GDP measures just one dimension of a country’s economy. So why did it become our main tool for judging prosperity? Because that works well for those who write the rules.
by Sasha Alyson
Gross domestic product (GDP) is the usual way to judge a country’s overall well-being. And yet, well-being is not what it measures. It doesn’t even pretend to do so. It merely reflects the amount of money that changes hands as goods and services are bought and sold.
If you cut down every forest and sell the lumber, GDP goes up. If all that new wealth goes into the hands of the five individuals who were already the richest, GDP goes up anyway. If a factory dumps toxins into the river while producing goods to sell, GDP goes up. If you live downstream, drink that water, and then have to pay for medical treatment, GDP goes up again. If a corrupt autocrat uses a foreign aid loan to build himself a $30 million mansion, the country falls deeper into debt but GDP goes up. If an overseas corporation buys all the farmland in your area, GDP goes up. If instead of growing your own food you now have to work for that company and buy food at the market, and your family has less to eat than before, GDP goes up. If your country produces tanks and bombs so it can invade a neighbor to get its oil but ten percent of your population gets killed, GDP goes up. We’re having a terrific decade.
Nearly every economist on the planet, as well as Simon Kuznets who created the general concept, will tell us that GDP should not be used as a measure of economic health or quality of life. Then most of them (though not Kuznets) do precisely that. To measure its goal of sustainable economic growth with full and productive employment for all, the U.N. proposes to use “Annual growth rate of real GDP per capita.”(1)
Why, if it is so flawed for these purposes, does GDP continue to be treated with such reverence? Several factors are at work.
GDP is easy to look up. The World Bank, the U.N., and the United States all publish lists of GDP by country, and they pressure countries to produce the needed data. When Bhutan famously decided to measure Gross National Happiness instead of GDP, the World Bank was having none of it. The Bank collected data to calculate what it thought Bhutan’s GDP was. The unthinkable alternative was to have a blank line on the spreadsheet.
Moreover, GDP sounds definitive. It looks like a crisp way to rank, evaluate, and compare. This is wishful thinking, however. A great many estimates and assumptions go into the final number. Some are quite big. After recalculating the data, Kenya announced in 2014 that its GDP was 25% larger than previously reported. With no change in its actual economy, Kenya suddenly graduated onto the World Bank’s list of middle-income countries.
Shaping the conversation
GDP is the wrong way to measure a country’s well-being. But if that were the whole story, the U.N., World Bank, and others would stop emphasizing it. They don’t.(2) Why not?
Because, quite simply, a focus on GDP benefits the global elite.
It hides inequality. Per-capita GDP in Colombia comes to about $6,300 a year; in Namibia , about $5,200. Pakistan ($2,500) and Vietnam ($2,300) seem much lower. But now compare the average income of the richest 10% to the poorest 10% within each country. In Colombia, the rich make about 60 times as much as the poorest; in Namibia, it’s 100 times as much. In Pakistan and Vietnam, the rich get “only” about 7 times as much.(3) Not only are the poor better off, economically, but also there is far less inequality. Feelings of inequality are widely believed to contribute to unhappiness.(4)
This inequality isn’t a small detail; it’s an essential feature of a country’s economy. But the GDP hides it.
GDP offers a cloak of objectivity for policies that the West wants to promote. Other economic indicators could be used. GDP is popular because it prioritizes the goals of those who already control both the economy, and the decision about how to measure prosperity. These are the corporate executives whose goal is to expand their markets and acquire more wealth for themselves; the best way to achieve that is to get more money moving around. Hence the otherwise inexplicable Gates foundation grant of $11 million to Mastercard to expand into Kenya. They want GDP growth, regardless of the human cost. Hence the love affair between Gates-Buffett clan and Coca-Cola. Booming junk-food sales are profitable for stockholders, as well as anyone who sells diabetes medicine. From Monday morning conversations with my colleague Khamla, I know that some of his happiest days are when he takes his daughter fishing on Sunday. Bill Gates and Warren Buffett don’t get a cent. They did not become two of the world’s wealthiest men by being indifferent about that.
Fast GDP growth is not compatible with ending climate change. In an ideal world, with superb leadership, it might be possible for GDP to keep rising, even as we take the necessary steps action against climate change. Or maybe it wouldn’t be possible. But in the real world, pushing for GDP growth (as the U.N.’s “Sustainable Development Goals” do) will make climate change worse, and will provide cover for high-polluting industries.(5) The U.N. does not grapple with this contradiction, because doing so might offend somebody.
The GDP focus distracts us from looking at other things we care about. The corporate drive for efficiency doesn’t stop to consider its impact on family and community; stockholders won’t reward that.
Someone who has lived on both sides of the Atlantic observed that: “Life in Africa is materially poor and socially/emotionally rich, while U.S. life is materially rich and socially/emotionally poor.”(6) Here, we don’t need to decide if that’s true, or how to balance our desire for various types of wealth. We need only — I hope — to agree that the decision should be made by the people affected, not by U.N. agencies and businesses based on the other side of the globe, using GDP as the dominant priority.
In the ’00s, Columbia University economist Jeffrey Sachs became a minor celebrity in the West — even including a Time cover story — by claiming that he knew how to “end poverty.” The key, he believed, was for development specialists to introduce many changes all together — in agriculture, education, and health, for example. This approach, called integrated development, had often been tried before, and had consistently failed. Sachs claimed that new technology, along with a rapid change to market-based economies, would make it different this time. With support from the United Nations and many others, he initiated the Millennium Village Project in selected regions of 11 countries in Africa.
It was a controversial project, in part because of Sachs’s domineering “I’m right, you’re wrong” approach, and his efforts to avoid independent evaluation. Journalists who asked to visit a Millennium Village found that their visits were tightly controlled; the MVP organization decided what they could see, and who they would talk to. But the Sachs organization couldn’t wall off entire villages. Several researchers bypassed the Sachs organization, so that they could hear directly from villagers.
One of them was Lia Haro, who approached villagers in Kenya directly about such questions as: “Of all the problems facing Sauri, which concerns you most?” She writes:
Sila Wamanga raised his hand and said softly, “The biggest problem is that we do not love each other. I cannot even talk to my neighbor now.” The others nodded in agreement.
“There is no love in this community, that is our greatest problem,” said Arthur Otieno. “There is only war since Millennium came.”
“Waonge hera [we have no love],” said Mathilda Awuor.
“We are thinking only about poverty as crops and money, but real poverty is when each person can only care for himself and not for others,” said Rachel Buyu.(7)
In another Millennium village, after a farmer expressed doubts about the scale of Jeffrey Sachs’s plans, Sachs shouted back, “We don’t want you to think big or small. What we want you to think is rich!”(8) But that was his priority, not theirs.
NOTES AND SOURCES
A university professor read a draft of this story and commented, “I think everybody knows that GDP is a bad index, even if it is awfully convenient. Doesn’t the UN have a variety of indexes that measure quality of life along different dimensions?” What do most people believe? I didn’t know, so I ran a Twitter poll:
A Twitter poll isn’t a scientific sampling, of course, but these results convinced me that a story was appropriate.
As for other indexes: The U.N. also recognizes the “Human Development Index” which factors together three criteria: Per-capita GDP, education levels, and health. This is only slightly better. The problems with GDP are covered above. “Education” would be a legitimate factor to include, but in practice, the HDI simply measures years of schooling. Under U.N. pressure, many countries now focus on getting more children into school, rather than on whether they learn anything. “Years of schooling” has thus become a poor indicator of true education. Those who didn’t attend a bad high school, and instead acquired some real-life experience, may well be better off than those who did. As for health, HDI uses life expectancy. If you’re only going to use one number, that’s a reasonable choice, but it’s only a small part of the picture.
1. This is Goal 8, target 1, indicator 1, of the U.N.’s Sustainable Development Goals, as stated in its “Final list of proposed Sustainable Development Goal indicators.” And let’s note that even if GDP rises, that tells us nothing about whether we’ve achieved “sustainable economic growth.” In fact, achieving the 7% annual GDP that the U.N. calls for is likely to require some highly un-sustainable activities.
2. Google reports that the U.N. website has about 43,000 pages which refer to GDP, compared with 4,400 for HDI. The World Bank’s site is even more skewed: More than 100 pages mention GDP for each one that mentions HDI. (Counts done on 29 August 2020)
3. These figures are from the U.N., as reported on Wikipedia pages for GDP per Capita and Income Equality. Such data always involves much guesswork and estimation, and I’ve found U.N. figures to be particularly haphazard. But this is what we have to work with, and it’s helpful if we recognize that we’re getting only a broad picture.
4. Causes of unhappiness are difficult to measure, but many have tried, and inequality is often identified as a factor. A New York Times story reports a study in which “certain households in Kenyan villages were randomly chosen to receive large financial windfalls. The lucky beneficiaries were pleased, of course, but their increased happiness was much more than offset by the increased unhappiness of other households, which lost nothing in absolute terms but suddenly saw themselves falling behind.”
5. Jason Hickel explores these issues in his new book Less Is More: How Degrowth Will Save the World. (Penguin Random House, London, 2020)
6. Quoted in The World Until Yesterday: What Can We Learn from Traditional Societies? by Jared Diamond. Viking Press, New York, 2012.
7. “The End(s) of the End of Poverty,” (dissertation) by Lia Haro, Department of Cultural Anthropology, Duke University, 2014. Haro did a far better job than the mainstream media, which heavily relied on press hand-outs from the MVP office. Anyone who’d like a better understanding of the Millennium Villages Project will find her dissertation invaluable.
8. The Idealist: Jeffrey Sachs and the Quest to End Poverty, by Nina Munk. Doubleday, New York, 2013. Munk wrote a flattering piece about Sachs for Vanity Fair, after which he allowed her to travel with him and write a book about the Millennium Villages Project. But the more she saw, the greater her doubts. Her book offers a fascinating insider look at many aspects of why aid projects so often fail.
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