A true measure of economic success

Written by Sonny Angara via Business Mirror on 8/23/2018

Economic managers today use the concept of GDP as a primary measure of their country’s economic success.  In the Philippines, discussions on the performance and the general outlook for our economy focus heavily on whether GDP growth rates remain among the fastest in the world.

Early pioneers of the GDP concept include Nobel laureate Dr. Simon Kuznets, who delivered a 1937 report to the US Congress on a way of measuring a nation’s economic activity using a single metric.

Many others eventually innovated on Dr. Kuznets’s initial work. But the basic idea gained global dominance after World War II because it was used by the World Bank and the International Monetary Fund (IMF) as the main lens for viewing and understanding a country’s economy. Countries had to follow suit, especially if they wanted to receive support for their postwar rehabilitation efforts.

Essentially, GDP measures the market value of final goods and services produced by a country in a given year—with this “output” believed to be the definitive sign of an economy’s health.

Some economic experts, like Prof. Diane Coyle from the University of Manchester, say this emphasis on production and output stems from the fact that GDP was “invented to prepare nations better for warfare.” In her book, GDP: A Brief, but Affectionate History, Prof. Coyle explains that GDP’s early origins can be traced to British scientist William Petty who, in the 1660s, aimed to measure the assets of England and Wales to assess their capability to fight wars. John Maynard Keynes, the great British economist who established the modern definition of GDP, once made a plea during World War II for better figures on the British economy’s capacity to produce ammunition, guns, tanks and airplanes.

Many experts now challenge the applicability of the metric in the 21st century. The Organization for Economic Cooperation and Development argues that GDP provides no holistic measure of the well-being of the country and its population. Even IMF Chief Christine Lagarde called for the creation of a new index to measure overall economic success in current times. In a 2016 briefing, The Economist summed up the critiques perfectly, noting that “[GDP] was [and is] a measure for production, not of welfare.”

Stewart Wallis, former executive director of the New Economics Foundation (NEF), wrote in a 2016 World Economic Forum article that GDP “is like a speedometer […] useful, but doesn’t tell you everything you want to know.… It won’t tell you whether you are overheating, or about to run out of fuel.”

Wallis then cited a 2015 NEF report, which proposed five indicators said to be more effective than GDP: 1) good jobs or the proportion of well-paying jobs versus jobs with minimal wages; 2) well-being or life satisfaction; 3) environment and climate change; 4) fairness and income equality; and 5) health and the quality of interventions.

Other countries have already started using other indicators as the basis for their policies. For instance, in 2008, the Bhutanese government started employing Gross National Happiness as the main measure for both the economic and non-economic welfare of their country.  Such a metric takes into account health, education, time use, cultural diversity, living standards and good governance.

Meanwhile, some economists advocate the use of the Genuine Progress Indicator, which measures other factors, such as the cost of commuting, transportation, noise pollution and depletion of nonrenewable energy sources that contribute to the well-being of a citizen.

Even the United Nations joined the fray when it started using in 1990 the Human Development Index formulated by Pakistani economist Mahbub ul Haq. The HDI is a composite of a country’s life expectancies, education and per-capita income indicators—in a bid to measure how well an economy supports (and spends for) its human capital.

Perhaps it’s time the Philippines follows suit. That isn’t to say, however, that GDP should be disregarded altogether.  In fact, it should remain among our “big-picture” metrics. But we would do well if we employed more resources to better track and understand aspects of our economic life other than final output—such as wealth disparity, environmental impact, access to economic opportunity, and even mental health and well-being.

Even one of GDP’s pioneers, Dr. Simon Kuznets, once said: “Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what.”