Debates about GDP and numbers

Once again, this discussion is intense. On the one side are those who wish to capture everything in terms of numbers. They are the quants who believe in quantitative analyses. On the other side are the ones who want to measure actual progress, and prosperity. They have a qualitative bent, and question the “world’s accounting systems” as they exist. Indeed, while the former section prays to the God of GDP, the latter think of the figure as partly-demonic. The first thinks of GDP as a sacrosanct, sure-shot way to measure the rise of the nations. The second feels the number reflects the demise of the planet.

The present debate was kicked off by Antonio Guterres, UN secretary general, who said that we needed an “urgent overhaul” of how we measure growth via GDP. “We must… go beyond gross domestic product as a measure of human progress and wellbeing. Moving beyond… is about measuring the things that really matter to people, and their communities. GDP tells us the cost of everything, and the value of nothing. Our world is not a gigantic corporation,” he added. In effect, the fascination with GDP and numbers is misplaced.

Over the years, economists have argued that the problem with GDP is its obsession with market transactions, what is sold and bought in the marketplace, rather than with the “real value of work or welfare.” Thus, growth numbers provide the wrong results, or measure the irrelevant outcomes. For example, as Diane Coyle illustrated, if a widower marries a housekeeper, and stops paying, GDP falls. If someone grows veggies at home, and does not buy them, the result is the same. This is true if you cook at home, and do not order. The fact is that the effort involved in both sets may remain the same. Yet, GDP does not. Inequalities, polarisation, and inclusion are never, and cannot, be captured by GDP. “Nations are so locked into the game of beating other nations in terms of the GDP metric, that the wellbeing of the ordinary citizens, and sustainability are ignored. If all the new income accrues to a few individuals, and the GDP grows, all citizens are expected to cheer.

This feeds hyper-nationalism, inequality, and polarisation,” explains Kaushik Basu, an economist. The fact is that the GDP was never designed to measure human progress, only productivity and visible output that is paid for. Yet, it is the dominant benchmark of success.

Another aspect that is ignored by GDP, or rather turned on its head, relates to the environment and sustainability. Guterres maintained that the existing accounting tends to reward activities that degrade and devastate the planet. “When we destroy a forest, we are creating GDP. When we overfish, we are creating GDP,” he explained. In essence, growth happens at the expense of natural resources. This is reflected in newspaper headlines, and policy discussions. A major criticism against activists is that they impede growth and development, or rather GDP. Only by demolishing the resources can we grow faster.

On the flip side, while GDP systems negate resource depletion, they do not account for things that they need to. In a media report, it was indicated that the “rise of artificial intelligence, automation, and digital economies may intensify the debate. Many forms of value creation, especially digital services, or unpaid activities, remain poorly captured by traditional metrics.” Hence, there is a need to finesse and massage the numbers in any case. In many cases, the systems are archaic. Only recently did India shift to a new data series, with its GDP based on something that was almost 15 years old. The world changed. GDP did not until the criticism was too harsh and loud to bear.

In fact, it is because the world has changed, especially in the past two decades, that economists want to take a relook at GDP. A report by a group set up by UN’s Guterres argued that “as the world wrestled with repeated global shocks… the need for economic transformation has become increasingly urgent, from the financial crash of 2008 to the Covid-19 pandemic.” It added that these events were “exacerbated by the ‘triple planetary crisis of climate change, biodiversity loss, and pollution.” The fact is that rapid tech changes were “upending” labour markets, and increasing and aiding the growing inequality.

“Economic growth (as measured by higher GDP) can coexist with poverty, exclusion, and serious violations of human rights, outcomes that remain largely invisible in the conventional economic accounts…. The (UN) group’s aim is not to replace GDP but to complement it, helping governments and the public assess whether development is truly improving human wellbeing, advancing equity, and safeguarding sustainability now, and for future generations,” said Basu. The current models do not account for climate shocks, and are, therefore, fundamentally flawed. Hence, the former will be unable to detect or pinpoint the future tipping points that can crash economies.

Maybe, as some economists argue, there is a need for de-growth. Not rapid rises in GDP, which conflict with nature, but policies that ask the human race to pause, take deep breaths, and rethink the growth models. A recent survey found that nearly three-fourths of the 800 climate policy researchers surveyed supported “post-growth positions,” or some form of receding the GDPs. “A deeper system change is required. Specifically, we need to democratise control over production, which can enable us to change what we produce, and for whom. The dominance of GDP is not an accident, it occurs because GDP measures what is valuable to capital,” explains a political economist.

During the 1930s, when the concept of GDP gained traction, one of its prime movers wanted it to measure human welfare, and not just the volume of economic activity. Thus, he wanted activities such as military spending, excessive advertising, and inflated urban housing costs out of its ambit. However, during World War II, there was an urgent need to track and monitor output and productivity, especially military and industrial ones.

Thus, GDP became a tool to gauge production, and nothing else, or little else. Volume growth mattered, which was measured largely and wholly in terms of monetary value.

As Nithin Kamath, founder, Zerodha, wrote in a recent blog, and as Basu admitted, GDP is important, and provides “valuable information about production and employment.” But one needs to remember, more than eight decades later, that the metric was built in the 1940s, during World War II, “for an industrial economy focused on measuring output.”