Special report: We need more than GDP growth (part 1)

Why measuring GDP is not enough.

By gross domestic product (GDP) per capita, Equatorial Guinea is the second richest country in Africa. According to the World Bank’s latest figures, the country ranks 55^th in the world on this measure. It is on a par with Russia, and richer than Mauritius.

On the United Nations Human Development Index, however, Equatorial Guinea ranks 141^st. This is below the island states of Vanuatu and Micronesia, both of which have a GDP per capita more than seven times smaller. Mauritius ranks 65^th.

While the small oil-rich west African country might be an extreme example, its situation does illustrate the shortcomings in using GDP as a country’s sole measure of progress. Girls in Equatorial Guinea only attend school for an average of four years, and life expectancy in the country is 58. This is lower than in Eswatini, which has the highest adult prevalence of HIV in the world.

This illustrates why focusing on GDP on its own is not particularly helpful when trying to understand a country’s state of wellbeing. It is also inadequate when considering how to improve it.

Read: Is GDP still a good measure of economies?

“I don’t think you want to ignore economic growth,” says Enrique Rueda-Sabater, senior advisor at the Boston Consulting Group (BCG) and a senior lecturer at Esade Business and Law School in Barcelona. “But it’s a question of thinking about the things that are not captured in the GDP measure, which are many.”

Focusing on the wrong thing

Over 10 years ago Nobel laureate Joseph Stiglitz was the central figure in a commission that identified “the limits of GDP as an indicator of economic performance and social progress”. The commission’s work was pretty universally accepted. Practically, however, it has changed little. Countries still see GDP as the most important, and sometimes the only, measure of their progress.

On one level, this is reasonable. GDP is a single, immediate and understandable figure. It can stand as a proxy for a lot of other things. The higher a country’s GDP per capita, the more likely it is to deliver high levels of wellbeing for its citizens.

That correlation is not, however, perfect.

“One of the shortcomings with GDP is that it uses averages,” explains Andrew Dittberner, chief investment officer at Old Mutual Private Client Securities. “So when you have a country like the USA where the top 1% own more than 50% of the wealth, when that 1% is doing well it looks like the whole country is doing well. In reality, however, a large part of the population is being left behind.

“So by just focusing on GDP you are potentially focusing on the wrong thing,” he adds.

This is a critically important consideration when thinking about government policy.

“We all agree that wellbeing is the goal,” says Rueda-Sabater. “But if you don’t measure it, you are not going to make any progress towards taking it more seriously. This is why BCG has developed a broad, relative measure of wellbeing.”

In a recent opinion piece, Stiglitz himself put it like this:

“What we measure affects what we do: if we measure the wrong thing, we will do the wrong thing. If we focus only on material wellbeing – 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.”

What we are missing

As a single number, GDP lacks both nuance and context. There is a lot that it doesn’t show. The methodology for measuring it was built in the 1930s, when mass production was the dominant economic model. There is however a lot that it overlooks

Read: GDP is a flawed but magical indicator

“It was built to measure products and services with a transactional value attached to them – where money changed hands in a formal way,” Dittberner says. “So volunteering at your local charity is not counted as part of GDP, but surely that’s good for society? Other very simple examples of non-transactional items that would be overlooked include someone babysitting my kids or me cleaning my home. There is undoubtedly a societal benefit from that, but it does not count towards GDP.”

While GDP measures actual production, it also does not capture the potential for production. This includes factors such as the health of citizens, education outcomes, and whether a country has adequate infrastructure.

Conversely, GDP can be boosted by things that are detrimental to society. For instance, a major natural disaster like a flood or an earthquake would obviously be bad for an economy – it would destroy wealth and damage productivity.

It could, however, result in a short term boost to GDP. This is because the rebuilding activity would register as added production.

“The other thing it doesn’t take into account is the distribution,” points out Andrew Aitken, senior economist at the National Institute of Economic and Social Research in the UK. “Stiglitz argued that we need to look at the distribution because GDP per capita could be going up but inequality could be rising at the same time. If you look at median household income and compare that to GDP per capita, there is a big divergence.”

GDP has to come from somewhere

In the South African context, these questions are particularly important because, as Athol Williams, a social philosopher and a senior lecturer at the University of Cape Town’s Graduate School of Business, notes, GDP measures outputs, not inputs.

“GDP is a meaningful measure, but it shouldn’t be the only measure,” Williams says. “Our economic system is a function of our social system. The things we do and how we do them have an economic output.”

Put another way, economic growth is always the result of a lot of other things. So when the national obsession is that we have to grow the economy, it doesn’t actually help that much to only measure whether the economy is growing or not. We have to consider, and measure, those things that are necessary to deliver economic growth, such as adequate nutrition, access to healthcare and safety.

It’s not that South Africans don’t know that these things are important. The issue is that they are not properly and regularly measured or given the same level of prominence as the GDP figures. Yet, they are of far more immediate concern to the average citizen.

This might also force a rethink of policy assumptions. Is creating jobs a result of economic growth, for example, or does economic growth result from businesses operating in a supportive environment in which they are able to create more jobs?

Fix what needs fixing

It also demands that consideration is given to the root causes of issues impacting on the economy, and not simply trying to address them as symptoms.

“How do you address gang violence on the Cape Flats, for example?” asks Williams. “You don’t send in the army. You fix the society. Until we can provide economic alternatives for them, they will keep doing it. Sending in the army doesn’t take away the need to pay for school fees or their parents’ medical care.”

This may not sound like tangible economics, but it has to be to get a full picture of a country’s state of progress. Only measuring wealth or income assumes that everything can be explained in rand and cents terms. This is the fallacy that a one-dimensional focus on GDP has perpetuated.

What is actually imperative is understanding whether wealth and income translates effectively into improved wellbeing.

“There are countries with similar wealth and income that have fairly different levels of wellbeing,” says Rueda-Sabater. “So that proves that there is something else there. And that’s also a reason for optimism. It means that there are things you can do, regardless of your income level, to do better.”

Seeing a shift

This does not mean that we shouldn’t measure GDP, or disregard its significance.

“GDP does have its uses,” says Aitken. “For example, it is important for deciding monetary and fiscal policy. I don’t think we want to get rid of it entirely.”

However, it is important to recognise its inadequacies. Focusing too much on whether the economy is growing or not, does not answer questions about the kind of society that is needed to support growth, or the kind of society that such growth should foster.

Those are the really significant, and more complex, questions that policy makers should be concerned with.

“I think there are signs in a quite a few different countries of things starting to happen in this regard,” says Aitken. “The OECD [Organisation for Economic Co-operation and Development] is working on this area a lot and it does seem like gradually things are probably starting to change. But maybe that’s just wishful thinking.”

Tomorrow: How to more effectively measure South Africa’s wellbeing