The world needs to replace Gross Domestic Product (GDP) with a fit-for-purpose measure of economic health – could Sustainable Domestic Product (SDP) be the answer? Dr Ajay Gambhir, Senior Policy Fellow at the Grantham Institute thinks about this and the potential to view growth from a different angle.
If all goes well, the astonishing scientific developments that have brought us a variety of COVID-19 vaccines so unexpectedly fast will also allow the world to begin its economic recovery from the pandemic over the course of 2021.
All eyes will be on an indicator that arguably trumps any other, including the pandemic’s R rate, the proportion of people immunised, or other more grim statistics about infections and fatalities. That indicator is Gross Domestic Product, or GDP, the still-dominant measure of economic health. GDP measures the total value of all the goods made and services provided during a specified period in a specified region. The International Monetary Fund (IMF)’s latest World Economic Outlook reported a 3.5% fall in global GDP over the course of 2020, and while its projections see a 5.5% increase in 2021, this means the world economy will be only slightly bigger at the end of this year than it was just before COVID-19 became a fixture at the top of the news agenda.
As governments scramble to stimulate their GDPs to recover, a debate rages around whether humanity’s output of goods and services can continue to grow within our planetary boundaries. Terms such as the Anthropocene, the sixth mass extinction, and of course climate change, are rising to the heart of both business and government outlooks (if not yet their actual strategies). Yet, businesses still seek profit and increasing market capitalisation, and governments still seek to show off their GDP growth – or explain away their poor GDP performance. This tension must eventually reach a reckoning.
What’s wrong with GDP?
There have been several critiques of GDP, including its focus on new capital investment whilst failing to account for capital depreciation, either when considering human-made capital (i.e. machines) or natural capital (i.e. the environment). The latter issue has recently been highlighted in the Dasgupta Review on the Economics of Biodiversity. Critiques of GDP have also highlighted that it cares nothing for social inequality, nor for the benefits of “sharing, repairing, reusing, refurbishing and recycling“. In addition, and critically, GDP doesn’t tell us how vulnerable our economies are to shocks and disruptions. Two countries with equal GDP may suffer very different GDP losses in the face of particular shocks if they have differences in the robustness of their institutions, their leadership, their mix of economic sectors or their ability to finance government spending in times of crisis.
There have been numerous proposals for new metrics to replace GDP, each of which seeks to address at least some of these limitations. These include Green GDP, the Genuine Progress Indicator (GPI), the Human Development Index (HDI), the Happy Planet Index (HPI), and several more besides. The careful statistical and analytical work that has gone into developing these indicators is invaluable groundwork for a measure which can eventually replace GDP. However, none of these metrics have themselves succeeded in doing anything more than augmenting GDP in most national economic accounts.
What’s in a name? Perhaps a lot.
No doubt the greatest barrier for any rival metric to usurp GDP is the institutional inertia that has maintained its dominance in measuring economic health. But in order to wean society off GDP, economists need a replacement that is equally tangible in communicating what economies produce, yet far more all-encompassing around those social and environmental goals that societies should be embracing at this precarious time.
And therein lies the answer. The United Nations has already created a raft of 17 carefully developed goals, each with its sub-targets, that are intended to guide humanity through the early part of the twenty first century’s development – the Sustainable Development Goals (SDGs). A measure of our sustainable – rather than gross – domestic product (SDP), accounting for all 17 elements that the world’s countries have already agreed constitute ‘sustainability’, would be an obvious way to update economic accounting. Robert Cadenza and colleagues highlighted back in 2014 how the SDGs offered the perfect opportunity to leave GDP behind for something more fit-for-purpose. While efforts to do so continue to gain momentum each year, a totemic replacement indicator is still lacking.
This is where SDP comes in. It withholds the principle of measuring the output of goods and services, thereby representing a conceptually smaller leap from GDP than alternatives, which may still be deemed too intangible or esoteric. Yet it would anchor the valuation of those goods and services (and their relative contribution towards an aggregate measure of total economic output), in a way that incorporates the different SDGs. With careful analysis, SDP would represent what countries produce in a way that values their net impact on addressing poverty, inequality, unemployment, the protection of life on land and below the water, as well as the safeguarding of the planet’s ecosystems and atmosphere. And crucially, the more that countries’ production detracted from those goals, the lower would be their SDP.
GDP is neither infallible nor irreplaceable
Many will protest that the complexities of calculating such an SDP measure are insurmountable: 17 different goals; no normalised metric or easy way of valuing in monetary terms many of the societal objectives most critical to our prosperity and arguably even our survival; and a data analysis and collection exercise that could take years to agree and undertake.
Yet, calculating GDP is also no picnic and involves an array of internationally non-uniform practices driven in many cases by subjective judgements that can have a significant impact on the resulting level of GDP. For example, the UK’s 20% loss in GDP in the second quarter of 2020 (following the first COVID-19 lockdown) may have been only 14% if it accounted for health and education output losses in the same way that many other countries did. The UK used a measure related to actual output of teaching and healthcare (which plunged at this time), in contrast to many countries that valued these sectors’ output according to salaries paid (which stayed fairly constant).
In 2020, world GDP fell by nearly 4%, and the UK’s GDP by almost 10%. Yet, by how much did their SDP change? In other words, what was the change in the value of goods and services produced that on balance contributed to guiding humanity’s development within its planetary boundaries, and towards a more equal, resilient and sustainable future? Now more than ever, we really need to know.