The Gross Domestic Problem

Cape Times (South Africa), June 4, 2013 | Go to article overview

The Gross Domestic Problem


BYLINE: Lorenzo Fioramonti

Crises are revelatory moments. Roughly 80 years ago, amid the Great Depression of the 1930s, the US government invented the gross domestic product (GDP) to jump-start stagnating markets and convert its civilian industries to a war economy. The current global economic crisis, which has triggered the largest recession since the 1930s, may very well bury GDP once and for all.

Even a defender of economic conservatism such as The Economist hosted an online debate in 2010 concluding that "GDP is a poor measure of improving living standards." The Organisation for Economic Co-operation and Development (OECD), another bastion of economic traditionalism, has also been casting doubts on the dogma of GDP growth: "For a good portion of the 20th century there was an implicit assumption that economic growth was synonymous with progress: an assumption that a growing GDP meant life must be getting better. But now the world recognises that it isn't quite as simple as that."

The GDP mantra has long dominated public debate and the media. Countries are ranked according to GDP, the global definition of "power" is based on GDP, access to global governance institutions is also granted on GDP performance (eg the G8 or G20 members are selected according to their GDP) and development policies are driven by the GDP formula, which is why the UK has recently decided to cut aid to South Africa. The Brics forum is also based on GDP, as the acronym initially indicated the fastest growing economies of the 21st century.

But what exactly is GDP? It is just a sum of consumption, investment and government spending measured in terms of market prices, which means that whatever is exchanged outside the market (eg within households, in the informal economies, through barter, etc) does not count. In addition, GDP disregards the value of the natural resources consumed in the growth process, as these are obtained free of charge from nature. GDP does not even consider the economic costs of pollution and environmental degradation, which are obvious consequences of industrial growth.

All these important omissions make this "almighty number" a very myopic measure of economic success (let alone of "living standards"). Household services, for instance, have a fundamental impact on economic performance. If we had to pay for the innumerable services freely available at the household level (from child and frail care to education), our economies would arguably grind to a halt. Moreover, healthy households constitute the social fabric of a good society and are the best antidotes against child abuse and crime, two notorious plagues in GDP-obsessed South Africa.

In many African countries, the "odd jobs" and the goods and services exchanged informally provide the necessary subsistence to millions of people and often constitute the backbone of the real economy, albeit they do not feature in GDP. According to the International Monetary Fund (IMF), informal economies account for 45 percent of economic output in developing nations and 30 percent in transition economies, including countries like South Africa. Similarly, disregarding the input from nature makes us forget that economic growth is only possible because of a continuous provision of "capital" from our ecosystems.

Agricultural production would not be attainable without clean soil, water, air and other essential natural processes. Industrialisation would not have been achieved without the fossil fuels, hydrocarbons and energy sources made available by the planet. When these resources are depleted, however, we risk endangering not only economic progress, but also the very natural equilibrium that makes life possible. By supporting policies that push up GDP, our leaders are weakening households and destroying informal safety nets while privatising public resources.

Accounting 101 tells us that profit equals income minus "all" costs. …

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