GDP can’t mea­sure well­be­ing

IN­AD­E­QUATE: ONE OF THE SHORT­COM­INGS IS THAT IT USES AV­ER­AGES WHICH IS MIS­LEAD­ING

The Citizen (KZN) - - News - Patrick Cairns

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.

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