Let’s not be led astray by GDP

Last week, Kate Pickett, Richard Wilkinson and eight other well respected academics published a journal article questioning the validity of gross domestic product (GDP) as a true reflection of a society’s progress.  The article asserts that GDP is an increasingly misleading measure of national success, measuring mainly market transactions and ignoring social costs, income inequality and environmental impacts.  And yet, while there is broad agreement among numerous academicspoliticians and activists that a global society should strive for a high quality of life that is equitably shared and sustainable, GDP remains the primary national policy goal in almost every country, a position it has occupied since the end of the Second World War.

The emphasis on GDP in developed countries not only fails to heed the negative effects of income inequality, but may in fact fuel social and environmental instability.     The disjuncture between GDP and an equitable distribution of its benefits is highlighted by the comparative movement of world GDP and GPI (the genuine progress indicator) since the late 1970s.  The indicator is a key tool in assessing the importance of income inequality to progress in living standards.  Calculated by starting with personal consumption expenditures and making over 20 additions and subtractions to account for factors such as the value of volunteer work and the costs of divorce, crime and pollution, it reflects the fact that a dollar’s worth of increased income to a poor person boosts welfare more than a dollar’s worth of increased income for a rich person. Tellingly, world GDP and GPI started to move apart in about 1978 as social costs began to outweigh the benefits of increased GDP and income inequality grew rapidly.  

In fact, there is a growing body of UK and international evidence to suggest that not only is growth increasingly less evenly distributed and life satisfaction stagnating, but that the unequal distribution of growth is itself an impediment to its progress.    Increasing levels of inequality may stymie growth, engendereconomic instability and lead to financial crises.

There are a growing number of alternative measures of progress, many of which more effectively integrate current knowledge of how economics, psychology and sociology interact to better reflect wellbeing and living standards of the majority rather than a wealthy few.   And yet, while there is much conversation, the task of creating a single uniformly accepted measure is yet to completed.  The opportunity provided by the creation of the UN Sustainable Development Goals should not be missed.  Failure to seize this chance will be to the social and economic detriment of us all.

Maddy Power, Senior Research and Policy Advisor