Thinking beyond GDP

Written by Santosh Kumar Mohapatra via Orissa Post on 8/31/2018

Economic growth is the most powerful single determinant that has ever entered political and economic discourse. The most basic measure of economic growth is gross domestic product (GDP). The lack of GDP growth embarrasses governments as they have to confront opposition furore and criticism from rating agencies, the IMF and World Bank. Therefore, all governments work to enhance GDP or distort data to show higher GDP. The BJP-led NDA government at present is no exception as it boasts of India having become the fastest growing economy in world, even ahead of China, under its regime.

But GDP data released recently by the Ministry of Statistics, taking 2011-12 as the base year, reveals the best years of economic growth were the UPA years 2004-2014 with average growth rate of 8.36 per cent in UPA-I and 7.68 per cent in UPA-II against 5.68 per cent in NDA-I and 7.3 per cent in first 4 years of NDA-II. The Indian economy has achieved double-digit growth once in 2007-08 at 10.23 per cent and then in 2010-11 at 10.78 per cent.

Congress exulted as the new GDP figure was half a percentage point above what was previously reported. But to deny any credit to the UPA, the government disowned the new GDP data produced by a committee it had appointed. It stated that the high growth under the UPA government came from untenable fiscal deficit and reckless expansion of bank credit.

Neither the Congress nor the BJP is prepared to accept the grim reality that GDP growth neither reflects well-being nor prosperity; it reflects in India’s abysmal position in social indicators and poor social infrastructure. GDP growth means money and economic activity and not happiness or sustainability.

GDP indicates economic activity by measuring the value of all transactions for goods and services. It was developed from the work in the 1930s of the American economist Simon Kuznets after World War II, when governments needed data to drive reconstruction. It became the standard for measuring economic output following the Bretton Woods conference in 1944.

Neither the Congress nor the BJP is prepared to accept the grim reality that GDP growth neither reflects well-being nor prosperity; it reflects in India’s abysmal position in social indicators and poor social infrastructure


But right from the beginning, Kuznets and other economists highlighted that GDP was not a measure of prosperity. High GDP growth does not tell you anything about the welfare consequences of growth. The all-important question of whether welfare has increased is completely ignored. Nor does it tell you whether growth has come at the cost of greater income inequality, between individuals and/or between regions, as is increasingly the case.

In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted known issues such as the GDP not being able to capture changes in quality of the products or the value of unpaid labor. The commission also cited evidence that GDP growth does not always correlate with increases in measures of well-being, such as health or self-reported happiness, and concluded that growing GDP can have detrimental effects on the environment.

According to Robert J Samuelson, GDP measures only market output. If you do your own housework, the effort doesn’t count in the GDP; but if you hire someone, the costs add to GDP. Hence GDP shrinks, say, if one marries one’s maid servant as she is not paid anymore. Further, GDP does not subtract many of prosperity’s costs — pollution, crime, congestion, industrial dislocation and inequality to name a few.

According to Robert F Kennedy, “The gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything in short, except that which makes life worthwhile.”

If your parents are staying with you, it does not add to the GDP. If you neglect them and place them in a care home, GDP will increase. When one leaves paid jobs to be a full-time volunteer or social activist, his GDP contribution falls. Each time we repair and reuse something considered disposable we fail to contribute to the GDP. The GDP’s limitations as an indicator of well-being are visible from the following example: Suppose a fire breaks out at big factory, and many are injured and hospitalised. All the costs for ambulances, doctors, medicines and other hospital expenses will jack up the GDP. And if people die, funeral services, hearses, flowers, gravediggers will all stimulate GDP growth.

Extreme weather events, such as floods and storms, can also increase GDP as resources are brought in to deal with these. If GDP growth is our highest aspiration, we should be praying for more weather catastrophes.

The focus on GDP triggers conflicts. While the government tries to maximise GDP, conscious citizens demand that attention be paid to improving security and reducing air, water and noise pollution, among other things, all of which might lower GDP growth. Many also advocate degrowth, and argue that it is the only way to prevent catastrophic climate change and exhaustion of the world’s resources, which is not boundless. Some others also stress on Green GDP, which monetises loss of biodiversity, and accounts for costs of climate change.

But the time has come for human beings to clamp greed and extravagance and to reduce unnecessary consumption, curb wastage and to lead a sensible life to save resources for posterity. Population control should be the prime agenda of government. The whole thrust of public policy, which currently aims at increasing GDP at all costs, should instead focus on raising human capital, enhancing welfare of people and reducing inequality. This is feasible only if the rich are taxed more.

Matthew Wisner