF) in Davos this week.

“There’s emerging agreement that the kind of statistics we’ve used in the past just aren’t working any more,” said British economist Diane Coyle, from the University of Manchester, in Davos.

Coyle is one of several experts who have written books on the subject. Others have detailed proposals such as a “Human Development Index”, and a new addition to the literature has been published this week from Financial Times journalist David Pilling, entitled The Growth Delusion.

The kind of statistics we’ve used in the past just aren’t working any more
Diane Coyle, economist

In Davos, Coyle outlined new thinking that would supplement brute economic data with measurements covering human capital (skills and education), physical infrastructure and “intangible capital” such as computerised data and patents. They would also cover environmental quality, and “social capital” looking at how united or divided a country is.

Ascribing a value to data is particularly pressing as companies and customers increasingly transact their lives “in the cloud”. To take one example, a globally accessible and hugely useful resource like Wikipedia is worth precisely zero in traditional GDP accounting models.

Neither does GDP encompass the black market, omitting a huge source of activity and income in many developing countries, including Africa and Latin America.

Notably, GDP cannot measure the distribution of wealth within a country. So while its total value can go up, gains are all too often skewed towards top earners. Those lower down the ladder can fall further behind in relative terms.

That is exactly what has been playing out in the United States, powering a populist backlash that elected Donald Trump, and influencing the British people’s decision to quit the European Union.

After the Brexit referendum campaign, pro-EU campaigner Anand Menon wrote he was trying to explain at one event about the hit to GDP he felt would come if Britons voted to leave the bloc.

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He said one woman in the audience in Newcastle, northern England, shouted back “that’s your bloody GDP, not ours”.

Developed in 1934 by economist Simon Kuznets to help the United States chart an escape from the Great Depression, GDP measures the total value of a country’s goods and services over quarters and years.

Woe betide a government that heads into an election on the back of a recession – usually defined as two consecutive quarters of decline in its GDP.

But even where there is growth, disenchantment with how it is shared out can be seen vividly in Brexit-bound Britain, according to Inga Beale, chief executive of Lloyd’s of London, the insurance market.

“We’ve got to find another mechanism to include much bigger parts of the population, and use different metrics to measure success of a country,” she told CNBC television.

GDP is widely seen as a blunt instrument to measure growth, and has attracted criticism from Nobel Prize winners Joseph Stiglitz and Amartya Sen, and International Monetary Fund chief Christine Lagarde, among others.

But countries that do execute sustained rises in GDP can use the accreted wealth to transform their standing.

We’ve got to find another mechanism to include much bigger parts of the population, and use different metrics
Inga Beale, chief executive of Lloyd’s of London

Exhibit A is China, which after decades of pell-mell growth is now the world’s second-biggest economy as measured by GDP, awarding it the kind of international prestige and influence it has not enjoyed for centuries.

But even in China the GDP debate is intensifying as President Xi Jinping attempts to prioritise quality over quantity in the economy’s expansion.

So what are the alternatives to GDP?

Dissident thinkers are calling for a holistic approach that calibrates not just economic inputs but human capital along with quality-of-life issues.

With the planet warming and some resources already exploited to near exhaustion, including many fisheries, the WEF proposed a broader measure of growth called the Inclusive Development Index that accounts for such factors.

The 2018 index assessed 103 economies by measuring three individual pillars – growth and development, inclusion, and intergenerational equity. On that basis, Norway is the world’s richest country and the rest of the top 10 comprises small European countries and Australia. Germany is in 12th position, the United States is 23rd and China 26th.

“Decades of prioritising economic growth over social equity has led to historically high levels of wealth and income inequality,” the WEF said in a report. “[That’s] caused governments to miss out on a virtuous circle in which growth is strengthened by being shared more widely and generated without unduly straining the environment or burdening future generations.”

The WEF report showed that while advanced economies grew GDP by 5.3 per cent, on average, between 2012 and 2016, inclusion grew only by 0.01 per cent.

“Under-emphasis of these [structural] policies relative to macroeconomic, trade and financial stability policies is a key reason for many governments’ failure in recent decades to mobilise a more effective response to widening inequality and stagnating median income as technological change and globalisation have gathered force,” the report said.

Overall, the findings largely make for bleak reading. Over the past five years, despite a growing world economy, social inclusion has fallen or been unchanged in 20 of 29 advanced economies and intergenerational equity has worsened in 56 of 74 emerging economies, according to the report.

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Over the same period, less than half of the advanced economies were successful in reducing poverty and only eight recorded a decrease in income inequality.

WEF argued that using GDP as a primary economic metric is ineffective as it measures current production of goods and services rather than the extent to which the economy contributes to broader socio-economic progress as seen in median household income, employment opportunity, economic security and quality of life.

In any case, Professor Coyle said, countries do not drastically have to overhaul their national accounting to take stock of environmental degradation caused by the rush for growth.

“You just need to breathe the air in Beijing to feel the cost,” she said.

Additional reporting by Bloomberg