GDP is no longer an accurate measure of economic progress

In this author’s previous two columns, readers would recall that a thorough dissection and analysis of Guyana’s GDP outturn for 2018 was conducted. Those articles looked at the GDP growth rate achieved for 2018 and established that this was not reflective of any real substantive growth of the economy. Rather, it was — more or less — reflective of growth in terms of massive increases in Government expenditure, and not real expansive growth of the economy.
Consistent with this contention put forward by this analyst, a World Economic Forum article echoed the same concerns, which shall be summarised in today’s article as a consideration for policymakers in Guyana, going forward.
According to the article, the forum contended that “it is critically important we monitor societal progress and design responsive policies to 21st century challenges, such as climate change, the marginalisation of more than a billion people, resource depletion, and emerging pollution-driven health crises.”
Accordingly, this necessitates the need for reliable metrics, to know how we are performing on the yardsticks of our economy, sustainability, and social harmony. Unfortunately, the radar used to track progress is far from satisfactory, to such an extent that countries still use a 20th century metric to measure wellbeing other than Gross Domestic Product, or GDP.
It is understandable — that growing international interest in a tool that still captures financial and produced capital, but also the skills in our workforce (human capital), the cohesion in our society (social capital), and the value of our environment (natural capital), given that GDP functions as a good measurement of output, income, and expenditure. These are needed to understand and devise fiscal and monetary policies, but this measure flatly fails when it comes to wellbeing.
Its founder, Simon Kuznets, cautioned half a century ago that it is useful mainly in tracking income. More recently, other economists have suggested that knowing change in per capita wealth of all types is key to monitoring sustainability.
Work has advanced on some of these elements. The UN Environment Programme-led Inclusive Wealth Index shows the aggregation through accounting and shadow pricing of produced capital, natural capital, and human capital for 140 countries. The global growth rate of wealth tracked by this index is much lower than growth in GDP. In fact, the 2018 data suggests that natural capital declined for 140 countries for the period of 1992 to 2014 (World Economic Forum).
Interestingly, many countries record GDP growth while they lose natural capital. One can see the trade-off among various types of capital, but the report clearly conveys that mixing income with wealth is bad economics, and is dangerous for sustainability measurement.
The findings of the Index include strong recommendations to help reach global sustainability targets, including the UN Sustainable Development Goals. Closely tracking countries’ productive bases is key, as a declining asset base implies a non-sustainable trajectory. Many of the assets critical for maintaining productive bases are either not priced, or are priced at much lower levels than they should be. This is especially true for natural capital and human capital assets. Natural capital assets, such as forests and water bodies, have only been valued for the products they provide for the market, such as timber and fish. However, these ecosystems offer a much larger suite of services, such as water purification, water regulation, and habitat provisioning for species, among many other things. (World Economic Forum).

Introduction of the Inclusive Wealth Index helps policy-
makers prepare to negotiate for reductions in greenhouse gases, as well as for compensations accruing from climate change. Further, past reports have shown conclusively how countries can become unsustainable in absolute terms when population growth is factored into the computation. Understanding the impact population growth has on productive bases is a critical variable that leaders should factor into policy-making. Hence analytic progress has been made, but there is still need to bring all five elements of prosperity — financial, produced, natural, human and social capital — into one framework (World Economic Forum).