Measuring a country’s success through GDP was never a good idea, even for its own creator. E&M investigates alternatives to the index that became a dogma.

Buthan, the first country to implement the Gross National Happiness as an alternative to GDP – Photo: Roberto Saltori (Flickr) Licence: CC BY 2.0 

GDP’s problems were evident to the very man who invented it. In 1932, the United States wanted to know if its economy was recovering from the Great Depression. Simon Kuznets found a solution in Gross Domestic Product (GDP), measuring national economic output by looking at a tally of the goods and services a country produces. Although Kuznets himself stated that “the welfare of a nation can scarcely be inferred from a measurement of national income as defined by GDP”, for politicians and economists and journalists, GDP has become “the most commonly used and widely accepted measure of national success”. Since its birth, it has become the benchmark by which countries are measured and its continued growth is a constant priority in policy making. In fact only recently, a World Bank report claimed that “nothing besides long-term high rates of GDP growth (specifically, a doubling of GDP each decade) can solve the world’s poverty problem”.

The world’s pre-occupation with increasing GDP is dangerous and will only lead us to bad policies, especially in the developed world. While it can be useful in some specific analysis, it is not a comprehensive tool and cannot be our sole focus. As Bobby Kennedy noted in 1968, GDP “measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything, in short, except that which makes life worthwhile.” The problem is that it was only designed to measure economic output and, therefore, it is like driving a car that has nothing but the speedometer. It can only tell you how fast you are going, not how much fuel you have left, how many miles you have to go or how many miles you have done.

GDP cannot tell us about the many things that define quality of life. Increasing our GDP can only increase our happiness to a certain level and then other problems, such as tiredness, loneliness and stress become increasingly important. This is shown by comparing GDP per capita and “prosperity” (a term used by the Legatum Institute to capture all things that make a state thrive from education and health, to business opportunity and social capital to personal freedom and good governance).

The problem is that it [GDP] was only designed to measure economic output and, therefore, it is like driving a car that has nothing but the speedometer…

GDP cannot capture “how able people are to make use of the other assets [such as education] they have at their disposal”. Nor does it account for inequality which is increasing – as seen in the well-publicised rise of the top 1%. As Stiglitz notes, “regardless of how fast GDP grows, an economic system that fails to deliver gains for most of its citizens, and in which a rising share of the population faces increasing insecurity, is, in a fundamental sense, a failed economic system.” Nor can it capture the damage of reckless wealth creation – from the fallout of the 2008 financial crisis to the impact on the environment. GDP encourages depletion of resources because output is all it measures – clear-cutting a forest for lumber is valued more in GDP terms than the ecosystem services that forest provides if left untouched.

Thus, GDP should not be the sole tool for measuring success. In fact, according to Jon Gertner, a focus on GDP “has not only failed to capture the well-being of a 21st-century society but has also skewed global political objectives toward the single-minded pursuit of economic growth”.

In light of this, people are starting to look beyond GDP. There are a new array of happiness indexes such as the Bhutan and Canadian. Furthermore, leaders such as the British Prime Minister David Cameron and those at the Rio+ 20 Summit have showed “a demand for looking beyond GDP”. The European Union has also joined this search for better measures of success.

The Commission recently noted that “… by design and purpose, [GDP] cannot be relied upon to inform policy debates on all issues. Critically, GDP does not measure environmental sustainability or social inclusion and these limitations need to be taken into account when using it in policy analysis and debates”.

The EU began to discuss the need to look beyond GDP in 2007. The European Commission, European Parliament, Club of Rome, OECD and WWF hosted the high-level conference “Beyond GDP”. The objectives were to clarify which indices were most appropriate to measure progress, and how these can best be integrated into the decision-making process and taken up by public debate. In 2009 the Commission released “GDP and beyond: Measuring progress in a changing world” in which it highlights five actions: complementing GDP with environmental and social indicators; near real-time information for decision-making (improving timeliness); more accurate reporting on distribution and inequalities between regions and social groups; improving measurement towards sustainability and extending national accounts to environmental and social issues. In 2013 it then set out the requirements of indices that could complement GDP and noted a number of possible indices.

More importantly, the EU has made efforts to operationalise these indicators, from making them easier to access on the website to looking at how they can be used in “‘real-world’ policy-making.” For example, environmental accounts were “the lead indicator for the Roadmap to a Resource Efficient Europe” and the data on poverty and social exclusion is “being used in social policy-making in the context of the Europe 2020 strategy”.

These complementary indicators were evident in the Greek financial crisis. While public talks and the final Memorandum of Understanding (MoU) concentrated far more on the financial regulations and plans for Greece – such as how to cut costs and how to liberalise the market – the “social side” of Greece’s financial problems were clearly considered. The MoU was followed by a Commission report assessing its social impact. The report began by stating: “The Commission is fully aware of the social conditions in Greece and sees their improvement as essential to achieve sustainable and inclusive growth.”

In its assessment the report looked into issues such as “the social fairness of the new programme to ensure that the adjustment is spread equitably and to protect the most vulnerable in society, thus improving social cohesion”. It also highlights the plans to address – among other things – education systems, the health system, the welfare system and apprenticeship schemes. All of this shows recognition of the need to move beyond GDP – even when the problems faced by the EU may seem primarily economic.

Moreover, the Greek financial crisis is a clear example of how economic factors can have a terrible impact on many aspects of society. In Greece, the financial crisis increased pessimism, especially towards national and individual prospects, and made the society less generous, with massive declines in the number of people donating money. There was also a clear decline in social capital: people no longer felt like they could trust each other. This can slow down recovery and make a financial crisis devastating. It can decrease a society’s ability to cooperate and encourage people to bypass the system rather than accept its policies. Thus, a satisfactory solution for Greece must be one that considers these factors.

Greece shows the importance of looking beyond GDP, which is not – and was never designed to be – an all-encompassing measure of success. The sooner a wider measure permeates all the EU does, the better its policies will be.

Feature image: A series of statues depicting life during The Great Depression inside of the Franklin Delano Roosevelt Memorial in Washington, DC. – Photo: Brian Talbot (Flickr) Licence: CC BY 2.0 

  • Abigail Watson has undertaken BA in Politics at the University of York and an MA in Contemporary European Studies with a (transatlantic track) at the University of Bath – spending a semester studying at the University of Washington, America, and another at the Università degli Studi di Siena, Italy. She is currently a Research Intern in the Prosperity Index team at the Legatum Institute.

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