A look at the Mid-Year Report, 2018: Economic Growth vs Economic Development vs Human Development (Part 2)

In last week’s article, it was argued that the 2018 mid-year growth rate of 4.5 percent was attained largely because of the dramatic increase in Government expenditure in comparison to the corresponding half-year period for 2017. It is important to note that while, in theory, increases in Government expenditure are usually intended to stimulate growth in the economy, the key understanding that ought to be established in this regard is where these expenditures are allocated. If the expenditures are largely concentrated on unproductive activities, such as national events, dietary, other operating expenses, local travel and subsistence, vehicle spare parts and service, and rental of buildings and things like that, then increases in Government spending like these will simply not translate to real developmental growth.
Rather, these will just be a burden on the national treasury, and therefore the allocation of Government spending is what is really important to achieve the desired outcomes of real developmental growth, and not just manipulating one component of the GDP equation, inter alia, mathematical simulation to make the numbers appear to look good. As such, in the context of this argument, it is implied that this level of GDP growth rate does not necessarily reflect the true economic status of the economy with respect to real growth in terms of an expansion of the economy in developmental terms.
For example, this cannot be the case when the rate of unemployment remains relatively high. The last survey that was carried out showed that Guyana’s unemployment rate is 12 percent. However, in a previous article featured under this column some time ago, it was argued that if we were to adjust that figure to account for the 9,000 plus unemployed sugar workers in 2018, then real unemployment rate would be anywhere in the region of 20 – 25 percent.
The unemployment rate of a country is a key indicator that tells of the economic health of an economy; and therefore, with a rate of unemployment hovering over 20 percent, that is certainly not a good indicator, and does not tell a good story in terms of the economic growth direction of a country.
Some of the limitations of GDP to measure quality of life and economic progress
“Economists have warned since its introduction that GDP is a specialised tool, and treating it as an indicator of general well-being is inaccurate and dangerous. However, over the last 70 years, economic growth – measured by GDP – has become the sine qua non for economic progress.” (Costanza et.al, 2009).
Because GDP only measures monetary transactions related to the production of goods and services, it is based on an incomplete picture of the system within which the human economy operates. A more complete picture of how the human economic system fits within the social and environmental systems upon which it depends is described hereunder.
The way an economy works is that it draws benefits from natural, social and human capital, and the quantity and quality of such capital, in turn, is affected by net investments from the economy. By measuring only marketed economic activity, GDP ignores changes in the natural, social and human components of community capital upon which the community relies for continued existence and well-being. Consequently, GDP not only fails to measure key aspects of quality of life; in many ways, it encourages activities that are counter to long-term community well-being. Moreover, of particular concern is that GDP measurement encourages the depletion of natural resources faster than they can renew themselves. Another is that current economic activity is degrading ecosystems, thereby reducing the services that until now have been provided to humans virtually for free. For example, in 1997, it was estimated that the world’s ecosystems provided benefits valued at an average of US$33 trillion per year. This was significantly larger than the total GDP at the time. (Costanza, et.al, 1997 & 2009).
Another problem with GDP is its use as a measure of progress in relation to the “threshold effect”. As GDP increases, overall quality of life often increases, up to a point. Beyond this point, increases in GDP are often offset by the costs associated with increasing income inequality, loss of leisure time, and natural capital depletion (Max-Neef 1995; Talberth, Cobb et.al, 2007). Empirical evidences confirm that beyond a certain threshold, further increases in material well-being have the negative side effects of lowering community cohesion, healthy relationships, knowledge, wisdom, a sense of purpose, connection with nature, and other dimensions of human happiness.