Is GDP right economic growth measure?

Written by Ndirangu Ngunjri via Business Daily on 5/16/2018

For more than a half-century, the most widely accepted measure of economic progress has been the gross domestic product (GDP). If ever there was a controversial icon from the statistics world, GDP is it.

It measures income, but not equality, it measures growth, but not destruction, and it ignores values like social cohesion and the environment. Yet, governments, businesses and probably most people swear by it. The gross domestic product is the most widely cited economic indicator. As the old quip goes, we value what we measure.

The GDP, Which has been used since 1934, does not adequately reflect the true health of a nation and should be replaced by more comprehensive measures. It measures a nation’s economic performance because it is determined by the market value of all final goods and services.

Using this measure exclusively has placed Kenya at or near the top economically for decades in the region. Yet, it is far too narrow to gauge the overall health of a nation and its people.

Economic growth is basically an accounting measure. It measures how much money is changing hands in the economy. Growth occurs when the value and number of commercial transactions increase in the economy.

For example, if you cook food at home, the GDP does not increase but if you eat at a restaurant, it does.

Similarly, if parents raise their children directly, GDP does not increase. But when parents put their kids in a daycare centre, then GDP rises. Therefore, it only accounts for the growth in the number of commercial transactions in the economy.

It is not a very good measure to understand the development of a society. It is also highly value-neutral, which can be a bad thing. 

The GDP measures mainly market transactions. It ignores social costs, environmental impacts and income inequality. If a business used GDP-style accounting, it would aim to maximize gross revenue — even at the expense of profitability, efficiency, sustainability or flexibility. That is hardly smart or sustainable. Yet since the end of the Second World War, promoting GDP growth has remained the primary national policy goal in almost every country.

There are many things that are important to our economic well-being that GDP does not measure because they’re not monetised.

So, for example, when people provide care labour in their household, taking care of children, the elderly and disabled people, that does not get counted in GDP.

The value of having a stable climate does not get counted in GDP. Open source information that people do not have to pay for does not get counted. So part of the problem is that there are things that are really important to our economic well-being that GDP does not measure. Another problem is there are things that get counted but do not enhance our welfare.

So GDP rather hopelessly, I am afraid, mixes up good things, bad things, counts some of the bad things but not some of the good things. Therefore, it is really not a satisfactory measure of average well-being in any society.

Gains in income that come at the expense of future income, at the expense of future generations shouldn’t really be counted is gain. They should be counted as borrowing against the future rather than lifting our level of income. 

Development, on the other hand, is a very political term whose meaning changes from person-to-person.

A good way to define it is that development leads to the increase in the quality of life of individuals, whether materially, socially, psychologically, politically, or spiritually.

All individuals have some potential that would enable them to achieve their potential. Development removes the constraints such as poverty, illiteracy, lack of skills and poor health that prevent individuals from realising their potentials.

We are gradually moving away from GDP towards other measures but we still have a long way to go.