Revise biased economic analysis based on GDP

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Despite the well-known problems with using GDP as an indicator of human development, policymakers around the world still seem to be obsessed with it. Governments seek to promote GDP growth by any means possible, often regardless of the wider consequences for the planet and the distribution of rewards. The current focus on quarterly growth reflects a particularly unhealthy short-term outlook. Yet the International Monetary Fund and other multilateral organizations refer to GDP in all assessments of economic performance and make it the sole focus of their forecasts.

But the concept of GDP is deeply flawed. Aggregate or per capita figures are obviously blind to income distribution, and GDP is increasingly incapable of measuring the quality of life or the sustainability of any particular system of production, distribution and consumption.

Moreover, since the GDP of most countries only captures market transactions, it excludes a significant amount of goods and services produced for personal or household consumption. By making market prices the main determinant of value, regardless of the social value of any activity, GDP massively undervalues ​​what many now recognize (especially in light of the Covid-19 pandemic) as essential services linked to the care economy.

GDP therefore overvalues ​​activities, goods and services that are priced higher due to the oligopolistic structure of markets – financial services being a particularly telling example. The obsession with economic growth, independent of other indicators of well-being, leads to problematic assessments of the real performance of economies and to poor policy decisions and outcomes.

This is why there is now much more discussion within the United Nations and its Statistical Commission on the possibility of going beyond GDP. UN Secretary-General António Guterres has repeatedly stressed that GDP is no longer the correct way to measure ‘wealth’ and says it’s ‘time to collectively commit to complementary measures’ .

This challenge has been taken up by the United Nations High Level Advisory Board on Economic and Social Affairs (of which I am a member), which recently published a compendium that examines six key issues relevant to achieving a just and sustainable recovery. An important recommendation is to suggest alternatives to GDP that national policy makers and international organizations should monitor regularly. The idea is to provide a dashboard that captures some of the key socio-economic variables that policy makers should monitor and which should be used to judge their performance.

What are these alternative measures? One is a labor market indicator: the median wage multiplied by the employment rate. The median salary is a better indicator of the conditions faced by most workers than the average (average) salary, which can be influenced too much by high compensation at the top. And the employment rate is a useful indicator not only of the state of demand in the labor market, but also of the amount of unpaid work usually done mainly by women (since the more they are involved in this work , the less likely they are to be able to hold paid employment).

In the United States and the United Kingdom, for example, my estimates suggest that GDP per capita significantly outpaced the labor market indicator over the period 2009-2020, with a widening gap between the two. In India, the two measures actually moved in different directions, with the labor market indicator declining even as GDP per capita rose.

Another alternative measure is the proportion of the population that can afford a nutritious diet (as defined by the Food and Agriculture Organization of the United Nations). This indicator is likely to become even more important as the global food crisis deepens, and it does not necessarily change with income poverty. In India, for example, 71% of the population cannot afford a nutritious diet, while official government and World Bank poverty estimates range from 13% to 22%.

The third measure is an indicator of time use, disaggregated by gender. This is particularly useful for capturing the incidence of unpaid care work, which is still largely done by women. This measure shows the distribution of time between paid work, unpaid work, personal leisure and social time. Many countries are now undertaking time-use surveys. These must be carried out regularly everywhere, with the necessary financial and technical resources provided to the countries that need them.

Gender analysis of time-use data is essential for understanding people’s social and material conditions. It shows how well people know about temporal poverty, which is much more prevalent among women and the poor. Time-use indicators also reveal the extent to which individuals provide unpaid work to society, particularly care services that are otherwise unrecognized and unvalued.

A fourth crucial indicator, vital for dealing with ongoing climate change and its implications, is carbon dioxide (CO2) emissions per capita. Although this metric does not capture all of the environmental effects of human activity, the carbon footprint (measured in terms of total consumption, not production) can closely track other environmental indicators, including those measuring pollution and exhaustion of nature.

Here, policy makers also need to pay attention to distributive equity. The ratio of CO2 emissions per capita of the top 10% to those of the bottom half has increased in most countries. Even more strikingly, the per capita CO2 emissions of the richest 1% of the world’s population have increased considerably and are now expected to be 30 times higher than the level compatible with limiting global warming to 1.5 degrees Celsius by 2030.

If all countries regularly tracked these four indicators, we would have a very different view of comparative economic performance than that which emerges from simplistic measures of GDP per capita or aggregate. And raising public awareness of this revised view of reality may well mobilize support for fundamentally different policies nationally and internationally.

Jayati Ghosh is a professor of economics at the University of Massachusetts at Amherst and a member of the UN Secretary-General’s High-Level Advisory Council on Effective Multilateralism.

Copyright : Project Syndicate

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