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GDP Outdated
and irrelevant
As the ‘season of economic prediction’ begins to bloom, GDP once again dominates the field. Gross domestic product (GDP) is defined as the monetary value of all finished goods and services produced within a country's borders within a specific time period.
Though widely used as an indicator of overall economic productivity, GDP is a measure of transactions, exchanges of capital. Of course, in many cases, a transaction involves the exchange of a product that has been produceddomestically. However, as a measure of gross transactions, it is unclear whether the produced product being exchanged for capital is incurring a loss or a benefit.
There is no way of knowing whether a transaction puts a nation in the red or black.
In short, GDP is a raw, quantitative measure, which describes nothing more than the fact that transactions have occurred. It is unable to attach a qualitative meaning to the stated transaction, nor able to attach a prediction of future value to the present transaction.
As a raw, quantitative measure, GDP cannot and should not be used singularly, and yet it has become the singular measure of the quality of a nation’s economic policy.
It has become the most-used measure of economic excellence, a marker for defining the world’s superpowers from its sub-par performers. But despite this prestige, the continued overuse of GDP as a yardstick for success has endangered many world economies unsuited to the dominant market dogma. And for those economies which have thrived under the production-at-all-costs model of growth, the consequences are becoming increasingly apparent.
American publications base the success of President Obama’s economic policy on his ability to attain a “3 per cent GDP year”, which would then “validate his economic policy.” Such is the pervasion of GDP as a supreme measure of success, that similarly inclined western publications have forecast the Great Fall of China, based on the natural slowing of its GDP growth rate. Alarmist headlines such as “China’s economy stuck in winter slumber”, and ‘Chinese economic collapse 2015’, the Gordon Changs of the world help perpetuate the belief that GDP growth is the sole measure of economic progress.
A Threat to Sustainable Development
April 30, 2015
GDP alone says little or nothing about the essential fabric of society. It is silent on environmental and social sustainability, health, life expectancy, justice, freedom of choice, income distribution, and on what people spend money.
Patrick Low, Fung Global Institute (2015)
Because we use such a flawed measure of economic well-being, its foolish to pursue policies whose primary aim is to raise it.
Eric Zencey, ‘GDP RIP’, The New York Times, (2009
In the Chinese case, such an over-emphasis leads to artificially inflated figures, environmental detriment and the development of a wholly unsustainable economic model. As Zencey argued in 2009, GDP is a overused economic concept that has “outlived its usefulness”, it is a “deeply flawed indicator of how the economy is doing.”
GDP is a narrow concept which excludes the services of homemakers, and subsistence farmers, and does not take into account externalities.
Dr. Vandana Shiva, Sydney Peace Prize (2010)
At this time, Li Keqiang was also publicly criticising the utility of local GDP growth as a measure of productivity in China. In the face of vastly inflated GDP claims and to counteract the overall unreliability of using a single one-size-fits-all measure of growth, Li preferred to consult cargo volume on a region’s railways, electricity consumption and loans disbursed by banks. The Economist produced an experimental “Keqiang Index”, based on the Premier’s comments, combining the three economic indicators he mentioned.
[The Keqiang Index] reveals an economy that is as dynamic as the official figures suggest, but a great deal more volatile.
Though the purpose of the Keqiang Index was to highlight the inflation of GDP statistics by local corrupt officials, it also demonstrates the dangers of relying on a single one-size-fits-all measure of growth.
A greater threat exists in the lack of cohesion between economic policy and ecology. As Zencey argues, it is only “built-capital” services that are reflected in GDP statistics, negating the positive effects of “natural-capital” services, such as “sun-drying clothes, or the propagation of fish, or flood control and water purification.” If a service cannot be commodified and translated into a currency-based figure, it’s value is negated. Disturbingly, this means that transactions that negatively impact the natural environment, and therefore remove the availability of natural-capital services, are reflected positively in GDP analysis and celebrated as positive growth.
For example, the opening of a polluting ceramics factory in South China can be counted as a double-positive for GDP growth. Not only has an economic transaction taken place in the purchasing of land, and in the subsequent production and sale of ceramic products, but a further purchase needs to take place in order to clean up the river ecosystems destroyed and the soil contaminated in the process of production. The local government must now invest in extensive water-treatment facilities in order to harness the natural-capital service of clean water that would otherwise be freely provided by a natural, uncontaminated river. Instead local residents must continually purchase bottled water, install water filters in their shower heads, purchase hardier cleaning detergents, and sanitise their dishes using a energy-burning machine, again driving up and up transaction-dependent GDP.
However, the opening of an advanced ceramics factory investing in modern, clean ceramic production methods only accounts for the formative transactions and not the aftershock cleanup, thereby producing far less in terms of overall GDP, while providing far more in terms of actual, real-life benefits.
The cost of investing in environmental cleanup technologies - the development and use of which, ironically, drive up GDP - could be negated by tighter restrictions on polluting firms. GDP fails to measure the benefits of pre-transaction cost-reduction, both in terms of capital and ecological benefits such as preventing pollution (rather than retroactively trying to address the impact of it).
If we don’t count ecosystem services as a benefit in our basic measure of well-being, their loss can’t be counted as a loss - and then economic decision making can’t help but lead us to undesirable and perversely un-economic outcomes.
Eric Zencey, ‘GDP RIP’, The New York Times, (2009)
Of course liquidity and the encouragement of spending is important to maintaining a dynamic and developing economy; but in emphasising the importance of GDP growth, governments forget the very people they are supposed to represent. The people. Ignoring the fact that GDP fails to describe the overall economic situation of the vast majority of the population, and is wholly unrepresentative of individual wealth and wellbeing; an over-emphasis on GDP growth genuinely endangers the livelihoods of communities across the world.
No wonder the leaders of the now-largest economy on earth not in terms of GDP are now shunning the measure in their economic policy-making. Perhaps it is about time its western counterpart followed suit.
GDP growth should not be an end in itself, since it is now widely recognised that it does not necessarily create more life satisfaction.
Dr. Jayati Ghosh, The Guardian (2009)
Written by Bey Critical
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