“GDP” Was Never Meant to Last This Long

I’m almost surprised it’s taken this long. “GDP” was never intended to be the end all and be all measure of the health of economies. Yet, over 85 years since it(or a version of it) was first used, it continues to dominate the mainstream economic discourse around prosperity, growth, and development.

The most recent critique of it came in the recent edition of The Economist, which captured the challenge nicely:

GDP is often wildly inaccurate: Nigeria’s GDP was bumped up by 89% in 2014, after number-crunchers adjusted their methods. Guesswork prevails: the size of the paid-sex market in Britain is assumed to expand in line with the male population; charges at lap-dancing clubs are a proxy for prices. Revisions are common, and in big, rich countries, bar America, tend to be upwards. Since less attention is paid to revised figures, this adds to an often exaggerated impression that America is doing far better than Europe. It also means that policymakers take decisions based on faulty data.

Accounting for a country’s production and income was first thought of in the 1930s, responding to information gaps that became apparent during the ‘Great Depression’. Subsequently, it rose to importance during World War II, for planning needs amidst constrained resources, and thereafter in the 1950s and 60s when stimulating economic growth was top of the agenda. The man tasked with developing the measure was American Professor Simon Kuznetsk (of Kuznetsk curve fame). It’s ironic that the man who gave birth to this measure of an economy’s output – which is now being bashed for not capturing dimensions like growth inequality and so on – is also the man who became famous for developing the ‘Kuznet’s Curve’ hypothesis of economic inequality.

As this article from 2014 notes, “GDP has become the king of all statistics. It’s kept by every country in the world”, but also goes on to say “…it’s a good 1950s number. The question is, is it a good 2014 number?” The point being that our current measurement of GDP may not be the most contemporary way to measure the prosperity of nations. It’s simply a measure of what was produced and consumed.

The most mainstream critique of GDP came this year at the World Economic Forum in Davos, when IMF chief Christine Lagarde, Nobel prize-winning economist Joseph Stieglitz, and MIT professor Erik Brynjolfsson agreed that GDP is a poor way of assessing the health of our economies and we urgently need to find a new measure. The Forum even created a separate page on their site that captures the new debate on going ‘beyond GDP’.

For too long we have been pre-occupied with rates of growth, rather than quality of growth. In an economy, we can have 7% growth with just one or two sector growing very very rapidly. (Indeed thats what happened in the post-war period in Sri Lanka – growth was driven by a handful of domestic non-tradable sub-sectors like banking, construction, retail and wholesale trade, and hotels and restaurants.). We can also have rapid GDP growth with just a handful of people contributing to creating that growth or benefiting from that growth – essentially, growth with inclusivity. Yet, we are still to come up with a measure to capture ‘economic inclusive growth’. A measure that is comparable across countries, is fairly all-encompassing, and easily understandable.

Another reason why existing measures of GDP may prove inaccurate, moving forward, is because of changes in technology, how societies operate, how we work, how things are produced, where value is generated and captured, and where things are made. All of these dimensions are being disrupted by technology, as I argued here. The Fourth industrial Revolution will make it harder to distinguish between products and services, between sectors. There will be biotech services embedded in agriculture and healthcare services embedded in pharmaceutical manufactures. One part of value may be added in a country, another part in the ‘cloud’. How do you measure GDP now? Central Banks and national statistics agencies will have to complete re-think it.

 

As The Economist article captured it,

“The services to consumers provided by Google and Facebook are free, so are excluded from GDP. When paid-for goods, such as maps and music recordings, become free digital services they too drop out of GDP. The convenience of online shopping and banking is a boon to consumers. But if it means less investment in buildings, it detracts from GDP.”

 But as the article acknowledged, we can’t just dump GDP as a measure. It’s too widely used, has ‘enduring appeal’ as a summary statistic that quickly tells us how an economy is doing. So, instead, “statisticians should improve how GDP data are collected and presented.”. The article calls for using 1) more firm-level data; 2) a new measure that captures services, informality, unpaid work, etc better (and overall captures well-being better); and 3) capture changes in ‘wealth’ better – ranging from private wealth to public wealth in the form of various asset classes.
All these are interesting suggestions. But the challenge lies in getting governments to recognise that GDP needs a re-look, and getting statistics agencies to get round to developing something new. GDP, in the way it began nearly a century ago and has only incrementally changed ever since, was never meant to last this long. It’s time to make it better.
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