GDP has historically been the lens through which we viewed our success: high GDP growth meant that the economy was booming and that lives were improving, while a drop in GDP in real terms meant that the economy was in a bad state and lives were getting worse.
But in these times of unprecedented disruption, the question as to whether GDP is truly such a great arbiter of how successful an economy is, is more pertinent than ever. China has already dropped a numerical target for GDP, and other countries have thought about following suit. As a Key Performance Indicator (KPI), GDP should showcase to the world how a government is doing, but in fact it does very little of the sort.
As the Covid-19 pandemic swept through the world, the drop in GDP is held up as the problem when we go into a lockdown. But the question arises as to why GDP should be the arbiter of prosperity in the first place. Even before the pandemic, warning flags were sounding all around, as in its very nature GDP does not measure free services or how people are getting value.
For example, it is estimated that people would pay $600 for Facebook, $1,100 for YouTube and $17,000 for Google, showing just how valuable these are to people, even if they are not accounted for by GDP.
According to Mark Cliffe, the chief economist at ING group, GDP could have been underestimated by at least 0.75%, but is likely to be underestimated by up to 1 or 2%. Even if this does not sound like very much, it has huge real-world impacts, as it would mean that over the last 15 years, median income would have actually increased by 50% instead of 15%.
GDP also misses more intangible things, such as brand strength or intellectual property. Given that this is what contributes to the vast majority of the value of US stocks (estimated to be 75% of their value), this makes its absence in GDP even more concerning, as the government bases its success economically off a metric that is not even very accurate. Furthermore, the US government’s own estimate is that tech activity worth 0.4% is excluded from GDP. This further highlights the issue with GDP: it just simply is not accurate enough.
But the reliance on GDP targets is worse than just inaccurate. It limits the government’s ability to act to help the people of the nation, instead making the government try to hit GDP targets instead. GDP per capita has traditionally been how people can infer what life is like in the country: A higher GDP per capita has meant that people living in the nation have better standards of living. But this really does not touch on what is most important to improve welfare.
In 2008, Bhutan became the first country in the world to abandon traditional KPI, and now uses the Gross National Happiness index as their means of creating policy. Through measuring psychological health, living standards and community vitality, Bhutan implements policy that they feel is most helpful to increasing this rather than increasing GDP. Similarly, New Zealand is the latest nation to try use the Happiness Index as a KPI, where they are explicitly trying to increase well-being rather than improve the economy.
This is indicative of the shift away from more traditional metrics that measure the country’s progress, to more intangible and modern methods. In particular, this allows for economics that does not try to maximise GDP, but rather which is expressly created to help everyone during their everyday lives. For example, New Zealand’s newfound focus on the Happiness index and gross national well-being (GNW) is allowing them to make significant investment into climate technology, as well as addressing inequality, rather than just going for growth maximising moves.
In particular, GDP’s inadequacy is shown when it is scrutinised further as a metric for success. Instead of directly focusing on the most important issues, it rather places an acute emphasis on growth for the sake of growth, rather than for the sake of better well-being. It is important to note that while GDP growth across the world rising is seemingly important, where the profits of this growth actually end up is more important.
A society where there is a vast amount of inequality is perhaps worse than a society perennially focused on growing the pie, even if the fruits of this labour goes to the 0.1%. Instead, alternative metrics such as GNW allow for a better distribution of resources, such that those who truly need it get the benefits of growth. GDP is only useful in so far as it gives us a perspective on how the economy is working, and just how strong it actually is. But given the shortcomings of GDP as a metric, both on the accuracy front and due to how it clouds our vision away from the real issues of our time, GDP needs to be replaced.
We should not purely focus on growth for growth’s sake. An obsession with GDP and growth targets naturally pigeonholes a society into doing what is best for the luckiest individuals, rather than helping the society at large. To change this, GDP needs to be replaced with alternative measures, such as GNW, which a focus on maximising the societies wellbeing as a whole, rather than fixating on economic growth.