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Are we measuring the right thing?

GDP dominates development metrics, but it was never designed to

Are we measuring the right thing? Photo: Shutterstock

Are we measuring the right thing? Photo: Shutterstock

Like humans, nations need and want indicators to measure their progress. And economic growth is widely used as the benchmark of national progress. Yet gross domestic product (GDP), our principal measure of economic well-being, and one which is designed to capture human consumption, is actually a child of the manufacturing age.

At the end of 1999, the US Department of Commerce named GDP as “its achievement of the century”. Simon Kuznets, the pioneering economist who helped develop our understanding of economic development and built the foundation for GDP metrics, won the Nobel Prize in 1971. Yet he was striving for a measure that would gauge welfare rather than what he considered a crude summation of all activity. He wanted to exclude illegal activities, socially harmful industries, and most government spending. On many of these issues he lost.

GDP as we know it was not designed to measure social or economic welfare, and yet today it is the raison d’être of government budgets across the world. It defines how much money a country can borrow and how much it can invest in its citizens. We are seeing a growing international debate around augmenting GDP as a measuring tool of national success with other factors.

Currently, Key Performance Indicators (KPIs) are purely numerical: number of jobs; number of projects; amounts of investment and so on. Yet the quality of life and national success are not limited to just these criteria. They are also intimately linked to better transport systems, better education, infrastructure, more planning, more social solidarity, a better environment and so on.

GDP does not take an adequate or holistic account of these matters. Neither does it gauge resource depletion, unpaid work, the conservation of natural heritage and countless other factors. If people reuse items, for instance, rather than purchase new ones, GDP does not grow.

The problem with GDP is that it tots up everything as growth, even including, say, pollution

Financial Times editor David Pilling will be the keynote speaker at EY’s annual Malta Attractiveness Event this October. He is the award-winning author of The Growth Delusion: The Wealth and Well-Being of Nations and acclaimed by leading economists and politicians across the world as a key influencer in the debate on the need to measure our successes and failures using different criteria.

Pilling is not against growth. But he argues that the problem with GDP is that it tots up everything as growth, even including, say, pollution. What’s more, when the latter is cleaned up, that also adds to GDP. So a negative becomes a positive, so to speak. Self-evidently, of course, no pollution in the first place would be a much better outcome.

So much of what is important to our well-being, from clean air to safe streets and from steady jobs to sound minds, lies outside the purview of our standard measure of success. He opines that we prioritise growth maximisation without stopping to think about the costs.

Pilling makes the case for a better balance and the need to move beyond “the cult of economic growth”. To remedy these set of challenges, he proposes GDP 2.0 – a new measurement which takes into account other missing variables to value what makes economies better, not just what makes them bigger. At EY’s event, Pilling will explore some of the new KPIs Malta should be considering and the impact this could have on policy and the country’s citizens.

EY’s Malta Attractiveness Event will be held on October 24 at the Intercontinental Conference Centre. For bookings and further information visit www.ey.com/mt/attractiveness.

Theo Dix is a manager in EY’s Transaction Advisory Services team.

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