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Policymaking: Inequality has made GDP an inadequate measure of economic growth

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Born in Cape Town, Natale Labia lives in Milan, Italy, and writes on the economy and finance. Partner of private equity firm Lionhead Capital Partners. MBA from Università Bocconi. Supports Juventus.

How do we measure wellbeing? And, moreover, how does society gauge economic progress?

The arguments of the pros and cons of GDP are well rehearsed. Clearly, as a measure of what is happening in complex systems like modern economies it is far from ideal, and yet the vibrant and usually academic debates around its usage usually conclude with a shrug of resignation. “It’s not perfect, but it’s all we have, and it’s better than any of the other decidedly ‘heterodox’ alternatives” is the standard refrain.

Usage of Bhutan’s favourite yardstick, the Gross National Happiness Index, has somewhat unsurprisingly failed to catch on outside of the Himalayan mountain kingdom.

And yet this does not mean we should not still be having these debates. GDP and indeed most of the other major yardsticks by which we measure economies are over a century old.

In that time the structural complexity and interconnectedness of our global economic system have increased exponentially. Surely if this is the case then the methods by which we measure our economies should have evolved with them?

The questions around the usage of GDP should not be reserved for the detached worlds of Ivy League departments of economics. Critically, and somewhat worryingly, they have very powerful real-world implications.

If we have not changed our measure of how to measure growth and progress, do we not risk not only being incapable of actually understanding what is happening in the economy, but also misdiagnosing the patient and indeed misprescribing supposed remedies?

If so, could the policy decisions resulting from chasing such hackneyed and misrepresentative headline numbers such as GDP not indeed exacerbate the problems that may actually be hindering real progress and increased levels of wellbeing?

Here, the headline data is not just objectively descriptive but, given its inherent significance, there is also a deeply subjective and prescriptive dimension to it.

The debate around these issues is perhaps unsurprisingly most vibrant in the US, where such views are even being heard within the White House. Heather Boushey, a member of President Joe Biden’s Council of Economic Advisers, argues that since the late 1970s GDP has not been a good indicator of what is happening to the average American or American family at all.

Her point is that, if US GDP grew on average around 3% from the middle of the 20th century until the 1970s, then one could assume that on average people were getting better off at that rate. However, in the past 50 years this relationship has broken down.

In the modern US economy, what GDP growth is purporting to describe only applies to those at the very top of the economic pyramid, with those in the bottom 80% to 90% of income distribution experiencing income growth of far less than the average economic growth.

Because of the exponential rise in inequality the metric that we still use and report on every quarter does not mean what it used to and it could just confuse and distort things further.

One is reminded of the joke that when Mark Zuckerberg walks into a bar on average everyone is a billionaire. The sheer chasm of inequalities that now exist mean that averages mean very little at all to anyone.

Of course, if this debate is being had in a US context, nowhere is the debate more necessary and critical than in South Africa.

Only this week, commentators warned that the post-election bout of load shedding is once again likely to put a dampener on any hopes and expectations for a rebound in economic growth during the third and fourth quarter of the year. However, what do these figures mean and for whom?

On average, since 1994 the South African economy has expanded at around 3% per year on a nominal basis; slower than other equivalent “emerging markets” such as Chile, Mexico or Turkey and yet better than nothing; the effects of such growth are obvious in the economic growth engines such as Sandton or the Cape Town CBD.

And yet if one looks any deeper into the statistics it is clear that this growth has barely benefited the lives of the majority of South Africans. If rising working-class wages, better living standards and job creation for the previously unemployed are not proceeds of GDP growth, then is the growth worth having at all?

Could the long-term structural effects of inequality with growth not be worse than mere secular stagnation?

After the tawdry spectacle of a local government election with record low turnout, and with this week’s Medium-Term Budget Policy Statement, this is clearly either a moment of reset for those policymakers in charge of the future direction of the economy or South Africans will have to succumb to the inevitability of continued decline.

Those policymakers could do worse than to start by looking a little deeper into what is going wrong with the South African economy than superficial fetishising on headline growth figures, which increasingly mean less, to fewer people, in increasingly detached parts of the global economy. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

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  • This is not correct about Bhutan’s Gross National Happiness Index. (I worked in Bhutan for 10 years and have written quite extensively about GNH). The author’s overall point about GNH bypassing inequalities is valid, but the GNH system is very powerful. GNH evaluates people’s life satisfaction, so if the poor experience little or no benefit from economic growth, as in South Africa, then that will be reflected in the GNH score. GNH is specifically designed to consider the life satisfaction of the poor. Quality of life is “measured” in both material, psychological and spiritual terms. Economic wellbeing, measured by income, is included as an indicator but rather pointedly it is not placed at the top of the list of indicators.
    GNP is useful as a limited, material-focused econometric tool but toxic as a religion. The GNP / growth mantra is today’s fix, and to question it is subversive.An almost unique voice: Robert Kennedy in the 1960s describing GNP: “[It] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile….” Well, we know what happened to him…

    • I don’t think the author got the GNH wrong. Nevertheless, it surely seems like a worthwhile indicator, particularly after reading your extraction of Kennedy’s quote on GNP.

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