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GDP, a statistical chimera

Don't be fixated on growth, focus on other meaningful goals, writes James Meadway.

india Updated: Aug 11, 2011 23:05 IST

The economic news grows daily more grim. Across the developed world, once-optimistic forecasts for growth are being revised downwards. Financial markets are in a tailspin. Debates over the future centre on a single metric: GDP.

Gross domestic product was not always with us. Created in the 1930s, and despite the warnings of its pioneer, it rapidly assumed centrestage in economic policymaking. Growth could now be measured targeted through policy. For the right, it would be a simple gauge of national economic virility. For the Left, it offered the more subtle appeal of an end to disputes over the distribution of wealth. By focusing not on the size of the slices, but on the size of the pie, an interminable conflict between capital and labour could seemingly be resolved. Growth would deliver the public goods – secure employment and a functioning welfare State.

That consensus has now held for 50 years or more. Yet mounting evidence suggests that GDP growth does not register many of the things people actually care about. It is a record of some aspects of economic life, but it fails to capture wider social needs and demands. Health, quality of life and inequality play no part in its measurement.

There is a growing consensus that rising GDP since the mid-1970s in the US and Britain has become disconnected from reported measures of well-being. We know that falling GDP produces misery, as unemployment rises and incomes collapse. But the reverse does not apply. Higher output does not necessarily mean happier people.

Even growth’s blunt promise of material prosperity is failing. Britain’s GDP inc-reased by 11% from 2003 to 2008. Over the same period, median real incomes stagnated. The economy boomed, but few shared in its rewards. Living standards were maintained through unsustainable debt. As we crawl back into recession, the majority will find those rewards still harder to come by — even if a minority continue to grow fat. And environmental damage has no impact on GDP’s progress. A few years of apparent prosperity can be bought at future cost. The Pacific island of Nauru once enjoyed the highest per capita living standards in the world. Its plentiful supplies of phosphate rock, in demand for fertiliser, had been strip-mined since the 1900s. But as the phosphate dwindled, so did incomes. Nauru has been reduced to providing a detention centre in return for Australian aid money. Environmental limits can and will bite. From declining fish stocks to the overwhelming threat of climate change, there are physical limits to our economic activities. GDP registers none of this.

We need to change how we think about the economy. Japan has now laboured through nearly two decades of flatlining GDP. A miracle of growth transformed it from defeated power in 1945 to the world’s second-largest economy. Then, in the 1990s, the growth stopped, never to convincingly return. Yet living standards in Japan are among the highest in the world. Unemployment is half that of the US; life expectancy five years longer.

The old consensus needs breaking. We need to fixate less on growth alone. Econ-omic policy must be broadened towards meaningful goals – creating secure, well-paid jobs; minimising environmental damage. Or we will be left to chase a statistical chimera.

The views expressed by the author are personal

First Published: Aug 11, 2011 23:04 IST