Sun, May 18, 2014 - Page 9 News List

The GDP-well-being gap

GDP is a grossly overused and largely meaningless measure of a nation’s economic data that concerns itself only with basic measurements and ignores quality of life

By Zakri Abdul Hamid and Anantha Duraiappah

Illustration: Lance Liu

The link between economic growth and human well-being seems obvious. Indeed, as measured by GDP, economic growth is widely viewed as the ultimate development objective. However, it is time to rethink this approach.

In fact, there is a rising disconnect between countries’ per capita GDP and their citizens’ well-being, as rapid output growth exacerbates health challenges and erodes environmental conditions. Given this, people increasingly value non-material wealth just as highly as monetary wealth, if not more.

However, persuading policymakers and politicians of GDP’s limitations is no easy feat. After all, it is far simpler to defend a well-understood, long-accepted framework than it is to champion a new worldview.

To be sure, GDP provides valuable information about a country’s production, expenditure and income streams, as well as the flow of goods across borders. Moreover, it has provided crucial guidance to countries, helping them to track economic gains that have improved citizens’ quality of life considerably — in many cases lifting them out of destitution.

However, GDP fails to account for changes in a country’s stock of assets, making it difficult for policymakers to balance economic, social and environmental concerns. Without better measures of well-being — including health, education and the state of the natural environment — policymakers cannot gain the insights that they need to ensure the long-term health of the economy and the individuals who comprise it.

This imperative underpins the concept of “sustainable development,” which has gradually gained acceptance since its introduction in the mid-1980s. However, even as countries have recognized the need for a more comprehensive understanding of development, they have largely retained GDP growth as their central objective. This has to change.

Even US-based Nobel laureate Simon Kuznets, the Depression-era father of GDP, said in 1934: “The welfare of a nation can scarcely be inferred from a measure of national income.”

The good news is that a robust, simple and effective framework for measuring sustainability already exists. Developed by a group of leading economists, including the Nobel laureate Kenneth Arrow and Partha Dasgupta of the University of Cambridge, it assesses an economy’s income flows in the context of its stocks of assets, including human and natural capital. In other words, it accounts for the economy’s productive base, rather than just its monetary wealth.

Based on this framework, UN University and the UN Environment Program unveiled the Inclusive Wealth Report (IWR) at the 2012 Earth Summit in Rio de Janeiro. By providing a long-term comparison between GDP and “inclusive wealth” for 20 countries, the report aimed to motivate policymakers to take a more comprehensive, longer-term view of their economies’ development.

In November, a second IWR is to be released, with many more countries represented and a stronger focus on human capital in national-account indicators. To this end, collaborating experts will convene in Malaysia this month for a series of meetings, culminating in a public symposium titled “Beyond Gross Domestic Product — Transitioning into Sustainability.”

Transforming the world’s understanding of economic development requires a dynamic approach. Experts in various fields — including economics, sociology, psychology and the natural sciences — must work together to develop an integrated suite of indicators that provides a comprehensive picture of humanity’s productive base, on which people’s ability to pursue their interpretation of success depends. While final decisions should rest with policymakers and citizens, the process must be guided by the best available science, without being compromised by political demands or vested interests.

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