Gross Domestic “Problem”: Time has come to let go of GDP

Crises are revelatory moments. Roughly eighty years ago, amid the Great Depression of the 1930s, the American government invented the gross domestic product (GDP) to measure economic performance and jumpstart its stagnating economy. The current global economic crisis, which has triggered the largest recession ever since the 1930s, may very well bury GDP once and for all.

Although media attention is almost exclusively focused on the world’s treacherous ‘road to economic recovery’, the turmoil triggered by the economic crisis and the preoccupations with climate degradation seem to suggest that a business-as-usual solution to the world’s problems is no longer feasible. Even a defender of economic conservatism such as The Economist hosted an online debate on the issue in 2010 and concluded that “GDP is a poor measure of improving living standards.” The Organization for Economic Cooperation and Development (OECD), another bastion of economic traditionalism, has also been casting doubts on the dogma of GDP growth. It recognizes that

“for a good portion of the 20th century there was an im-plicit assumption that economic growth was synonymous with progress: an assumption that a growing GDP meant life must be getting better. But now the world recognizes that it isn’t quite as simple as that. Despite high levels of economic growth in many countries, we are no more satis-fied with our life (or happier) than we were 50 years ago [and] increased income has come at the expense of in-creased insecurity, longer working hours and greater com-plexity in our lives.”

For decades, the GDP mantra has dominated public debate and the media. Countries are ranked according to GDP, the global definition of ‘power’ is based on GDP (e.g. superpowers, emerging powers, etc.), access to global governance institutions is also granted on GDP performance (e.g. the G8 or G20 members are selected according to their GDP) and development policies are driven by the GDP formula. Currently, governments striving to come of out of the Great Recession largely design their policies and strategic choices following the diktat of GDP growth, and even global efforts to curb climate change and greenhouse gas emissions are being opposed by many countries because they may exert a negative impact on global GDP growth.

GDP neglects all economic activities that do not take place within the market and are not priced accordingly

But what is GDP? GDP measures the value of goods and services exchanged in a given time period, generally every three months. It measures production output in terms of market prices and can be represented by the following formula:

GDP = Consumption + Investment + Government spending + eXports – iMports

As it is designed to measure only what is exchanged at the market level, GDP neglects all economic activities that do not take place within the market and are not priced accordingly. For instance, the innumerable services rendered at the household level or the many ‘odd jobs’ that provide the necessary subsistence to millions of people (and often constitute the backbone of the real economy) are not counted in GDP. Yet, as reported by the IMF, this ‘core’ economy (often termed informal economy) has reached remarkable levels worldwide: in 2002, it equalled 44% of economic output in developing nations, 30% in transition economies, and 16% in the OECD countries. When parents look after their children, provide for their education and care and directly grow their food, none of these activities is counted in GDP. But if they hire a professional childcare service or do shopping at the local supermarket, then these expenses are fully included in GDP, despite their social and health-related impacts. Moreover, as it does not take into account how income is distributed across society, GDP disregards the fact that the profits accumulated at the top may offset a loss of purchasing power at the bottom. As documented by the OECD, ever since the 1980s most industrialized nations have simply grown ‘unequal’, with the richest segments of society absorbing most of the GDP dividends. Business leaders seem increasingly aware of this: at the 2013 World Economic Forum, participants indicated economic inequality at the most significant threat to global stability.

GDP encourages a buy-new philosophy as it neglects whatever is repaired, recycled and reused. In doing so, it encourages a society in which things that break must be immediately replaced with  new items in an endless vicious circle of consumerism. GDP thrives when resources are privatized and monetized, as its methodological design does not recognize free-of-charge contributions to our economic welfare. Nature, which is the ultimate provider of all our wealth, is treated as a cash cow and a dustbin. All resources that nature provides, from the ecosystem services that make agricultural production possible to the energy that we use to fuel our consumption society, are invariably overlooked by GDP. As they are given to us for free, they do not feature in the GDP equation.

No reasonable company would use GDP as an accounting tool

Moreover, all the damaging effects of economic production, from pollution to environmental degradation, are not considered by GDP as ‘costs’ to be deducted from our ‘gross’ production. The result is that natural capital is neglected twice: when it provides resources and when it absorbs the negative externalities of economic growth. GDP treats natural capital (which is irreplaceable) as disposable income, thus encouraging the depletion of common resources. No reasonable company would use GDP as an accounting tool. All business leaders know that capital investment must be subtracted from gross profits if one is to gauge the actual performance of a company. When companies disregard this basic accounting principle, they can be prosecuted for fraud and are more likely to go bust. Yet, this is what we do everyday when we tacitly accept that GDP is used to measure economic performance in our countries.

Over the past decades, progressive economists, ecologically minded think tanks and NGOs have been criticizing GDP with a view to limiting its influence on policy making. Yet, until now, this critique has been limited to a small circle of experts, while GDP has con-tinued growing in popularity and influence. Only recently, the convergence of the environmental and economic ‘crises’ has brought new blood into this debate, also triggering important actions within the political arena.

Some of these actions are only cosmetic (characterized by some ‘greenwashing’ elements) while others aim at more radical chang-es. For instance, in 2004 China announced that a ‘green’ GDP would become the country’s main economic indicator in order to account for the financial impact of environmental degradation, pollution and other negative externalities. In November 2007, the EU hosted a high-level conference titled ‘Beyond GDP’ and, two years later, the Commission released a communication on ‘GDP and Beyond: Measuring progress in a changing world’, where it argued that GDP has been unduly “regarded as a proxy indicator for overall societal development and progress in general.” But, since it does not measure environmental sustainability or social inclusion, “its limitations need to be taken into account when using it in policy analysis and debates.” The special commission on social progress set up by former French President Nicholas Sarkozy and chaired by Nobel laureates Joseph Stiglitz and Amartya Sen also highlighted the profound inadequacy of GDP as a measure of wellbeing. In late 2010, British Prime Minister David Cameron called on the UK Office for National Statistics to complement the ever-more gloomy calculations of quarterly GDP trends with more general references to the “happiness” of his fellow citizens. A couple of months later, the US government followed suit. In April 2012, the UN Secretary General Ban Ki-Moon said:

“Gross Domestic Product (GDP) has long been the yardstick by which economies and politicians have been measured. Yet it fails to take into account the social and environmental costs of so-called progress. […]  We need a new economic paradigm that recognizes the parity between the three pillars of sustainable development. Social, economic and environmental well-being are indivisible. Together they define gross global happiness.”

Most importantly, though, GDP growth has not only been criticized by experts, but also by ordinary people. This has been particularly true in industrialized societies, where the GDP creed was first developed before being ‘sold’ to the rest of the world. These days, North America and Europe are in the eye of the storm, ravaged by international speculators and apparently unable to run the race of ‘growth at all costs’ against the formidable competition of China, India and a bunch of other fast-growing economies. Quite unexpectedly, this predicament has turned the ‘old West’ into a fertile terrain for revisionist approaches. New civil society initiatives and campaigns, from transition towns to degrowth movements and alternative currencies, are being promoted throughout both continents with a view to fighting GDP and radi-cally rethinking our dominant economic model. This is the most important struggle of all time.

Lorenzo Fioramonti is the director of the centre for the Study of Governance Innovation at the University of Pretoria, South Africe. He is also the author of the recently published book “The Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number”.

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