Re-thinking GDP: How Should we Measure Economic Progress for a Sustainable Future?

gdp-national-progress

How many ideas that first emerged in the 1930s remain the same in 2017?

Thankfully, not many.

Except Gross Domestic Product (GDP), which has been the dominant tool for measuring national welfare since the 1930s. What started as a way for US policy makers to measure economic output at a time when the country was plummeting into the Great Depression, fast became the number one measure for gauging the health of national economies the world over.

First thought up by economist Simon Kuznets, GDP provided an aggregated economic measure at a time when outputs consisted mainly of material goods. However, in the modern era of globalization, digitisation and ecological uncertainty, the nature of this need has shifted. Kuznets himself cautioned that GDP should never become a tool for all decision-making as it fails to capture the broader welfare and wellbeing of a country. So now, almost 90 years on, why is GDP still the dominant measure of national wellbeing?

KKS Advisors conducted research into the limitations of GDP as a measure. We identified 10 flaws of GDP in the context of sustainable development and explored how these flaws can lead to a misrepresentation of country wellbeing, using a sample of 15 Asian countries.

10 flaws of GDP: 

ten-flaws-gdp

By developing proxy indicators for each of these flaws, our research calculated whether each country was a laggard or leader in each area and therefore whether GDP was under or over estimating national wellbeing. Overall, we found the use of GDP gave a significant overestimation of national wellbeing in Cambodia, Thailand and Vietnam and a significant underestimation of wellbeing in the Philippines and Indonesia.

What’s the alternative to GDP?

Despite a growing body of research and rhetoric pointing to its flaws and misapplication, particularly in the context of global megatrends such as ageing populations, climate change and rising inequality, GDP remains the dominant measure of welfare the world over. But what could we use instead?

Many alternative metrics have been proposed, with varying success in their use and adoption. These range from corrective economic measures that attempt to add and omit components of GDP, to those that are non-economic in their focus.

Our report analysed nine alternative metrics to see which of them best overcome the 10 flaws of GDP outlined above. Each metric received a score between 0 (does not account for the flaw) and 1 (most completely accounts for the flaw) for each flaw.

Our research revealed four winning metrics, all of which address several of GDP’s flaws:

1.      Global Competitiveness Index: 5/10 (Addresses 7 flaws)

This is a measure of national productivity. Produced by the World Economic Forum, it combines 114 indicators, the majority of which are assessed through a survey to ~14,000 members of the business community in 135 countries globally.

2.      Human Development Report: 5/10 (Addresses 7 flaws)

This consolidates 5 metrics and multiple indicators to provide an assessment of a country’s development. It draws on a wide range of data sources that are quality assured.

3.      Genuine Progress Index: 4.5/10 (Addresses 6 flaws)

This metric fully adopts a ‘values’ perspective, making a values-based judgement on the contribution of socio-economic activities. This index combines 12 indicators across three categories: market based wellbeing, non-market based wellbeing and environmental and social costs.

4.      Social Progress Index: 3.5/10 (Addresses 7 flaws)

This metric assesses the capacity of a society to meet citizens’ basic human needs, enabling them to sustain a quality life and maximise their potential. It comprises 53 indicators in three themes: Basic Human Needs, Foundations for Wellbeing and Opportunity.

Of course, there are still significant barriers to the adoption of alternative metrics. Data quality and availability is limited and GDP is entrenched in the system. Changing the status quo will be a mammoth task. Even so, this research highlights the importance considering alternative measures alongside GDP to get a more realistic picture of a country’s performance. It’s not 1930 now. Let’s bring the system up to date.

Read the full report here.