GDP

Has Gross Domestic Product (GDP) Overstayed Its Welcome?

With the COVID-19 pandemic, many of our health care systems and development cycles have failed. Even in developed countries such as the USA, Italy, Spain, and France. Countries were forced to go into lockdown because of this. This raised concerns with regards to how prepared the world was to manage such a pandemic. The most affected from this coronavirus pandemic are the people living in poverty and the people working in and micro, small and medium industries all over the world. This calls into question the type of development we have created. A world where the heroic essential workers aren’t getting paid enough and the top 1% of the population owns half of the world’s wealth. Has focusing on development using only the lens of GDP has led us to this dilemma?   

Read: Decent Work and Economic Growth in Times of Coronavirus

What is even Gross Domestic Product (GDP)?   

GDP is the financial measure of all finished goods and services produced in a given time frame. In laymen’s terms, it is the net sum of everyone’s income in a country. Since world war 2, GDP has been considered the sole measure of growth. The development of a country is mostly measured in terms of income. Due to this, we shifted our focus from the growth of community and environment to a consumption-oriented development.   

Limitations of GDP  

The formula to calculate GDP is as follows: 

GDP = Consumption + Private Investment + Government spending + Exports – Imports1      

By simply looking at this equation you can understand that GDP does not take into the social and environmental pillar of sustainable development.  GDP as a criterion does not take into consideration tax savings or voluntary production. Let us look at the example from the US to understand the limitations of GDP.   

USA is ranked 1 in GDP and is valued at $19.485 trillion. According to the report by EPI (Economic Policy Insititute of USA), the top 1% salary grew by 138% since 1979, and wages at the bottom 90% grew by only 15%.   

GDP

Source – Economic Policy Institute

The above figure says a lot and tells about how wrong the perception of growth is. You can see it has widened the gap in inequality. This does not represent equal growth for all. Is this the system of development we want for our future? We need a new way to measure development and growth. Let us explore an alternative tool that has been gaining a lot of popularity, GPI.    

Watch: Closing The Inequalities Gap To Achieve Social Justice

What is the Genuine Progress Indicator (GPI)?   

GPI was built on top of the Index of Sustainable Economic Welfare (ISEW), which was originally proposed by Daly and Cobb in 1989. It has about 26 variables. These 26 variables are related to economic, social, and environmental progress. GPI focuses on economic sustainability rather than just economic activity.  Two states in the US, Maryland, and Vermont have officially adopted GPI as an indicator to measure its growth. People from Maryland have reported saying that GPI has helped influence the development of equal growth and bring in clean energy programs. So, how does GPI compare with GDP?  

GDP vs GPI  

Kubiszewski in her 2013 paper, “Beyond GDP: Measuring and Achieving Global Genuine Progress” compared the GDP and GPI progress of 17 countries.   

GDP

Source –
Beyond GDP: Measuring and Achieving Global Genuine Progress

From the graph, it can be seen how GPI is almost constant after 1975. While GDP might have helped with development in the beginning, after the 70s, there is a huge disparity between GDP and GPI. This indicates that only unequal economic growth was occurring since then. The social and environmental pillar of sustainable was being neglected. This is why 2.3 billion people still don’t have access to basic sanitation, 2.6 billion don’t have access to electricity and 50% of people don’t have access to basic education.

Over-reliance on GDP has affected our development model and it is clear that it is not sustainable. We need a new metric for development. Something like the GPI which can offer a more holistic approach to sustainable development. Even other indicators like the Human Development Index (HDI) and the Happy Planet Index (HPI) can be utilized. HDI measures life expectancy, literacy, and Gross National Income (GNI) per person. Whereas, HPI measures wellbeing, life expectancy, inequality of outcomes, and ecological footprint. There are many other indexes out there that measure development more holistically than GDP.  

We shouldn’t continue to use GDP to measure growth because it is easy and comfortable. If we want to save our planet from climate change and start promoting a sustainable way of living, we need a new way to measure and incentivize development.   

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