The hegemony of GDP

In an unequal world, seemingly paradoxical contrasts are ubiquitous. John Maynard Keynes was probably the first to articulate the paradox of poverty amidst plenty in his 1935 General Theory, written against the background of the Great Depression. This and many other contrasts continue to stare us in our faces but we refuse to build a comprehensive picture of the state of an economy because we are unable to see beyond one measure – GDP (gross domestic product), defined and measured as the output of a nation multiplied by market prices.

Glaring contrasts

The Indian media recently reported that there is excess stock of rice that will cost the Food Corporation of India Rs 16,000 cr to store (https://timesofindia.indiatimes.com/india/with-534-lakh-tonnes-fci-rice-stocks-now-at-4-times-buffer-requirement/articleshow/109800013.cms). This debate over excess stock of rice and its distribution has been going for over a year. And, a few weeks ago, the global media reported India’s rank in the Global Hunger Index (GHI) for 2023 – 111^th out of 123 countries with a score of 28.7 which puts us in the ‘serious’ category, the others being low, moderate, alarming and extremely alarming (https://www.globalhungerindex.org/india.html). It is astonishing that no one in the media thought it fit to reflect on the stark contrast.

A few months ago, edtech companies were the darlings of the media with most of them enjoying ridiculous valuations with ran concurrent with another data relating to education – more than 100,000 schools in India had just one teacher for the whole school! It didn’t strike the media to show the contrast. I did write a post on LinkedIn.

This is happening at a time when we are obsessively talking of a $5 trillion GDP!

The measure of the measure

Alternative ‘goals’ – SDG (sustainable development goals), GHI, HDI (human development index), inequalities of income and wealth, carbon footprint, progress towards global warming targets – remain largely ceremonial and occasional with some defined frequency. GDP remains the hegemonic measure; other measures hover on the margins.

Many people find it paradoxical that there is a significant prevalence of hunger in a country with a substantial GDP and growing. There is no paradox. The problem is with the measure: GDP is defined to include only what can be measured in market prices. A ‘high’ GDP can and does co-exist with a high degree of income inequality (stalling social progress) and all the other inequalities that arise out of that, a well-documented phenomenon.

The father of GDP, Simon Kuznets, was well aware of its deficiency. In his 1934 National Income 1929-32 presented to the US Congress (https://fraser.stlouisfed.org/files/docs/publications/natincome_1934/19340104_nationalinc.pdf), he articulated his concerns over an exclusive use of GDP. In the very first few pages, he emphasized the role of personal income distribution in determining market prices.  “Thus in a nation with a rich upper class, the personal services to the rich are likely to be valued at a much higher level than the very same services in another nation, characterized by a more equitable personal distribution of income”.

More important is his warning: “The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggest often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification”.

He also advised on the need to correctly interpret GDP, while mentioning all qualifications to GDP. “All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above”. Crystal clear!

Voices in the wilderness

The earliest criticism came from economists who studied development, giving rise to ‘Development Economics’ since the 1950s, growing into a separate discipline taught at  universities. Many have added to the critique from multiple angles. 

In an article ‘Why India should get over its obsession with GDP growth’, Rajni Bakshi made a plea for a move away from GDP – (https://qz.com/india/515172/why-india-should-get-over-its-obsession-with-gdp-growth). In February 2022, BBC World Series’ The Climate Question asked: “Is our obsession with GDP killing the climate?” https://www.bbc.co.uk/sounds/play/w3ct2drv. In the US where this obsession is at its most intense, in an interview with New York Times’ David Marchese, the economist Herman Daly said that this obsession must end. Do read the full interview here.   (https://www.nytimes.com/interactive/2022/07/18/magazine/herman-daly-interview.html). There are many more but the point is clear.

Genuine Progress Indicator (GPI)

In recent years, the late economist Eric Zencey spearheaded a campaign for GPI (Genuine Progress Indicator) as an alternative. Writing in the aftermath of the 2008 housing mortgage crisis, he observed: “Creative destruction can apply to economic concepts as well”.

In simple terms, GPI separates societal progress from GDP. Going back to Kuznets who observed that GDP does not take into account the costs and pain involved in producing all that goes into the making of GDP, GPI attempts to measure all these such as environmental impact and social costs of economic production and consumption. It evaluates whether these are negative or positive factors in overall health and well-being – a plus for positive and a minus for negative, thus incorporating not just social but also ecological costs.

Since 2013, The State of Vermont in the US has been publishing every five years a report on Genuine Progress Indicators –  (https://www.uvm.edu/~jdericks/NR385/VTGPI-Summary-30Jul13.pdf). It has published two more reports.

In the next article, I will elaborate on GPI.