There are lots of blind spots to GDP. For instance, it has no way of valuing anything that doesn’t involve a financial transaction. This leaves some of society’s most useful activity, such as raising children, unaccounted for. GDP tells us nothing about the distribution of wealth, making it entirely possible for growth to happen on paper without any rise in quality of life for the majority of citizens. (See the Egypt example here)
Most importantly for a world of climate change and resource decline, GDP cannot distinguish between good growth and bad growth, rewarding both equally. For example, UK households throw away 8.3 million tonnes of food every year. It’s a serious waste of money, a burden on council waste disposal and landfill, and a huge source of greenhouse gases. From a GDP point of view however, it’s great, adding £12 billion to the economy.
If GDP is our only measure of success, it will come to trump all other concerns. E F Schumacher railed against this in his classic book Small is Beautiful: “Call a thing immoral or ugly, soul-destroying or a degradation of man, a peril to the peace of the world, or to the well-being of future generations; as long as you have not shown it to be ‘uneconomic’ you have not really questioned its right to exist, grow, and prosper.” A modern example of this is the third runway at Heathrow. The emissions from such an expansion in aviation would wreck the UK’s climate targets, but the prospects for economic growth overruled the environmental concerns.
As Rajenda Pachauri said in early 2010, “we have to come up with new metrics where we look at welfare in a much larger context than just GDP, which I think is proving to be an extremely harmful way of measuring economic progress.”
There are a variety of different metrics available as alternatives to GDP, and our success as a nation begins to look a little different when we re-define success. The Index of Sustainable Economic Welfare, for example, suggests we’re into a slow decline.
Where some metrics measure quantity, the more recent Happy Planet Index is a measure of efficiency. Researchers measured life satisfaction and life expectancy, and divided it by ecological footprint. The result is a figure that shows how efficient economies are at delivering good lives.
The good news from the HPI reports is that “high levels of resource consumption do not reliably produce high levels of well-being, and that it is possible to produce high well-being without excessive consumption of the Earth’s resources.”
The image above shows the countries of the world according to their HPI rating. Economies score badly if they fail to deliver well-being, or if they do so at too high a cost, so both the US and sub-Saharan Africa are both in red. The countries that succeed are the ones that deliver life satisfaction and long lives without costing the earth. Costa Rica comes out well, with a score of 76.1, compared to the UK’s 43.3.
These kinds of broader measures of success are important, filling in the missing social and environmental pieces that GDP overlooks.
Unfortunately, governments have been slow to adopt these measures, although David Cameron has spoken positively about them. He’s also quoted President Kennedy’s 1968 comments on GDP, which I’ll use to sum up:
GDP… Does not allowfor the health of our children the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public office. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.