Trunk Economics | FEBRUARY 20, 2025
GDP and its discontents
It is time for policymakers, economists, and business leaders to collaborate and create a new measure of success that truly reflects the complexities of human wellbeing.
“HOW ARE YOU”, IS AN everyday opener for most seemingly innocuous human conversations. The standard responses to this question are almost always unremarkable, mostly “good,” “fine,” “not well” or something to a similar effect.
In itself, the question is an inquiry into a person’s well-being. Conversationally, it is good enough to respond with a one word reply, as it concerns an individual’s immediate state of being, or the quality of present experience.
But, how does one quantify well-being? Is the level of income alone the most definitive metric to gauge whether a person is better off or worse off than before?
Income is undoubtedly a crucial determinant of one's quality of life. It enables us to buy the things we need and want, from housing and healthcare to education and entertainment. But when it comes to measuring a country's economic well being, we need to look beyond individual incomes.
For decades, governments have been obsessed with Gross Domestic Product (GDP) as the ultimate measure of economic success. GDP, by definition, is the total value of all goods and services produced within a country's borders. (Savings is income not spent). But is it really the best way to measure a nation's progress?
Flaws too glaring to ignore
The problem with GDP is that it's a simplistic metric that doesn't account for the complexities of human wellbeing. It doesn't distinguish between income earned by the rich and the poor, or between economic growth that benefits everyone and growth that only enriches the elite.
Moreover, GDP ignores the value of unpaid work, such as caregiving and household chores, which are essential to human wellbeing. It also fails to account for the environmental and social costs of economic growth, such as pollution, inequality, and climate change, and, of course, of migrants.
For far too long, policymakers across the world (India included) have been obsessed with a single metric: GDP. The notion that a country's prosperity can be reduced to a single number has been perpetuated for decades.
The flaws of GDP are glaring. It's a quantitative metric that ignores the qualitative aspects of life. It's a snapshot that neglects the dynamics of economic activity. And it's a measure that's woefully insufficient in capturing inequality.
In India, the top 100 richest families account for nearly 20% of the country's GDP. This staggering statistic highlights the absurdity of using GDP as a measure of economic wellbeing.
Compelling arguments
The limitations of GDP are not new.
In 2008, French President Nicholas Sarkozy sparked a revolution in economic thought. He tasked three giants of economics - Joseph Stiglitz, Amartya Sen, and Jean Paul Fitoussi - to challenge the status quo. Their mission: to study the limitations of GDP as a measure of economic activity and propose bold new alternatives.
The Commission on the Measurement of Economic Performance and Social Progress (CMEPSP) report, followed by the seminal book "Mismeasuring Our Lives: Why GDP Doesn’t Add Up", blew the lid off GDP's shortcomings. Stiglitz, Sen, and Fitoussi made a compelling case on why GDP fails to capture the nuances of human wellbeing, neglecting crucial factors like environmental degradation, social inequality, and human happiness.
This groundbreaking work, ideally, should have paved the way for a radical overhaul of our economic metrics.
It's time to move beyond GDP's narrow focus on economic growth and embrace a more holistic approach that integrates the intangibles of human experience. We need a new system that prioritizes people and the planet alongside profit.
The OECD's Better Life Index offers a more nuanced approach. By measuring human wellbeing across 11 topics, including housing, income, jobs, education, and environment, the index provides a more comprehensive picture of a nation's prosperity. It's time to adopt a similar framework and move beyond the limitations of GDP.
But this requires a fundamental shift in mindset. It requires policymakers to recognize that economic growth is not an end in itself, but a means to an end. The end goal is to improve the lives of citizens, to provide them with access to quality education, healthcare, and infrastructure. GDP may be a useful indicator of economic activity, but it's a poor measure of human wellbeing.
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