Following the news that Big Society Capital CEO Nick O’Donohoe is to step down by the end of the year, James Perry looks at O’Donohoe’s legacyRead More ›
Eighty years since GDP was first developed, time for a different measure of national success?
Have we outgrown GDP?
The global economic downturn has created something of an obsession with getting back to economic growth. Yet, on its own, growth is an incomplete guide to the wellbeing of a country. Indeed, the adoption of the Millennium Development Goals was a recognition that we need measures other than growth to guide a country’s development. It is for this reason that ‘inclusive growth’ has emerged as an important part of the debate about what should replace the MGDs. Yet, for inclusive growth to be meaningful we have to be able to define it and to measure it.
This debate is particularly prescient now, as on this day eighty years ago a report was presented to the US Senate that has defined how global economic history is written. The 261-page publication introduced for the first time a macro-economic measurement of national income. The term itself may not have been coined until later that summer, but GDP was born on January 4, 1934.
The report by the economist Simon Kuznets, ‘National Income, 1929-32’, had been commissioned just over a year earlier by the US Senate to provide information about economic activity during the Great Depression.
Since its introduction, GDP has assumed an unmatched, unassailable authority as the de facto measure of a national progress. However, as the world recovers from the recent global economic downturn, it’s never been a better time for all academics, policy-makers, entrepreneurs, citizens and the media to ask ourselves whether GDP is the best way to quantify and define progress. For, as Kuznets himself said, GDP has always been a limited way in which to assess countries’ progress. “The welfare of a nation,” he wrote, “can scarcely be inferred from a measurement of national income.”
GDP continues to suffer from two shortcomings as a measure of national progress: the limits of the measure itself and its interpretation. Firstly, it excludes many important economic activities such as volunteer work from measurement, while including activities such as the costs of crime, an increasing prison population and the depletion of natural resources. The second limitation of GDP is in the way it is used and interpreted. The US Bureau of Economic Analysis’ description of GDP states the purpose of measuring GDP is to answer questions such as ‘how fast is the economy growing.’ Yet per capita GDP is often used to compare quality of life in different countries. Economic growth is frequently referred to by economists, politicians and the media as though it represents overall progress.
GDP is not inherently bad, but it is held back by the limitations of what it measures. That is why the Social Progress Index has been developed, as the most inclusive and ambitious measure of social progress ever attempted. Rather than focussing on economic factors alone, it asks the questions that are fundamental to the wellbeing of a population: Does a country have the capacity to satisfy the basic needs of its people? Does a country have the infrastructure and the instruments to allow its citizens and communities to improve their quality of life? Does a country offer the proper environment for each citizen to have the opportunity to reach their full potential?
Later this year when the 2014 Index is published more than 120 countries representing more than 9 of 10 people on the planet and nearly all of the world’s economic activity will be able to compare their performance on social progress. Moreover, by creating a holistic measure of national wellbeing that is independent of GDP it will help us to understand, empirically, under what conditions economic growth is inclusive and when it is not.
GDP has been and will continue to be a crucial measure of economic progress, but technological advances in the 21stCentury for the first time enable countries to undertake data collection that Kuznets and his contemporaries could have barely imagined. Today we should celebrate his historic achievement all those years ago, but the quest to measure progress must continue.
Just as today we look back and celebrate Kuznets’ historic achievement it’s my hope that 80 years from now future generations will look back to the start of the 21st Century as the time when nations recognised the value of measuring social progress on a par with economic progress.
Editor’s Note: This piece was originally posted on Post2015.org. It has been posted here with the author’s permission.