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 jumpstart stagnating markets and convert its civilian industries to a war economy. The current global economic crisis, which has triggered the largest recession since the 1930s, may very well bury GDP once and for all.
Even a defender of economic conservatism such as The Economist hosted an online debate in 2010 concluding that “GDP is a poor measure of improving living standards.” The OECD, another bastion of economic traditionalism, has also been casting doubts on the dogma of GDP growth: “for a good portion of the 20th century there was an implicit 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.”
The GDP mantra has long 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, which is why the UK has recently decided to cut aid to South Africa. The BRICS forum is also based on GDP, as the acronym initially indicated the fastest growing economies of the 21st century.
But what on earth is GDP? It is just a sum of consumption, investment and government spending measured in terms of market prices, which means that whatever is exchanged outside the market (e.g. within households, in the informal economies, through barter, etc.) does not count. In addition, GDP disregards the value of the natural resources consumed in the growth process, as these are obtained free of charge from nature. GDP does not even consider the economic costs of pollution and environmental degradation, which are obvious consequences of industrial growth. All these important omissions make this ‘almighty number’ a very myopic measure of economic success (let alone of ‘living standards’). Household services, for instance, have a fundamental impact on economic performance. If we had to pay for the innumerable services freely available at the household level (from child and frail care to education), our economies would arguably grind to halt. Moreover, healthy households constitute the social fabric of a good society and are the best antidotes against child abuse and crime, two notorious plagues in GDP-obsessed South Africa. In many African countries, the ‘odd jobs’ and the goods and services exchanged informally provide the necessary subsistence to millions of people and often constitute the backbone of the real economy, albeit they do not feature in GDP. According to the IMF, informal economies accounts for 45% of economic output in developing nations and 30% in transition economies, including countries like South Africa. Similarly, disregarding the input from nature makes us forget that economic growth is only possible because of a continuous provision of ‘capital’ from our ecosystems. Agricultural production would not be attainable without clean soil, water, air and other essential natural processes. Industrialization would have not been achieved without the fossil fuels, hydrocarbons and energy sources made available by the planet. When these resources are depleted, however, we risk endangering not only economic progress, but also the very natural equilibrium that makes life possible. By supporting policies that push up GDP, our leaders are weakening households and destroying informal safety nets while privatizing public resources.
Accounting 101 tells us that profit equals income minus ‘all’ costs. As GDP systematically disregards key productive sectors as well as critical costs, no reasonable businessman would use it to run a company. A sustainability indicator such as the adjusted net savings published by the World Bank tells us something that our politicians (and their economic advisors) do not want to hear: most African countries have become poorer in the process of GDP growth, mainly due to energy and natural resources depletion. DRC, Chad and Angola lead the group with a net loss of over 57%, 49% and 42% of their total wealth. South Africa has also accumulated net losses, of over 3%. The future of these countries is bleak, as economic, social and political tensions worsen.
The different procedures and operations to calculate GDP also produce troubling inconsistencies in comparative analysis, especially in Africa, where statistical resources are limited. For instance, as revealed by some recent publications, a country like Liberia would be considered the continent’s second-poorest, seventh-poorest or 22nd-poorest depending on whether one takes the international calculations published by the World Bank, the Penn World Table or the Maddison Project Database, which provide the data used by most development agencies to design their aid policies. When Ghana changed its base-year methodology for the calculation of GDP in 2010, all of a sudden it went from being a poor country to a middle-income nation. As declared by a blog post on the website of the Centre for Global Development, “Ghana says, hey, guess what? We are not poor anymore.”
As documented by the OECD, ever since the 1980s most 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 as the most significant threat to global stability. China has become one of the most unequal societies in the world, which is why, in 2004, the government announced that a ‘green’ GDP would become the country’s main economic indicator (although progress has stalled thus far). In November 2007, the EU declared that GDP has been unduly “regarded as a proxy indicator for overall societal development and progress in general,” but “its limitations need to be taken into account when using it in policy analysis and debates.” A special commission 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 quarterly GDP trends with more general references to the “happiness” of citizens. A couple of months later, the US government followed suit. In April 2012, the UN Secretary General Ban Ki-Moon said that “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.”
And South Africa? Our political and social debate is still obsessed with GDP and its quarterly updates. Both the ANC, with its national development plan, and the DA with its 8% growth plan are fully immersed in the GDP ideology. But now time has come for an open debate on the dark side of GDP. This number was invented to gauge war economies and was then imposed on Africa by international aid institutions. We must realize that GDP has been misleading development policies in our country and in the rest of the continent. We need to devote our best social scientists and statisticians to measuring what really matters, such as quality jobs (rather than ‘playing’ with employment numbers), income distribution, depletion of irreplaceable resources, environmental degradation, carbon footprints, household services and the impact of the informal economy. These are the numbers that matter for our wellbeing and for that of those who will come after us.
Originally published in Cape Times, 4 June 2013.