Despite the limitations of using GDP to measure progress, alternative indicators do not have the influence that GDP does. What's the solution?
One of the key issues to be debated in the World Economic Forum (WEF) session 'More than GDP' on January 23, 2019 is whether GDP (gross domestic product) is an adequate metric by which to measure the progress of nations. This is a topic that I have worked on for over a decade and is the focus of my new book Replacing GDP by 2030 to be published in April 2019.
GDP is the main attraction of the statistical world. It is used by all countries and GDP announcements are eagerly anticipated by markets, media and society. To paraphrase the novelist George Orwell – all statistics are equal but some statistics – such as GDP – are more equal than others.
While GDP is generally accepted as a proxy indicator for the "success" of a nation, it is also widely criticized, often for the fact that that it ignores important factors such as the wellbeing of citizens, levels of inequality and the health of the environment. Furthermore, the GDP methodology has been revised only four times in the last 70 years, which can raise doubts about whether it has kept pace with rapid developments in the globalized and digitized economy.
Hundreds of alternatives to GDP have been proposed by a multitude of organizations and researchers in the last few decades. They include the Human Development Index (HDI), the Genuine Progress Indicator (GPI), ecological footprint, the Better Life Index and the Sustainable Development Goals (SDGs). While each of these approaches has had some success, none of these is close to having the influence that GDP does.
Why not? Why has GDP continued to reign supreme as the metric of choice for measuring societal success?
Firstly, GDP is useful. It provides governments with a means to assess the likely economic impacts of policy alternatives and to project future growth.
Secondly, GDP is part of the common vocabulary of macro-economists - the System of National Accounts (SNA) - that enables economists the world over to communicate consistently with each other and the rest of the world. GDP is clearly defined, free of ambiguity and universally understood. As such, it has the weight of the global macro-economic community behind it along with the support of respected organizations such as the UN, OECD (Organisation for Economic Co-operation and Development), European Commission, IMF (International Monetary Fund) and the World Bank.
Thirdly, the organizations and researchers lobbying to move beyond GDP lack the co-ordination and community of the macro-economists. They share no common language. Core concepts such as "wellbeing", "welfare", and "sustainability" have no clearly defined, universally accepted meaning. If communication within the beyond-GDP community itself is confused and inconsistent, then the message sent to policy makers, business and society risks being incoherent and ineffective.
So what needs to happen if we are ever to move beyond GDP? We need to create a coherent beyond-GDP community based on a common language and vocabulary. This community needs to agree definitions and metrics for the concepts they discuss such as wellbeing and sustainability. The creation of the Intergovernmental Panel on Climate Change (IPCC) provides a good example of such a community-building process. The United Nations (UN) brought the world's climate scientists together and as a result, the IPCC now communicates a coherent and influential message to society.
Furthermore, in the same way as macro-economists created the System of National Accounts, the Beyond GDP community needs to develop its own accounting framework; one that can be used to monitor national "stocks and flows" related to environmental health, demography, the economy and inequality, and to provide a more holistic view of whether societies are heading in the right or the wrong direction.
My own view is that economists should not lead this new accounting system. Mainstream economics is insufficient to fully grasp the concepts of well-being and sustainability. We therefore need to move beyond economic terminology such as "externalities" and "natural capital". We have a rich and diverse palette of alternative scientific disciplines at our disposal, from behavioral economics and neuro-economics, to psychology, resilience and network theory. While mainstream economists are very important contributors, they should not be in the lead of this multidisciplinary process.
Many of the necessary scientific theories already exist. There are also many datasets on the global economy, inequality and environment which could be used in this process. There is really only one bottleneck. A respected international institute, such as the UN or the OECD needs to start and oversee the process. If this happens, then there is a real chance that – in addition to GDP as an indicator of the size of the economy – we will at last have a consistent and globally-accepted method to assess well-being and sustainability. We will have a more sophisticated approach to assess whether or not our societies are heading in the right or wrong direction, and to guide government decision-making. Better data, better policies, and better societies are at our finger tips.
Until then, GDP will continue to prevail and the success of nations will continue to be judged through the narrow lens of economic output alone.
Dr. Rutger Hoekstra is Scientific Director of KPMG True Value Services at KPMG in the Netherlands where he leads the development of methodologies to measure the impacts of business on societies.
His latest book, Replacing GDP by 2030: Towards a Common Language for the Well-being and Sustainability Community, will be published by Cambridge University Press in April 2019.