Why it’s time to end the tyranny of Gross Domestic Product.
- By Lorenzo FioramontiLorenzo Fioramonti is professor of political economy and director of the Centre for the Study of Governance Innovation at the University of Pretoria (South Africa). He is the author of the award-winning book Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number.
In global governance, a country’s status is intimately connected with the size of its economy. In his influential book, The Rise and Fall of the Great Powers, Yale historian Paul Kennedy concludes that economic strength is more significant than military might when it comes to determining the international pecking order. This has certainly been the case during the 20th century, when Gross Domestic Product (GDP) became the key parameter deciding which countries should lead the institutions of global governance. Definitions of “superpower,” “middle power,” or “emerging power” have all been defined by GDP. The distinction between the “developed” and the “developing” world is also a result of GDP. Powerful “clubs” like the G7/G20, the OECD, and even the BRICS (Brazil, Russia, India, China, and South Africa) are determined by actual or prospective estimates of GDP. GDP is not just an economic policy tool: It is first and foremost the leading parameter through which a nation can gain global clout and access the top echelons of global governance.
In the past few years, however, there has been a growing debate about the adequacy of GDP as an indicator of economic performance, let alone as a benchmark for international relevance. Indeed, GDP is not a measure of all gains and losses in an economy. While it counts the exploitation of natural resources as profit, it does not consider the economic costs of environmental degradation, and it completely disregards goods and services exchanged outside the market (within households, in the informal economies, through barter, etc.), which account for the bulk of economic activity in many countries. Chopping and selling trees adds to GDP but planting them doesn’t. As a consequence, the measure yields a distorted perception of “wealth” and resulting global status: How rich are emerging powers like China and India if, as the World Bank estimates, most of their GDP will have to be spent to fix the environmental destruction caused by its growth?
The concept of the GDP was introduced in the 1930s, when the myths of industrialization were uncontested and environmental and social concerns were less acute. But it is an outmoded tool for a generation increasingly concerned with social well-being and climate change. Against this backdrop, numerous calls have been made — not only by experts, but also by leading policy makers — to move beyond the GDP framework.
The French government established a high-level commission in 2008 to define post-GDP parameters of success, when both the OECD and the EU launched their “Beyond GDP” campaigns. In 2012, the Rio+20 U.N. Summit proposed the development of new measurements and targets, paving the way for the adoption of the Sustainable Development Goals, the new international benchmarks that will guide all countries’ economic policies as of 2015.
Even among the emerging powers, the influence of GDP has taken a knock. For instance, Chinese President Xi Jinping announced in 2013 that GDP will no longer be considered a parameter of success in China, ending the Communist Party tradition of rewarding officials that maximize GDP growth in their territory. A year later, over 70 Chinese cities ditched GDP as an economic policy tool. As admitted by the U.N. Secretary-General Ban Ki-moon, “[GDP] fails to take into account the social and environmental costs of the so-called progress.… We need a new economic paradigm that recognizes the parity between the three pillars of sustainable development. Social, economic and environmental well-being are indivisible.”
But given that GDP has determined the leadership of global governance, how would international politics be affected by the adoption of new measures of well-being, prosperity, and sustainable development? Let’s simulate the results using four leading alternative indicators: the Social Progress Index, the Legatum Prosperity Index, the Environmental Performance Index, and Ecological Footprint.
Using these measures, conventional powers — both in the West and in the East — would rank far below countries that have been more successful at building equitable and sustainable economies. The only current G7 members to survive the shift would be Germany (relatively high in its capacity to address basic needs and promote well-being) and Canada (mostly thanks to its education and social capital as factors of prosperity). By contrast, the world’s largest economies (in terms of GDP) would slide sharply down the rankings. Indeed, the United States ranks 10th in prosperity (mostly due to its poor track record in safety and security), 36th in well-being, and at the very bottom in sustainable development (due to its massive ecological footprint). China is 51st in terms of overall prosperity, mainly due to limited individual freedom and security, 92nd in well-being, due to a shaky recognition of personal rights, and at the very bottom in environmental performance (118th).
The new global leaders would be countries that have been able to marry economic progress with human and ecological well-being. Among them we find dynamic economies with a high quality of life such as Costa Rica, New Zealand, and South Korea (leaders in their respective regions) as well as established social democracies such as Sweden, Norway, Denmark, and Switzerland. We also find champions of good governance such as Botswana in Africa and Uruguay in South America.
Things would change for Southern Europe too. By including the value of the informal economy and the variety of household and community services provided free of charge (which are neglected by GDP), the income of many European economies increases significantly. The infamous acronym PIGS, describing the allegedly inefficient economies of Portugal, Italy, Greece, and Spain, would also need some rethinking, as their economies are much more prosperous — in non-GDP terms — than the current metrics reveal. Logically, a post-GDP scenario should lead to a revision of the European Union’s Stability and Growth Pact, which forces member states to anchor their capacity to invest in welfare mechanisms to their GDP performance.
Structural factors, too, are likely to accelerate the end of the GDP world. According to the IMF, the global economy is entering a “secular stagnation” — a prolonged phase of very low (if any) economic growth. International trade, a key driver of global GDP expansion, is also likely to contract, especially since fossil fuels (which can be easily transported) are becoming scarcer and more expensive, while renewable sources of energy (whose energy cannot travel long distances) become dominant. Global regulations to curb climate change will also make the resurgence of a GDP-fueled global economy very unlikely, especially as they will impose restrictions on emissions and environmental damage. But this will not mean a return to national economic self-sufficiency. The post-GDP economy will be less global — but more regional. Trade within regions and subcontinents will offer opportunities for more inclusive and sustainable development, especially where territorial continuity and shared energy sources provide new opportunities for cross-border cooperation. (The photo above shows a worker in a Japanese-operated car factory in Resende, Brazil.)
A post-GDP world is just a possibility. But with the convergence of economic, social, and environmental crises there appear to be no reasonable alternatives. Ultimately, global governance is what states want it to be. As we have seen, several countries have been able to maximize human and environmental well-being, but the GDP model of governance has relegated them to irrelevance. As the world gears up to ratify the Sustainable Development Goals and embark on negotiations for a new climate change agreement, these nations have an unprecedented window of opportunity to present themselves as beacons of sustainable development. A WE7 or WE20, that is, an alliance of leading “well-being economies,” would be better suited to address global challenges such as inequality and climate change than the current G7/G20, which is led by highly unequal and polluting countries. Time is ripe for major change.
Photo credit: YASUYOSHI CHIBA/AFP/Getty Images
Correction, June 2, 2015: Paul Kennedy is a historian at Yale University. An earlier version of this article mistakenly said he was with Harvard University.