Take a wider view of progress than GDP
The strictly economic measure misses much of what matters in life, writes
For years the health of the New Zealand economy has been defined by its gross domestic product (GDP). The trouble is, whenever there is an oil spill, GDP goes up. Whenever someone is diagnosed with cancer, GDP goes up. Whenever someone drives a car to work rather than walks, GDP goes up. GDP captures ‘‘official’’ economic activity, no matter if it is good and bad, and doesn’t capture a whole lot of other activity like raising kids, helping your neighbour, or biking to school.
New Zealand has been using GDP as the primary measure for progress since 1948 but, in many ways, GDP is deeply flawed. So why do we still keep using it?
Parliament will this week debate new law I’m introducing that recommends a number of new measures to sit alongside GDP to measure how well we’re really doing as a nation.
My new measures mainly focus on environmental changes, like what’s happening to the state of our rivers and lakes, the quality of the air we breathe, or the health of our fish stocks. Our environment is one area where the old GDP metric is completely indifferent.
If my Bill gets enough support in Parliament to make it over its First Reading hurdle, I’d be open to adding social indicators to complement the environmental indicators I’ve focused on. While definitely more politically controversial, assessing how the quality and affordability of our housing has changed over time, how many of our children are growing up in poverty, or how the gap between the rich and poor is shifting would further help put changes to GDP into better context.
Nine years on, National still don’t support a single metric for measuring child poverty, so I’m not holding my breath that my Bill will make it into law.
Why does all this matter? Since the 1980s, New Zealand’s GDP has more than doubled, yet so too have our child poverty rates. One in 10 kids growing up in New Zealand were poor in the late 1980s. Today, it’s one in four kids going to school hungry, without shoes, and coming home to cold, damp homes. Similarly, over this same period of incredible GDP growth, inequality in New Zealand grew at the fastest levels seen in the developed world.
New Zealand went from being one of the most equal societies in the developed world to one of the most unequal.
The story is the same if you look at what has happened to the state of our rivers over this time, or the levels of carbon pollution in our atmosphere. GDP has gone up while many things we value have been in rapid decline.
But you wouldn’t have guessed it from reading all the pages and pages of expert commentary from bank economists and politicians whenever our GDP statistics are announced. They almost always overlook the bigger picture of real changes to the economy that directly affect each and every one of us, and the fact that fewer and fewer New Zealanders are capturing the benefits of a ‘‘growing’’ economy.
Our singular focus on GDP is distracting us from focusing on what really matters in life.
Other countries have shown leadership questioning the current economic orthodoxy on GDP.
In 2004, China began adjusting GDP for pollution, subtracting the damage economic growth was having to their water, their air, and their landfills. In that year alone, environmental damage, had it been accounted for, would have knocked 3 per cent off China’s GDP. China’s President Xi Jinping told his officials: ‘‘We can no longer decide who is succeeding based on nothing but GDP figures.’’
The OECD found in 2006 that GDP per capita remains critical for any assessment of well-being but needs to be complemented with other measures to get a comprehensive picture of wellbeing.
In 2008, the US Government began funding the State of the USA project, designed to create a ‘‘key national indicator system’’ following a period of rising GDP yet falling personal incomes in the early 2000s. In 2010, the UK, under David Cameron’s leadership, began to survey happiness alongside GDP.
Since the 1980s, New Zealand’s GDP has more than doubled, yet so too have our child poverty rates.
The Right-leaning Nicolas Sarkozy established a commission, led by former World Bank chief economist Joseph Stiglitz, to reconsider the way prosperity is measured in France. The commission included development guru Amartya Sen, Nobel-prize winning psychologist Daniel Kahneman, and climate change expert Lord Nicholas Stern. They found that ‘‘new political narratives are necessary to identify where our societies should go’’ and recommended a ‘‘dashboard’’ of measures to capture human welfare.
Finally, the Economist magazine – that bastion of economic orthodoxy – recently said GDP is increasingly a poor measure of prosperity. It is not even a reliable gauge of production given the major technological changes that have happened to our economies since GDP was invented.
This week, Parliament can take one small but constructive step towards addressing the limitations of how we measure ‘progress’. But it might take a change of government in September to actually get them across the line. James Shaw is co-leader of the Green Party.