As we usher in the new decade, it’s imperative that we start thinking beyond Gross Domestic Product or GDP as the sole barometer of economic health and growth. Historically speaking, a nation’s GDP has proven to be a globally acceptable estimate of the value of goods and services within a given economy. But many tend to use it as a canopy term for gauging overall economic success.
Over the past decade there has been a growing consensus within the Asia-Pacific Economic Cooperation (APEC) forum that we are in need of more policies supportive of inclusive, secure, balanced, innovative and sustainable economic growth. These are apart from what APEC—made up of 21 diverse economies surrounding the Pacific Ocean, including economic heavyweights such as the United States, China and Japan—is known for: toppling barriers to cross-border trade in favor of economic growth, for which GDP is a perfectly fine measurement.
The latest APEC Regional Trends Analysis, a bi-annual report by the APEC Policy Support Unit, explores the limitations of GDP in light of the evolving priorities of APEC. GDP does not measure economic factors needed to make economies fairer and more sustainable. GDP alone does not measure, for example, environmental impacts and potential inequality in the distribution of goods and services, especially in an informal economy. It likewise does not factor in the rise of free digital services and the presence of both parental services and volunteer work. Often GDP also fails to measure the quality of goods or services in each setting.
Perhaps most significantly, as economies of all sizes begin to fully embrace the internet age, GDP can only measure growth and success in tangible currency, bypassing the growing impact of the digital economy. It cannot account for anything that goes beyond monetary transactions, like cloud storage, navigation apps, and streaming services. GDP also only works within the confines of an economy’s borders, which makes it an archaic model for measuring the near borderless digital market.
We cannot simply relegate to the background modern-day economic policy discussions like sustainability, inclusion, and distribution. By itself, GDP overlooks such key economic attributes. Though currently pressing, this is not a new concept. Even the Nobel Prize-winning economist Simon Kuznets, whom many regard as the father of GDP, had warned of the potential limitations of applying it as a catch-all measurement, adding that relying solely on it may result in misinterpretation, thus eschewing more nuanced empirical discussions that are needed to guide policy.
Now, more than ever, we need more complementary measures for economic progress during our policy discussions.
One measure, the Human Development Index (HDI), is concerned with examining standards of living based on a population’s knowledge, health and material conditions. HDI is generated by the United Nations Development Programme’s Human Development Report, the latest installment of which examines a new generation of inequalities evident in recent waves of social unrest and which are emerging around issues such as education, technology and climate change.
The Gender Inequality Index, another option to complement GDP, measures potential differences in access to economic opportunities among men and women. Green GDP considers environmental degradation and the depletion of natural resources. Expanded GDP (EGDP) calculates the economic value of free digital services. The Genuine Progress Indicator (GPI) adds in domestic labor and adjusts for environmental impact, inequality, and loss of leisure. The Inclusive Wealth Index (IWI) accounts for human, natural, and physical capital even as it takes the long view on sustainability.
These measures are not meant to completely take the place of GDP as a useful economic indicator, but they should eventually knock down its monopoly over economic policy discourse.
It is not GDP but our overreliance on GDP that is the problem. Elevating alternatives to prominence will certainly clutter our policy toolbox, so to speak, but it will be necessary to better track economic progress in a complex and changing world and inform policies down the line.
8 Comments
It's not in the dash the knocking sound
The finance system needs the overhaul.
Think how the mess of Rural Bank was dealt with. Bail out the borrowers, not the banks, it was.
More measures mean more measurers. More measurers mean ever-more expanding, intensified and detailed measurements. More measurements mean ever more interference and attempt at control. And so human society and its free (and generally well-meaning) activities become merely food to be consumed by bloated, unaccountable and destructive bureaucracies and their parasites.
Jeez, enuff. Yes, GDP is a poor measure. It does not take account of strategic issues like control of supply of essential materials like oil and food or the deterrent capability of the military. It also hides crap government buraeucracy by porking GDP with excess immigration. By all means measure more meaningful stuff, but make it real physical stuff not digital make believe. Things like minutes to drive to the beach comes to mind, or hours to get a doctor's appointment, or planning permission for an extension.
This is step in the direction though. If we measure things in a meaningful way and force politicians to use these measurements then at least we can assess our “progress” rather than just say more, more, more, more, more!
First step, this election come down like a ton of bricks on any politician who try’s to use gdp as an overall indicator. Explain to the public that in NZ at the moment it’s pretty much only measuring population growth.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.