|Is GDP the end all? |
Thursday, August 10 2017
Trinidad and Tobago has been recognised as the wealthiest country in the Caribbean as well as the third richest country by Gross Domestic Product (GDP) per capita in the Americas after the United States and Canada. Furthermore, it is also recognised as a high income economy by the World Bank.
Recently, the country’s economy has been negatively affected by fluctuating oil and gas prices and as a result, the GDP in Trinidad and Tobago contracted 10.80 per cent in the third quarter of 2016 over the same quarter of the previous year. It is expected, however, that Trinidad and Tobago will experience a modest recovery in growth over the coming quarters, driven by rebounding natural gas production.
By all indications, this expected economic growth is something that we citizens are all looking forward to.
The question is though - is GDP really an accurate measure of economic growth? Gross domestic product is the most commonly used measure of a country’s economic activity. It basically reflects the value of all final goods and services legally produced in an economy in a given time period and often correlates to the standard of living and the extent of economic development in a country.
GDP, however, excludes any unpaid activity as well as illegal activity, and also fails to account for reductions in quality of life and losses to natural disasters or crime. Additionally, even per-capita GDP does not necessarily reflect the wealth of the typical citizen, as a majority of low-earning citizens could be offset by a small group of very high earners.
Former Microsoft Corporation chief architect Edward Jung once called GDP a misleading indicator that sabotaged development and innovation, and a growing number of researchers, economists, industry leaders and policy makers have made it clear that they think GDP is a poorly devised relic. An example of this is where GDP can increase after a major flood or grow rapidly after a disaster.
If all of Port of Spain burnt to the ground, the rebuilding effort might positively impact GDP. This is because GDP is very susceptible to the broken window fallacy — false signals of rising prosperity when obvious destruction has taken place.
Gross domestic product is certainly a valuable tool but unfortunately, it misses out on a number of effects, which together have an impact that is rather larger than the percentagepoint statistical revisions economists squabble over. It measures income, but not equality, it measures growth, but not destruction, and it ignores values like social cohesion and the environment. Another of the larger problems can be summed up in one word: debt. GDP only deals in positive numbers, so doesn’t consider future obligations. Obviously it is easy to boost the economy by borrowing from other countries and also from future generations, in the form of resource extraction and depletion.
Interestingly, International Monetary Fund head Christine Lagarde, Nobel prize-winning economist Joseph Stiglitz and MIT Professor Erik Brynjolfsson noted at the World Economic Forum in Davos, Switzerland, “GDP is a poor way of assessing the health of our economies and we urgently need to find a new measure.” In the end, GDP measures only output and makes no claims on the quality of that output, let alone on subjective concepts such as social progress or human happiness. It can obscure growing inequality and encourage the depletion of resources.
It cannot differentiate, for example, between spending on education versus purchasing cigarettes and fails to account for the value of social cohesion, education, health, leisure, or a clean environment. We can agree with the academics in that GDP is a universal, objective and very useful measurement, however, we should recognise its limitations. Increasing GDP should not be government’s only objective and GDP alone cannot be considered a definitive measurement of human welfare. As we look forward to the rebounding of our economy at some point, we need to understand that an increase in economic growth does not equate to progress.
Ultimately, we need to hold our politicians to better account. Should we should shape government policy on GDP alone?