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Monday, April 15, 2024

Sorry, GDP. There Are Other Ways to Measure a Nation’s Worth

On June 3, 2022, as United Nations members gathered to celebrate the 50th World Environment Day, Secretary-General Antonio Guterres said it was time to eschew using gross domestic product as a measure of economic strength, as it rewards pollution and waste. “Let us not forget that when we destroy a forest, we are creating GPD,” he said. “GDP is not the way to measure richness in the present situation of the world. Instead, we must shift to a circular and regenerative economy.” 

Talk of replacing GDP as a performance indicator is not new. This economic measure, which is defined as the total market value of goods and services produced within a country, was developed in 1934 by economist Simon Kuznets as a wartime metric designed to help governments figure out how to pay for tanks and fighter jets. It was never intended to be a measure for societal welfare. Economists like Diane Coyle, Amartya Sen, and Joseph Stiglitz have dismissed it as antiquated and reckless, as it ignores societal welfare dimensions like inequality and clean air.

Amid the perfect storm of food and energy crises, in 2023 politicians worldwide will finally start adopting alternative economic indicators. For instance, China has long espoused the so-called ecological civilization, setting explicit targets for nature and resource use. In July 2022, its Politburo surprised the world when it did not mention the growth target in a statement after its quarterly economic meeting. China Daily, an official mouthpiece of the government, also hinted at a likely shift, floating the idea of the need for a new “development yardstick” and of additional indicators like employment and price stability. 

China is not alone. A paper by the German Economic Ministry last year openly considered adding new indicators of welfare, including equality across local regions, as well as sustainability, employment, participation and social security. New Zealand’s Living Standards Framework, developed by the Treasury, includes a dashboard which measures a range of well-being indicators and is embedded as the organizing principle of its national budget. 

An idea floated by many economists is to replace GDP with another composite metric. One often cited example has been Bhutan’s National Happiness Index, enshrined in its Constitution, which encompasses psychological health, living standards, community vitality and environmental resilience.

The United Nations Environment Program’s Inclusive Wealth Index has indicators that sum up the social value of economic, human, produced, and natural assets to assess whether countries are developing sustainably. Nearly 140 countries fall short of reaching an acceptable standard.

The Organization for Economic Cooperation and Development’s Better Life Index uses indicators from housing affordability to work-life balance and air pollution. 

In 2023, as the world faces unprecedented climate breakdown and economic recession, the scramble for alternatives to GDP will begin in earnest. Navigating fractious politics from this shift will be tricky, as critics will see them as attempts to shed responsibilities. But ultimately the purpose of new economic indicators will be about delivering better results for people, and there will be much anger if policymakers fall short.

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