GDP (Gross Domestic Product) has been improperly used to measure development for decades.
It was originally devised to see how poorly the U.S. economy was doing during the Great Depression. Today, it’s not only used to indicate the economic health of our nations but also to compare the overall state of development and determine which countries are doing well and which are doing poorly.
The problem with GDP, which has been well documented by economists and development professionals alike, is that it doesn’t give an accurate picture of national economics, let alone state of development.
GDP is a representation of the total spending, or value of goods and services, of a country.
However, to get an accurate indication of how well countries are doing, we need to look at more than just spending.
For example, a nation’s GDP increases when a family spends money on an alarm system because they live in an unsafe neighbourhood. This means that the more money that families spend on locking up their homes from thieves, the better the country looks overall.
Spending to remediate environmental disasters also increases GDP. For example, efforts to clean up after the BP oil spill in the Gulf of Mexico boosted the U.S. GDP by billions of dollars. Unfortunately, the extreme devastation that this event caused the local people and the environment didn’t register anywhere.
As shown in these examples, increased spending doesn’t necessarily mean that the well-being of citizens is improving. Not only are the ‘goods’ produced accounted for in GDP but also are what ecological economists consider the ‘bads’. As a result, spending can only ever register in a positive way, when in reality, spending to mitigate pollution, crime or other undesirable social spending should be deducted from the total.
In addition, not only does GDP inaccurately reflect our societies by including the detriments, but it also misses out on some important merits that reflect the greatness of our societies and don’t involve spending, such as volunteering and growing your own food.
Many alternative measures have been provided and are used such as Human Development Index (HDI), Gross National Happiness Index (GNHI), and Genuine Progress Indicator (GPI). These indicators include other important factors such as education, health and happiness.
However, none of these indicators have gained the global prominence that GDP has, largely because institutions such as the International Monetary Fund firmly insist that tracking economic growth (GDP) is an important way to track development and ultimately, human well-being.
It’s time to finally move away from GDP. Instead of adding up all spending and celebrating the total, we should add up the value of the things we want (such as spending on education, health care and environmental protection) and subtract the value of the things we don’t want (including pollution and theft), ending up with a more accurate reflection of the state of our nations.
Many economists have argued that this approach of weighing the costs and benefits associated with economic activity is the only way to get an accurate understanding of growth and ultimately, the development of a country.
Canada poses an interesting example of this. According to Canadian Industry Statistics from 2011, the energy sector is responsible for nearly $85 billion of Canada’s annual GDP. That is almost 7% of the country’s total GDP.
A large part of this comes from Alberta’s oil reserves.
If the ‘bad’ elements of energy extraction, such as the cost of maintaining toxic tailing ponds, the massive demand for water, and the emissions of greenhouse gases were subtracted from this $85 billion, the industry would undoubtedly be painted in a much different, and more realistic, way.
Herman Daly, an American ecological economist explains that when the cost of growth exceeds its worth, it becomes uneconomic growth. By focusing on a cost-benefit balancing approach we can begin to see if our economic activities are indeed experiencing uneconomic growth. If so, we can focus on improving the quality of these activities instead of merely the quantities involved. And ultimately, it is essential to have a clear picture of the quality of our economies and societies to create an adaptable and resilient planet.