Why we should move beyond GDP and focus on societal wellbeing

By Leith van Onselen

With the ABS releasing its March quarter national accounts, ABC’s business reporter, Stephen Letts, penned a timely article arguing that the world’s favoured measure of economic development – gross domestic product or GDP – is “deeply flawed and outdated”:

[GDP is] the stuff of headlines, political pointscoring and national pride or shame…

It is also flawed, outdated and a very narrow measure of a nation’s economic wellbeing.

The ABS is not alone. Every nation trots out the same thing…

It is of dubious value in capturing many of the difficult policy issues governments face, particularly on the environment, health and equality…

On OECD figures, the Swiss domestic economy has on average had the lowest price-adjusted GDP growth of all the industrial countries over the past 50 years, plodding along at sub-2 per cent pace.

China, held up as the champion of global growth, has averaged closer to 10 per cent a year over the same period.

However, through the prism of Yale University’s respected Environmental Performance Index, the Swiss are ranked number one, China comes in at 120 out of 180 nations. Australia sits just outside the top 20.

…one of the great paradoxes of GDP growth is that an environmental disaster — such as decent sized oil spill — can be a real positive…

Putting it another way, a nation could boost its GDP almost immediately by clear-felling all its forests and shipping out the timber…

The happiest countries — including Australia, ranked 10th last year — score well across all six categories, but do not necessarily shoot the lights out in their GDP per capita ranking…

I have explained previously why I believe that real GDP is a rubbish measure of economic well-being (here, here and here), and have argued that “economists’, the media’s, and the Government’s infatuation with GDP is one of the biggest shortcomings in macro-economics”.

This infatuation has led to spurious policies like the pursuit of endless population growth on the basis that it stimulates headline GDP (more inputs equals more outputs), even though it provides next to no benefits to everyone’s share of the economic pie and reduces living standards of the pre-existing population.

Then there is the focus on the quantity of growth in GDP, rather than the quality (and sustainability) of growth, such as the Government and RBA’s never ending drive to increase house (land) prices and private debt, which creates structural imbalances and damages longer-run productivity and competitiveness.

GDP also takes no account of environmental damage, and effectively treats the earth as a business in liquidation. Digging up finite resources boosts GDP, but does not account for what was lost.

With GDP, we can bulldoze a perfectly good home to build a new one, and this process will boost GDP. But again, no account is taken of the loss of the old building, even though the asset base did not actually increase.

And of course, GDP does not take account of the distribution of economic growth and inequality. Nor does it measure non-market production, such as work around the home.

The Productivity Commission agrees that GDP is a “weak” measure of wellbeing, noting the following in its Migrant Intake Australia report:

While the economywide modelling suggests that the Australian economy will benefit from immigration in terms of higher output per person, GDP per person is a weak measure of the overall wellbeing of the Australian community and does not capture how gains would be distributed among the community. Whether a particular rate of immigration will deliver an overall benefit to the existing Australian community will crucially depend on the distribution of the gains and the interrelated social and environmental impacts.

The ABS did try to develop new ways of measuring Australia’s progress, which included a bunch of qualitative factors such as health, safety, equality, etc. However, I understand this project has been shunned.

Back in March, Richard Samans – Managing Director of the World Economic Forum (WEF) – penned a detailed article in VOX calling for nations to move beyond GDP and instead focus on broader measures of living standards.

Let’s hope the world’s policy makers and economics take note.

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