GDP growth not enough

ECONOMY: MORE MONEY DOES NOT MEAN THAT EVERYBODY IS BETTER OFF

To understand the levels of well-being in a society, you can’t rely on a single number.

South Africa is obsessed with its Gross Domestic Product (GDP). When Statistics South Africa released the latest economic data last week, it set off an inevitable flurry of news and opinion that showed just how important we consider these figures to be.

Certainly, generating meaningful GDP growth in South Africa has become an urgent necessity. The economy has to expand to be both more inclusive and supportive of government’s finances.

However, it has long been a settled argument that just looking at a GDP figure does not tell you everything about how well a country is doing.

While it is a meaningful and useful measure, it can both overlook and conceal a lot. Since it only considers the value of economic transactions, it doesn’t cover the many other things that are not only vital to a country’s wellbeing, but are necessary inputs into strengthening its economy.

These are much broader, and far more nuanced. For example, they include spending on research and development, access to the internet, and child malnutrition.

Almost every South African must be aware that the country’s GDP growth is currently meagre, but how many know how the country is performing when measured by the UN Human Development Index? This takes into account not just GDP performance, but a range of other factors as well.

South Africa has shown steady, if unspectacular progress on this index since 1990.

Much of this has been underpinned by a generally expanding economy. It is not, however, the only factor, and is often far less meaningful to people who have actually seen tangible benefits from improvements like access to proper sanitation, clean water and better schooling.

In the past decade a lot more consideration has been given globally to whether more emphasis shouldn’t be placed on measuring and designing better policy around all of these other things. Nobel laureate Joseph Stiglitz, who was the most prominent figure in a commission that investigated this question, recently noted in an opinion piece that:

“Political outcomes in the US and many other countries in recent years have reflected the state of insecurity in which many ordinary citizens live, and to which GDP pays scant attention. A range of policies focused narrowly on GDP and fiscal prudence has fuelled this insecurity.”

Put simply, relying on a GDP figure to measure a country’s state of progress can never be enough. Policy needs to be designed to both maximise economic growth and ensure that such growth is translated into citizens living better lives.

“Why do we talk about GDP so much? Why do we measure it?” asked Athol Williams, a social philosopher and a senior lecturer at the University of Cape Town’s Graduate School of Business. “Yes, it is tangible, but it talks to particular interests.”

In the second half of the 20th century the assumption developed that higher wealth and income levels were the holy grail that automatically led to better outcomes for citizens. Broadly, this is true. Countries with higher GDP per capita do generally have higher levels of wellbeing.

This is not, however, a perfect correlation. More money in a country does not mean that everybody is better off.

The US over the last few decades offers a clear example of this. The chart below from the US Federal Reserve shows how net wealth has expanded massively among the top 10% of the population since 1990, but has stagnated or even declined for the bottom 50%.

Measured purely by GDP, the US has done spectacularly well over this time. However, the rise of political extremism on both the right and left in that country has been an obvious consequence of a large part of the population not sharing in that progress.

This is why measuring a country’s state by GDP alone is insufficient. To understand the actual levels of wellbeing in a society, you can’t rely on a single dollar number.