ECONOMY - 03 OCT 2018

Much Ado About GDP

Much Ado About GDP
GDP ratings fail to incorporate the changes in the standards of living

Why does Nigeria rank 71st, France 25th, and the U.S. 38th on the list of suicide rates by country? 

When asked how happy they were, why did respondents in Germany (GDP per capita: $41,936) and the U.S. (GDP per capita: $57,466) report feeling less happy than their counterparts in Nigeria (GDP per capita: $2,177)? Surely, whatever problems the French, Germans, and Americans have pale in comparison to what most Nigerians face. So, what gives? 

GDP (Gross Domestic Product), the most widely used measure of economic prosperity, is so popular that politicians all over the world make promises in GDP. It is a measure of economic growth that tells us how wealthy or prosperous a nation is, and how the standard of living has improved over time. 

The biggest appeal of GDP is that it gives a simple and concrete summary of prosperity, unlike other measures like Gross National Happiness (GNH) which give a more complicated and harder to interpret index value. Moreover, for developing countries like Nigeria, focusing on national wealth as a measure of prosperity is rooted in survival, not extravagance.

But as important as it is to measure prosperity in GDP terms, it is also important to consider how GDP falls short as a measure of well-being and prosperity, and how it has begun to fail our more successful western counterparts.

In the first paragraph, I posed the very intelligently phrased question, what gives? Well, GDP happens to be an inadequate measure of well-being. The gist is that you can be the wealthiest country in dollar terms and still be significantly less happy than your poorer counterparts, which arguably defeats the purpose of amassing wealth.

Thoughtful readers would realise that this is as true for people as it is for countries. Just as individuals measure success by their wealth, countries do the same. If GDP growth is strong, we deduce that we are doing alright, enough people are employed, and people are getting paid enough.

But in reality, GDP cannot tell us how well we are faring since wealth alone does not sufficiently measure well-being. Evidence that economic prosperity does not equate to well-being can be seen in Scandinavian countries which have the highest living standards, where the government provides health care and free education, and life is generally good. And yet, suicide rates are high. Some people call this the no one-left-to-blame phenomenon.

A particularly interesting way GDP falls short is that it fails to measure improvements in the standard of living resulting from technological progress. Uber is an excellent example of this. Once upon a time, you had to walk to the street and hope to find a cab driving by that was willing to drop you off at your destination, while also ensuring that you had cash on you. The product is essentially the same, but the improvement in quality and experience is stark. However, GDP would struggle to account for the improved convenience that the ride-hailing industry affords.

Electric stoves offer another great example. The move from cooking over kerosene stoves and open flames has notably improved our standard of living, yet GDP stops at measuring the value of this invention as the cost of inputs of production.

The same way the GDP fails to account for innovations that improve our standard of living is why it also fails to take into account the environmental degradation that tends to occur during wealth creation. Even those who dispute global warming cannot ignore the current environmental degradation and pollution Nigeria faces, and the cost it imposes on our lives and the (probably) higher cost on the lives of future generations.

How to save our planet from the hazards caused by day-to-day economic activities like driving and manufacturing, or while extracting non-renewable natural resources, is something world leaders continue to ponder. Meanwhile, GDP treats the earth's degradation as a positive by focusing on goods produced in the process of polluting the environment, failing to measure the associated costs.

Even with all this, we can persist with GDP as our primary measure of prosperity as a developing country, but we must do so with caution. After all, in the presence of high-income inequality, GDP tells us nothing about the well-being of the average person. In a country as unequal as Nigeria, with a GINI coefficient of 0.43—where 0 is perfect equality, and 1 is perfect inequality—and where wealth is concentrated in the hands of a few people, GDP will significantly overstate how well the majority of citizens are faring. If 90% of the wealth of a rich country is in the hands of 1% of the population, it makes little sense to infer that the nation is rich or that its people are prosperous. We must also consider the distribution of wealth.

Alternative measures like the GPI (Genuine Progress Indicator) are a step in the right direction. The GPI produces a monetary value like GDP but addresses a handful of variables that GDP ignores. In particular, it factors in the social cost of economic production and puts a value on activities like homemaking and volunteering, both notably absent in GDP calculations. It also estimates the cost of resource depletion and accounts for income inequality among other things. So while we wait for the use of more sophisticated measures like GPI to take off, it is important to keep the shortcomings of GDP in mind.

 

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Tobi Fakorede

Tobi Fakorede

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