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Going beyond GDP

5 min read

13 Jan 2021

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Maria Stambler

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123RF

5 min read

13 Jan 2021

Text:

Maria Stambler

Photo:

123RF

Gross Domestic Product (GDP) is a good measure of economic performance of a country, but is it the best way to assess a country’s overall wellbeing and prosperity? This is the first in a three-part series exploring the issue.

In rankings and surveys, a country’s status is frequently cited in terms of Gross Domestic Product, or GDP – the monetary value of all goods and services in an economy. A high GPD indicates economic strength, a low one – economic weakness. The concept was first introduced by American economist Simon Kuznets in 1934 and although Kuznets warned at the time that GDP should not be used as a measure of social wellbeing, it has often become a shorthand for just that. But is economic performance really the best way to judge a country’s overall worth? And if it is not, what metric should be used instead?

 

What’s wrong with GDP?

 

As Robert Kennedy once said, GDP measures "everything except what makes life worthwhile.”

Dr. Peter Doran, Lecturer at Queen’s University Belfast School of Law, echoes Kennedy’s sentiment, calling GDP “a measure designed for an economy defined and measured, for the most part, by physical mass production and consumption and crude growth.”

Doran says the system that prioritises GDP is the same system that under-values the health professions and carers, and ignores a wider set of societal imperatives, including equality and ecological constraints. “GDP skews a society's value system by reducing our judgment of national performance to a crude economic matrix,” he says.

But with governments focused on enhancing economic growth, GDP has become a primary policy goal. Rutger Hoekstra, author of “Replacing GDP by 2030” and founder of Metrics for the Future, says that’s skewed.

“The real goals of policy should be to enhance the wellbeing of citizens, to ensure that future generations can sustain themselves and to resolve the growing inequalities. The only relevance of GDP – money – is that it provides the financial means to achieve some of these goals. Policy goals need to shift to wellbeing, sustainability, and equity,” Hoekstra says.

GDP can be a means to the end of sustainable wellbeing (real development), says Dr. Robert Costanza, Professor and Vice Chancellor’s Chair in Public Policy, Crawford School of Public Policy at the Australian National University, but not the end itself.

“Economists have known this from the beginning, and yet GDP has come to be universally misused as a measure of progress. GDP conflates costs with benefits and ignores inequality and the many benefits from natural and social capital that make life worthwhile and contribute to sustainable wellbeing,” Costanza says.

 

What are the alternatives?

 

The conversation around alternatives to GDP is not new and so there are actually too many to choose from. For at least 50 years, ‘beyond GDP’ proposals have been suggested to measure the real progress of societies.

“Some measure progress in monetary terms, others use different units. Some focus on wellbeing, while others focus on sustainability. Some are created by scientists, including many Noble Prize winners like Amartya Sen, Joseph Stiglitz, William Nordhaus, James Tobin, and Daniel Kahneman. Some are also created by governments,” explains Hoekstra.

The more prominent alternatives include:

  • The Genuine Progress Indicator
  • Ecological Footprint
  • Comprehensive Wealth
  • Genuine Savings
  • Human Development Index
  • Better Life Index
  • The Sustainable Development Goals

New Zealand’s 'Wellbeing budget’ and Bhutan’s Gross National Happiness (GNH) index that focus on measuring its citizens’ health and life satisfaction are key examples of government-led initiatives that look beyond the realms of GDP. The World Happiness Report measures life satisfaction too, directly with surveys.

Doran, Hoekstra and Costanza are all members of and advocates for the Wellbeing Economy Alliance. According to Doran, it puts forward a new narrative that “foregrounds equality, including equal access to health and wellbeing, together with design principles that ensure that we can flourish as a species within the boundaries set by the planet's needs and rights to regenerate.”

More specifically, the alliance says that a wellbeing economy should deliver on five goals (the ‘WEAll Needs’):

  1. Dignity: Everyone has enough to live in comfort, safety, and happiness.
  2. Nature: A restored and safe natural world for all life.
  3. Connection: A sense of belonging and institutions that serve the common good.
  4. Fairness: Justice in all its dimensions at the heart of economic systems. And the gap between the richest and poorest greatly reduced.  
  5. Participation: Active engagement from citizens in their communities and locally rooted economies.

Constanza says that these goals have advantages and disadvantages but considers them a good place to start. He advocates a broad consensus on hybrid indicators that combine the advantages of all of these goals.

Hoekstra agrees with that – to a point. “We need indicators to measure wellbeing, sustainability and equity,” he says, adding “but, most of all, we need some global standards in this field.”

 

Corporations to take the lead

 

One of the main challenges to moving past GDP, according to Doran, relates to the dominance of the current economic narrative in certain sectors of business. Given this context, corporations have a vital role to play in promoting new ways of measuring success. Doran says that the climate emergency and the Covid-19 pandemic have accelerated a conversation about a very different vision of the global economy and its purpose, and that corporations can show leadership in driving this new economy forward.

“As a next step, leadership and corporate practices must align themselves with goals including the UN Sustainable Development Goals (SDG) and other forms of environmental, social and corporate governance,” he says.

Wärtsilä is already showing leadership in addressing a number of the 17 UN SDGs, particularly SDG7, Affordable and clean energy; SDG8, Decent Work and Economic Growth, and SDG9, Industry, Innovation and Infrastructure. Together with its stakeholders, Wärtsilä is committed to developing solutions to solve the societal challenges addressed in the SDGs while also generating new business opportunities.

 

Want to go further beyond GDP? Read the other stories in our series.