Redefining success: Is GDP’s value as the major arbiter of economic performance warranted?

27th January 2022

The world’s obsession with GDP as a measurement of economic success could present one of the biggest barriers to achieving climate and environmental goals. Chris Seekings reports

Gross domestic product, or GDP, has been seen as the ultimate measure of a country’s economic success, prosperity and overall welfare for almost 80 years. The yardstick was adopted in 1944 by Allied nations at the UN Monetary and Financial Conference at Bretton Woods in the US, and has been used by wealthy countries to boast about their apparent success ever since.

For decades, though, economists have warned about the flawed characteristics of GDP, and its failure to consider the fundamental characteristics of human wellbeing. Furthermore, the focus on GDP may be one of the biggest barriers to achieving net-zero emissions by 2050, while actively counting the destruction of nature as economic gain.

Robert Kennedy pointed this out during an election rally in 1968. “It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl,” he said. “Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It measures neither our wit nor our courage, neither our wisdom nor our learning. It measures everything, in short, except that which makes life worthwhile.”

Useful, but flawed

Although it is a profound message, Kennedy’s assessment of GDP is not entirely fair. The measurement is defined as ‘the monetary value of all finished goods and services made within a country during a specific period’. This is a useful indicator of a country’s economic activity, which can reflect the rising welfare of its citizens. Since China began to open and reform its economy in 1978, its GDP growth has averaged almost 10% a year and more than 800 million people have been lifted out of poverty, according to the World Bank.

However, we should note that the ‘G’ in GDP stands for ‘gross’, not ‘net’, and therefore doesn’t tell us about the depreciation of assets and the extent to which a country is using tomorrow’s resources to consume today, or how well-off it will be in the future. A nation that grows by borrowing will see GDP rise, but much of the increase in income may go back out of the country to pay the interest.

“For the inventors of GDP, it was never ever thought of as a measure of success or performance,” explains Jørgen Randers, co-author of The Limits To Growth. “It was simply a measure of the activity level, and the value of the goods and services that are being produced. That’s the reason why GDP increases when there is a mass murder or when there are floods, because then, of course, there is a lot of economic activity.”

GDP fails to capture values such as people’s health and wellbeing, social cohesion, and the distribution of wealth – but perhaps its biggest failing is its inability to consider the environmental impact of endless economic growth.

Uneconomic growth

When Anglo-Australian mineral company BHP Billiton opened the Ok Tedi gold and copper mine in Papua New Guinea in 1984, the country saw its GDP rise. However, the mine inflicted huge environmental damage, discharging at least 90m tons of tailings into the local river system every year and thus polluting the main source of livelihood for 40,000 people, causing huge financial losses.

It remains one of the worst environmental disasters ever caused by humans, and is a prime example of how the pursuit of higher GDP can be devastating for both the environment and the economy. “We’re going to see a lot more damage in the future, not less,” warned Royal Melbourne Institute of Technology Professor Doug Holdway in 1999. “If you put 400m tonnes of tailings down a river system, there should be no surprises that you’re going to have significant biological impacts that will last for decades, possibly even centuries”.

Looking at the global picture, it is easy to see how our short-term obsession with GDP is likely to have catastrophic long-term impacts for the environment and economy. The average global temperature has increased by more than 1°C since the Industrial Revolution and our unprecedented carbon emissions, and the UN has warned that this is on course to surpass 3°C. Last year, a study led by scientists from University College London found that, by 2100, global GDP could be 37% lower than it would have been without the impacts of warming. Study co-author, Dr Chris Brierley, said: “Each person’s emissions could quite well result in a cost to humanity of over US$1,300 per year, rising to over US$15,000 once the impacts of climate change on economic growth are included.”

It should come as no surprise that global upward trends in GDP have correlated with an increase in air pollution, resource depletion and biodiversity loss, too. “Gradually, everyone has gotten into this totally idiotic thinking that if GDP grows, then everything is better,” Randers explains. “What can we do? It is very simple: develop another indicator.”

Pricing nature

According to the UN, around one million animal and plant species are now threatened with extinction – many within decades. This is more than ever before in human history. The main causes? Loss and degradation of habitat (mainly deforestation), over-exploitation (hunting and overfishing), invasive species, climate change and nitrogen pollution – all of which are driven by human economic activity.

The Dasgupta Review, commissioned by the UK government and published last year, argues that nature is a “blind spot” in economics, and that humanity has “mismanaged its global portfolio of assets”. It calls for a new measure of economic success, highlighting how demands on nature far exceed supply and significant declines in biodiversity are undermining productivity, resilience and adaptability – in turn threatening economies, livelihoods and wellbeing.

“Nature needs to enter economic and finance decision-making in the same way buildings, machines, roads and skills do,” the review’s authors explain. “To do so ultimately requires changing our measures of economic success. GDP is needed for short-run macroeconomic analysis and management. However, GDP does not account for the depreciation of assets, including the natural environment. By measuring our wealth in terms of all assets, including natural assets, ‘inclusive wealth’ provides a clear and coherent measure that corresponds directly with the wellbeing of current and future generations. Introducing natural capital into national accounting systems would be a critical step towards making inclusive wealth our measure of progress.”

Frameworks for natural capital accounting and assessment already exist, and are at different stages of development. These include:

  • Genuine progress indicator: Developed in the US in 1994, the genuine progress indicator takes GDP and corrects it for various social and environmental factors such as inequality, under-employment and costs of pollution. It separates the concept of societal progress from economic growth.
  • Inclusive Wealth Index: The UN’s biennial report measures the ‘social value’ of a country’s natural, human and produced capital assets, and aims to represent the trade-offs between different conservation and development policies.
  • System of Environmental-Economic Accounting: Aims to draw attention to the impact of economic activity on the environment and has been adopted by the UN Statistical Commission. It is built on five ‘core accounts’, measuring the area, condition, contribution, value and stocks of ecosystems.
  • Green GDP: Developed by China in 2006, green GDP is a measure of national economic output that takes environmental factors into consideration. It found that environmental damage would have knocked 3% off China’s GDP in 2004.
  • The Changing Wealth of Nations: Developed by the World Bank, the index measures 141 countries’ produced, natural and human capital, as well as their net foreign assets. It was designed to help governments “plan for a more sustainable future”, although it was intended to be used alongside GDP.
  • Doughnut economics: Economist Kate Raworth developed the doughnut economics concept in 2021. It is based on two concentric circles: ‘social foundation’ – containing human needs, such as water, housing, equality, peace and education – and the ‘ecological ceiling’ – representing the boundaries of the planet’s ability to support life. It aims to replace GDP, focusing on ‘thriving’ rather than ‘growth’.
  • Gross National Happiness Index: The index was developed in Bhutan and implies that sustainable development should take a holistic approach towards notions of progress. It is a single number index developed from 33 indicators categorised under nine domains, including psychological wellbeing, health and ecological diversity and resilience.

Shifting focus

Technological advancements have been successful in improving air quality and bringing down emissions in some parts of the world, suggesting that it may be possible for human society to decouple growth in GDP from growth in environmental degradation. However, as demonstrated by a study by Ward et al. in 2016, it is unlikely that GDP can ultimately be detached from growth in material and energy use. “It is therefore misleading to develop growth-oriented policy around the expectation that decoupling is possible,” the authors wrote. “Society can sustainably improve wellbeing, including the wellbeing of its natural assets, but only by discarding GDP growth as the goal in favour of more comprehensive measures of societal wellbeing.”

While GDP functions as an effective calculation to measure the total productive output of a country, it actively discourages governments from pursuing the more ambitious policy measures needed to deliver the UN’s Sustainable Development Goals (SDGs) and the aims of the Paris Agreement. To achieve truly sustainable growth, it appears that GDP will need to be supplemented with other measures of social progress. Ward et al conclude: “Now is the time to recognise the biophysical limits, and to begin the overdue task of reorienting society around a more achievable and satisfying set of goals, rather than simply growing forever.”

Image credit | Getty

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