Gross Domestic Product – Increasingly Being Questioned

Economic growth has raised living standards around the world. It is measured by gross domestic product (GDP), but is narrowly restricted to the “dollar size” of a nation’s economy and fails to measure a nation’s welfare be it social such as stress levels of people thus their happiness or the health of the natural environment such as water, river and air quality levels. 

For some seven decades, governments have clung to the GDP measurement.

The Council of Outdoor Recreation Associations (CORANZ) challenged this over a decade ago when in its election charter in 2008, detailing desirable outdoor recreational and environmental needs, it listed the need for GDP to be replaced by GPI.

GPI stands for Genuine Progress Indicator. Point 17 in the election charter says “The index for national prosperity, Gross Domestic Product (GDP) based on solely economic indicators, be replaced by a Genuine Progress Indicator (GPI) based on three values – social, environmental and economic to thus fully measure the quality of life.”

The charter was sent to all MPs and Parliamentary political parties asking for indications of support or non-support and comments. Significantly and disappointingly, parties despite being given several weeks to respond, failed to reply.  Most had to contacted to get a reply. Of individual MPs less than half a dozen of 120 MPs bothered to reply.

Obviously MPs, and for that matter policymakers and most economists, continue to support GDP. Yes most economists seem to – but the majority is decreasing and an increasing number are challenging the GDP mantra.

The bad news is that it’s slow work. Policies that result in unbridled economic growth are still being used by most governments including New Zealand. The good news is an increasing number of economists do not support blind faith in GDP.

It’s becoming increasingly accepted that focusing exclusively on GDP and economic gain to measure development ignores negative effects of economic growth on society, such as contaminated water, dwindling flows in rivers, monocultures on the land, siltation of the sea-bed, plundered fisheries and with human living domestic violence and income inequality. 

It’s well past time to admit limitations of the GDP dogma and embrace society’s quality of life into the measurement of a nation’s progress.

Some countries have begun the transition. India, has developed an Ease of Living Index, which measures quality of life, economic ability and sustainability.

Bhutan has a Gross National Happiness which considers factors like equitable socio-economic development and good governance. But it seems the environment is not fully represented. However at least it’s a giant step away from the austere and insensitive sole preoccupation with GDP.

Fast growth, as measured by GDP, has been considered as the mark of success of a country. In striving for maximum economic growth, it possessed strong exploitation of the natural environment.

Too often the environment was sacrificed to get GDP growth moving, whether it be clean air, clean water, wilderness values or even raising a national park lake at Lake Manapouri.

GDP, used to rank countries’ performance, determines how much a country can borrow and at what rate. However there’s growing realisation GDP is out of step with modern needs and is well past its used-by date. It was developed in the 1930s as a means of fighting the Great Depression. Today – almost a century later – and with today’s people population explosion, it is deficient as a true method of measuring modern living.

GDP is a gross number based on goods production. “It is good at quantity, but lousy at quality,” is how one commentator neatly put it..

The deficiency is shown by a hypothetical example thus:- if an airline’s safety record improves, GDP ignores it. Probably GDP would prefer a plane crash – so that it can build a new plane.

GDP is about unbridled growth, a reflection of New Zealand’s failed “Think Big” policies of the 1970s and 1980s.

From GDP’s perspective, bigger and more is always better. Infinite growth. It’s akin to a dog chasing its tail.

GDP is not a measure of “wealth” – in its wider sense – at all. It is a measure of income. 

But GDP has a part to play but only as one leg of the tripod.

The other two legs of the tripod are equally important. Measures of wealth, equality, recreation, the environment and others can no longer be ignored.

English economist Kate Haworth is convinced of the failure of GDP. Her book “Doughnut Economics”, (Penguin Books) highlights a need for balance between quality of life and environment for a thriving and inclusive economy. 

Kate Raworth, who now works with both Oxford and Cambridge universities in the UK, was studying the indicators of a thriving economy when she realised the diagram she drew was doughnut shaped. 

In her Doughnut Economics model, the innermost ring consists of the resources required to lead a good life – the social foundation. 

This includes things like housing, food, water health, education, and so on. The outer ring of the doughnut represents the earth’s environmental limits, or as Kate Raworth describes it – the environmental ceiling.