The case against GDP

Gross Domestic Product has been used as an overarching measure for development for over half a century despite its long-observed problems. However, what is particularly concerning is that this narrow measure of economic activity is confused with broader measures of social progress. These measures influence policy-making, thus any flaws in their measurement could lead to distortions in the economy. Presently, our policies seem to have a singular aim of increasing GDP and are not always accompanied with adequate consequent welfare development. Van den Bergh, 2009 proves that a welfare growth equivalent to the targeted GDP growth cannot be maintained. Assuming the average rate of annual GDP growth as 2% is maintained for the next 1000 years the GDP will be (1.02) 1000 ≈ 400 million times higher than it currently is. Clearly an equivalent increase in social welfare cannot take place implying that a decoupling of GDP and social welfare must occur at some point. Considering this, a possible conclusion is that our indicators are faulty. With advances in our understanding of the issue and widespread acceptance of the flawed nature of GDP, this article explores a move away from this fetishism toward better indicators.

The concepts of Degrowth and Agrowth emerged in opposition to GDP fetishism.

Degrowth is a multifaceted term that has no simple definition. It has been comprehensively explained as, “Sustainable degrowth is a downscaling of production and consumption that increases human well-being and enhances ecological conditions and equity on the planet…”.

Although a movement with potential merits, degrowth has been opposed on many fronts. Hueting (2010) shows that realising environmental restoration is likely to result in a contraction in the GDP, at least initially, since majority of economic growth is generated by sectors that contribute to pollution. However, the reverse may not hold true: GDP degrowth may not lead to environmental restoration. Therefore, degrowth isn’t considered a strong solution and widely criticised for this unstable basis, among other reasons.

The concept of Agrowth has been proposed as a more viable alternative to degrowth. The term expresses an indifference towards economic growth but doesn’t oppose it; rather it targets GDP growth fetishism. GDP, in its restricted measurement has failed, as an indicator, to accurately capture development of a nation. There is a need to focus on more direct indicators of social and environmental welfare that can replace GDP. While Agrowth doesn’t offer an alternative, it proposes a neutral or agnostic stance on the fluctuations of GDP.

Growth may be beneficial to some nations in certain development stages, and even necessary, but “unconditional growth” shouldn’t be the target. This places a needless and avoidable constraint on the social progress of a country, which impedes decision-making on health, climate and labor policies. Optimization theory dictates that under an additional constraint the objective function (social welfare) results in a lower or at best equal optimal value, but never a higher one. The added constraint of a positive or minimum 2% economic growth will be unable to contribute to an increased level of social welfare, and will possibly diminish social welfare. Thus, the aim of agrowth is dismissing economic growth as a necessary and sufficient condition to actualize welfare and its growth.

While Agrowth takes the shift away from growth, the need for a replacement arises. The obsession that surrounds GDP growth makes substituting it with Degrowth all the more challenging, especially considering the connotation of the word to those who are unfamiliar with its intricacies. Therefore, considering the disregard for GDP that Agrowth hopes for, the difficulties that Degrowth poses and the larger human development and environmental concerns, Basu (2006)’s Quintile Axiom appears to be the perfect intermediate measure.

He proposes that while assessing a country’s economic state or progress, our focus should fall upon how the poorest people in the nation are faring. This can be achieved by looking at the economic condition of the poorest 20 percent of the population - the bottom quintile. The per capita income of the bottom quintile (quintile income) and the growth rate of the quintile income (quintile growth rate) as opposed to that of the nation would give us a better evaluation of the state of development of the country.

This approach may not seem to be directly related to furthering non-economic goals of “comprehensive development” or environmental protection, or provide an indicator like United Nations Development Program’s Human Development Index and instead may be just another measure that could lead to its own kind of fetishism. But the rebuttal of this criticism is twofold: Firstly, while our current focus is on GDP growth and per capita income, it proposes a less radical change to measuring quintile income in lieu of it. Second, the quintile growth rate (working towards constantly ensuring the bottom quintile is faring optimally) is likely to correlate better with social indicators, such as standard of living, inequality, environmental conditions etc.

One of the major advantages of the quintile axiom is that despite concentrating resources on the poorest 20 percent, it does not ignore the people outside of this group. Any measure targeted at the lowest strata is bound to benefit those who are better off. If those outside of the bottom quintile bracket fare badly, they will be included in the bottom quintile, thus brought into the focus of targeted policies. This provides us with a moving target that cannot be satisfied. There will always be a bottom quintile whose conditions can be improved, meanwhile constantly improving the overall standards.

The bottom up approach to welfare development proposed by the quintile axiom has a directness, which the other strategies lack. Instead of aiming for increased growth in the overall GDP and hoping for a spillover effect that benefits the poorest sections, this measure begins with the improvement in the growth rate of quintile incomes. This ensures that the weaker sections of society are not just included, but brought to the forefront.

In practical applicability, agrowth combined with policies modelled on the quintile axiom has the possibility to lead to sustainable development, which concerns itself with human welfare above all.

Daksha Parmani