Home 2012: 3 The problem with GDP

The problem with GDP

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Anil Netto explains why GDP growth is a poor measure of economic performance and why we need to move towards ecological economics.

E F Schumacher, author of ‘Small is Beautiful’

Every year, when it comes to the Budget, one of most-watched figures is the GDP growth rate forecast. Can we really achieve 5-6 per cent growth this year, in the face of a global economic slowdown? (The forecast has now been reduced to 4-5 per cent.) That seems to be the main question. Similarly, many other countries look to GDP growth rate as a key indicator of how well their economies are performing.

The unstated assumption is that a higher GDP growth rate will translate to a better quality of life and greater prosperity for the people. But that has not happened for many people, has it? Instead in cities around the world the “99 percenters” have protested in the Occupy movement against an unfair distribution of resources and the wealth accumulation by the top 1 per cent.

What is Gross Domestic Product? Simply put, it is the market value of all the final goods and services produced in a country over a specific period.

That’s the mainstream definition. And that’s a problem: GDP only measures the “goods” and services produced but not the “bads” (resource depletion, pollution, carbon and green-house gas emissions, toxins that are the by-products of our economic system). We are harvesting the “goods” for the current generation but leaving behind the “bads” for future generations to bear. And they will curse us for it.

In fact, conventional economic thinking assumes that raw materials are unlimited: it does not even contemplate a world where these resources are being rapidly depleted and where it will need several planets to obtain the natural resources for everyone to achieve an affluent life-style.

Tenaga is already feeling the effects of the depletion of natural gas supply in Malaysia and it is only a matter of time that electricity tariffs will rise significantly.

Alternatives to GDP

Instead of focusing so much on GDP, we could pay more attention to the UN human development index, which aggregates statistics for life expectancy, literacy, education and standards of living by nation. Malaysia was ranked 61 according to the Human Development Index for 2011.

But even this may not be a satisfactory measure as the gap between the rich and poor may be large and calculating an average indicator for each component may mask the reality. The UN has attempted to overcome this by coming up with an inequality-adjusted human development index.

The UNDP is now working with the Malaysian government to come up with a National Human Development Report for Malaysia by this year – a step in the right direction.

It would be timely to come up with other indices of our own to measure quality of life including health care, housing and health care indicators, access to safe and nutritious natural food, food self-sufficiency, recreational public green spaces per capita, forest cover, resource depletion and pollution.

And how do we take care of the most vulnerable and marginalised in our society – or is ‘development’ only meant for a select few who can afford expensive houses, cars, housing and health care?

Bhutan has come up with a Gross National Happiness (GNH) Index as an alternative to GDP. The thinking behind this is that happiness and well-being result when material and spiritual development take place side by side and reinforce each other. The index stresses the promotion or preservation of sustainable development, cultural values, the natural environment and good governance.

GNH has been refined to include several metrics such as psychological well-being, ecological (including perception of pollution and ecological knowledge), health, education, culture, living standards (such as income sufficiency to meet daily needs and food security), time use (including hours of sleep), community vitality and good governance. Of course, Bhutan has a feudal system but the GNH provides an alternative indicator to GDP growth and FDI.

Indonesia has recently launched the People’s Welfare Index (or IKRAR, Indeks Kesejahteraan Rakyat) to measure the effectiveness of programmes to reduce poverty and income inequality. The index has three main indicator clusters, namely Economic Justice, Social Justice and Democracy.

A fourth cluster should be included: Environmental Justice and Sustainable Development.

Ecological and steady-state economies

Like an accelerating locomotive about to plunge into a ravine, the corporate-led global economy is rapidly hurtling towards environmental catastrophe, loss of biodiversity and even species extinction. Unfortunately, mainstream economists do not even talk about these ecological trends.

Instead it’s all about GDP growth and FDI and what-not. Part of the problem is that the ecosystem and the environment are assumed to be a sub-set of the economy.

But that was not always the case. Even free market economist Adam Smith recognised there was a limit to economic growth. He knew that over the long-term, growth in population would suppress wages and natural resources would be depleted.

Philosopher and economist John Stuart Mill believed that after a while, the economy would reach a steady state of population and stocks. This he thought would not be a bad thing. “It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living and, much more likelihood of its being improved, when minds cease to be engrossed by the art of getting on.” (Limits to growth: the 30-year update by Donella H. Meadows, 2004, Jørgen Randers, Dennis L. Meadows).

Other economists like the Catholic thinker E F Schumacher wrote about “Buddhist Economics” in his book Small Is Beautiful. His economic model was based on a sufficiency in consumption. And he envisioned vibrant communities supported by peaceful and cooperative efforts. Dorothy Day and Peter Maurin, the founders of the Catholic Worker movement, attempted to put into practice ‘distributism’ that focused on the local economy – the idea of making people self-sufficient in food and turning workers into the owners of their own businesses.

This leads us to ecological economics and the study of ‘steady-state economies’, where the economy is manoeuvred to reach a stable, sustainable level. In ecological economics, the human economy is embedded in Nature and not the other way around.

In wealthier nations, ecological economics may even find that de-growth could be necessary if it can be seen that the present level of economic activity is harmful to the ecosystem and against the long-term interests of future generations. Ecological economics also emphasises a fair distribution of resources. It is morally wrong for the top 1 per cent or top 10 per cent to control the majority of wealth while others have insufficient to meet even basic needs.

How apt. The economy should serve the people (not only the present generation, but future generations as well) and it should be sustainable within the context of the larger ecosystem. We have to explore alternative, more just and sustainable economic models – before it is too late.

Anil Netto is honorary treasurer of Aliran.

The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.

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