GDP can’t measure wellbeing
INADEQUATE: ONE OF THE SHORTCOMINGS IS THAT IT USES AVERAGES WHICH IS MISLEADING
Have to measure what is necessary to deliver economic growth.
By gross domestic product (GDP) per capita, Equatorial Guinea is the second richest country in Africa. According to the World Bank’s latest figures, the country ranks 55th in the world on this measure, on a par with Russia, and richer than Mauritius.
On the United Nations Human Development Index, however, Equatorial Guinea ranks 141st. This is below the island states of Vanuatu and Micronesia, both of which have a GDP per capita more than seven times smaller. Mauritius ranks 65th.
While the small oil-rich west African country might be an extreme example, it does illustrate the shortcomings in using GDP as the sole measure of progress. Girls in Equatorial Guinea only attend school for an average of four years, and life expectancy is 58. This is lower than in Eswatini, which has the highest adult prevalence of HIV in the world.
This illustrates why focusing on GDP on its own is not very helpful to understand a country’s state of wellbeing. It is also inadequate when considering how to improve it. Enrique Rueda-Sabater, senior advisor at the Boston Consulting Group (BCG) and a senior lecturer at Esade Business and Law School in Barcelona, said: “It’s a question of thinking about the things not captured in the GDP measure, which are many.”
Over 10 years ago Nobel laureate Joseph Stiglitz was the central figure in a commission that identified “the limits of GDP as an indicator of economic performance and social progress”. The commission’s work was universally accepted. Practically, however, it has changed little. Countries still see GDP as the most important, and sometimes the only measure of their progress. On one level, this is reasonable. GDP is a single, immediate and understandable figure. The higher a country’s GDP per capita, the more likely it is to deliver high levels of wellbeing for its citizens. That correlation is not, however, perfect.
“One of the shortcomings with GDP is that it uses averages,” said Andrew Dittberner, chief investment officer at Old Mutual Private Client Securities. “So when you have a country like the US where the top 1% own more than 50% of the wealth, when that 1% is doing well it looks like the whole country is doing well. In reality, however, a large part of the population is being left behind.”
This is a critically important consideration when thinking about government policy. “We all agree that wellbeing is the goal,” said Rueda-Sabater. “But if you don’t measure it, you are not going to make any progress towards taking it more seriously.”
In a recent opinion piece, Stiglitz put it like this: “What we measure affects what we do: if we measure the wrong thing, we will do the wrong thing. If we focus only on material wellbeing – on, say, the production of goods, rather than on health, education, and the environment – we become distorted in the same way that these measures are distorted; we become more materialistic.”
While GDP measures actual production, it also does not capture the potential for production. This includes factors such as the health of citizens, education outcomes, and whether a country has adequate infrastructure. Conversely, GDP can be boosted by things that are detrimental to society. For instance, a major natural disaster like a flood or an earthquake could, however, result in a short-term boost to GDP due to the rebuilding activity.
“The other thing it doesn’t take into account is the distribution,” pointed out Andrew Aitken, senior economist at the National Institute of Economic and Social Research in the UK. “Stiglitz argued that we need to look at the distribution because GDP per capita could be going up but inequality could be rising at the same time. ”
In the South African context, these questions are particularly important. As Athol Williams, a senior lecturer at University of Cape Town’s Graduate School of Business, noted, GDP measures outputs, not inputs. So we have to consider, and measure, what is necessary to deliver economic growth, like adequate nutrition, access to healthcare and safety. This might also force a rethink of policy assumptions.