The Gross Domestic Problem

Lorenzo Fioramonti is a political scientist and specialist on governance issues who teaches at the University of Pretoria where he directs the Centre for the Study of Governance Innovation. His work on global and supranational governance with a focus on regional integration brought him to the attention of the United Nations University Institute on Comparative Regional Integration Studies (UNU-CRIS), where he was appointed Associate Fellow in 2012.

In January 2013 he published his latest book, Gross Domestic Problem — The Politics Behind the World’s Most Powerful Number. We recently spoke with Prof. Fioramonti regarding his perspective on the world’s most “powerful” economic indicator.

What motivated you to choose the topic of GDP?

I wrote this book to popularize the critique of Gross Domestic Product (GDP). For too long, this theme has been limited to a small circle of experts, while conventional economic thinking has dominated policymaking and the public debate. Time has come to turn the critique of GDP into a matter of popular debate, by which I mean a serious open discussion among citizens and civil society.

[quote quote=”If GDP has so many flaws and numerous attempts were made at finding ‘better’ numbers, then why are we still using GDP?” type=”text” ]

While in Italy in 2010, I was invited by the Head of the Italian Statistical Institute to a gathering of statisticians and economists aimed at discussing the limits of GDP and identifying potential alternatives. This was just after the so-called Stiglitz Sen Fitoussi Commission had released its report on measuring economic performance and social progress. I had been questioning GDP myself for a few years and during the gathering I realized that, while many economists had tried to replace GDP for years, nobody had ever analyzed the very politics of GDP.

My question was: if GDP has so many flaws and numerous attempts were made at finding ‘better’ numbers, then why are we are still using GDP? Is it possible that there are specific interests supporting the nexus between GDP and policymaking? What are the political dimensions of this almighty number? So I set out to do my research on the history of GDP and realized that this story needed to be told. The story of GDP is the story of how we built the type of society we live in. It is the story of how economics took over all other sciences to become the servant of power.

Who “invented” GDP? And why?

GDP was developed in the late 1930s in the US to help governments tackle the Great Depression and afterwards it was used to plan America’s involvement in the Second World War. How does one use GDP for the war? Imagine you are a government and you need to know what type of involvement you can afford and over what time frame. You don’t know how long the war may take and you want to ensure that you have enough resources to fight it successfully to the end. The US government used the national income accounts, which is the statistical survey upon which GDP is based, to map areas of the economy that were underutilized and that could be successfully converted to a full-scale munitions programme. Another aspect was to estimate the rate of economic output that would be necessary to pay for the war. The US government managed to coordinate its involvement in the war by supporting internal consumption, which in turn reinforced industrial production and pushed up economic growth.

Other countries, especially Nazi Germany, which did not have GDP accounts, forcefully converted internal industries to the war efforts and basically stifled internal consumption. Germany ultimately suffocated its capacity to wage the war for a prolonged period of time. The US had enough money and resources to play on two fronts (Europe and the Pacific), while Americans were consuming more than ever. An intact industrial sector and pent-up consumer demand for durable goods also triggered America’s economic expansion after the war.

What is GDP (today)?

GDP is a measure of economic output. It measures all of a nation’s consumption, private investment and government spending plus exports but minus imports. It is a market measure, which means that the value of the various dimensions mentioned above is calculated in terms of their market prices. What does not have a price tag is not included in GDP.

This leads to the exclusion of important elements of economic performance such as the ‘core’ economy, which includes services rendered within the household, the informal economy, the odd jobs and all types of voluntary activities that reinforce social cohesion and also make economic growth possible. According to the International Monetary Fund, informal economies account for about 45 percent of economic output in developing nations, 30 percent in transition economies and roughly 20 percent in industrialized countries. Yet, they are neglected by GDP.

GDP is gross because it does not measure the overall capital inputted in the economic process, which means that it neglects, for instance, the depletion of natural resources used for economic growth, as these are provided free of charge by nature, nor does it consider the costs associated with economic growth, which include social risks, environmental degradation and the like.

You mention twice that “GDP is built on a great lie. This lie says that markets are the only producers of wealth.” What do you consider to be true wealth?

For me, wealth is primarily found in the health of my body and the context of my ecosystem (which also include effective and social relations). As Amartya Sen argues, poverty is about unfulfilled capabilities rather than limited cash. A person without good health, isolated and living in precarious environmental conditions would be poor irrespective of the size of his/her bank account. We create wealth every day when we support our communities, educate our children and spend time together strengthening social bonds.

[quote quote=”We create wealth every day when we support our communities, educate our children and spend time together strengthening social bonds.” type=”text” ]

When we grow or cook our own food, produce our own energy and share our knowledge and expertise free of charge, we build the pillars of our economies — that is the essential difference between poverty and wealth. Markets could not even function without these important components. No growth would be possible if everything we need to function was provided at a cost. Yet, none of these fundamental spheres of ‘production’ count for GDP, which I found paradoxical.

The UNU released the Inclusive Wealth Index. Where do you see the strengths and weaknesses of this form of measure?

The Inclusive Wealth Index is a laudable attempt to quantify the contribution of natural capital to economic growth. GDP entirely neglects the natural capital fueling the growth process and, by doing so, it undervalues the economic importance of natural resources.

In an attempt at showing how significant these contributions are, economists have devised so-called genuine progress indicators, which subtract the value of natural capital used in the production process as well as the costs of negative externalities from GDP. To a certain extent, the IWI follows this tradition by incorporating the most recent advances in the field of the economics of ecosystem services and biodiversity. However, there is a big risk. All these indicators are based on the assumption that natural capital can be monetized, which is a precondition for it to be deducted from the GDP computation. The monetization of Mother Nature is very problematic and controversial and it can ultimately lead to a marketization of natural wealth, which we are seeing more and more in the field of forestation, conservation and offsets championed by the REDD+ scheme of the Kyoto Protocol. Just like in the case of GDP, we need to realize that there are powerful interests supporting such monetization efforts.

GDP is was developed in the United States. The HDI (Human Development Index) is based on the Scandinavian model. GNH (Gross National Happiness) is based on the model of Bhutan. Is the idea of a universal index invalid?

I believe that there is room for a universal index, although it may not be necessary or desirable. If what we want is a fulfilling life, then I see no reason why all countries should measure this according to one standard. We need a more mature global governance system, which favours diversity rather than homogenization. Technocrats controlled the GDP but we now need citizens to be involved in the process of defining what really matters to them. And Bhutanese people may have different views from Americans. While we can (and should) learn from one another, there is no reason why policies in Asia or in Africa should be driven by the same standards adopted in America or Europe.

You explain alternative indexes in your book. Is there one index you are in favour of and why?

No alternative to GDP will ever be perfect. What matters is not statistical efficiency but social relevance. We should measure what we want rather than wanting what we measure.

[quote quote=”We should measure what we want rather than wanting what we measure.” type=”text” ]

I personally think that in the 21st century our societies have reached a level of maturity that allows policymakers to use a set of indicators (like a dashboard) rather than hold onto one single misleading number — a variety of indicators showing us whether we are achieving what we really aspire to would be a good way forward.

Japan has been a fast growing economy for most of the 20th century, but it has been stagnating for roughly two decades. What has happened?

I’m not an expert on the Japanese economy, but I believe it is an interesting case. Japan led the global economic expansion in the 1980s, similarly to what China has been doing for the past decade. It achieved high rates of GDP growth and led the world in terms of exports. In order to do that, it built a culture of long working hours, frenetic consumption and high-paced social life, which resulted in social distress and a competitive mentality in a hitherto cooperative Confucian society. Ever since the late 1990s, and also because of the plummeting birth rate, the economy has been stagnating, which partly explains the fact that Japan is the most indebted country in the world. This is a worst-case scenario for a society modeled around GDP — a growth society that does not grow! On the bright side, Japan has the most long-living population on earth. If the country were to reject GDP growth as a key policy objective and focus on rebuilding its internal social cohesion, it would be better positioned to deal with current and future challenges.

Keynes prediction in 1930 was that the average citizen in industrialized societies would work a maximum of fifteen hours per week by 2030. Why are we still working such long hours?

Because GDP growth is a shifting target and ultimately becomes a vicious circle. In order to produce more and compete globally, workers are forced to increase their productivity. Whereas innovation helps, it also frees up new space for production, which requires people to work longer hours in spite of technological advancements.

GDP growth also generates new wants. While a few years ago, an average household would own one car and two TV sets, nowadays we feel poor unless we have at least two cars and a handful of TVs, let alone the seemingly endless amount of gadgets we fill our homes with. Deprivation is often a relational concept. If the people around me have more stuff, I also want more stuff and feel deprived if I can’t get it. Moreover, as GDP sustains market goods (which must be bought) and neglects non-market goods, what in the past was free (e.g., parental care, hobbies, leisure, etc.) is nowadays a costly experience. All of this requires more money and, as a consequence, more work.

You are Professor of Political Science at the University of Pretoria, Republic of South Africa. What is your perspective on GDP in your country of residence and other African nations?

In South Africa we tackle a lot of social issues. My interest is on how to build alternative forms of governance that will allow this region to prosper without having to grow in the conventional sense and destroy its natural resources.

The problem is most African economies are designed. These countries rely on exports of raw materials, which have been leading to a significant growth of GDP. A country like Angola, for instance, has experienced an average growth rate of 18 percent for the past couple of years as a result of oil exports. In the short term this leads to the illusion of enrichment, but it is simply based on an unsustainable sale of the country’s most precious energy and natural resources. In this type of growth, only a few benefit from the ‘cash’ while most people suffer the social and environmental consequences of the systematic exploitation of natural capital and the privatization of communal resources, which is a precondition of the GDP growth model.

[quote quote=”Only a few benefit from the ‘cash’ while most people suffer the social and environmental consequences of the systematic exploitation of natural capital and the privatization of communal resources, which is a precondition of the GDP growth model.” type=”text” ]

By contrast, African countries would need a different model that places emphasis on well-being and ultimately addresses the issue of deprivation and unemployment. Labour is relatively cheap in African countries. If these countries were to focus more on areas which are labour intensive (just as health, education and care services), they would be able to create more jobs while costs would remain relatively low. The GDP growth model fuelled by the expansion of big industries tends to use a lot of imported technologies, thus reducing the amount of labour over time. So, in order to keep jobs constant, industries have to produce more and more, and consumers have to keep consuming, thus leading to the dogma of infinite growth. By fostering the service sector rather than relying on industrial labour, unemployment might be reduced and these new jobs would also have a positive effect for society, as our well-being is closely correlated with the quality of our health, education and social capital.

Like many other African countries, South Africa too should recognize the pitfalls of the GDP model and plan for a ‘steady state economy’.

Do you plan to continue on the topic and what research questions remain unanswered for you?

This is the most important topic I can think of. It brings together politics, economics and sociology. I could not think of a more relevant theme for academic research.

I am hoping to have the book translated into Chinese because China is one of the countries where such a debate needs to happen. Beyond that I hope to spread the message to Brazil, Russia and India as these countries have become the new beacons of GDP growth and that is where we need to encourage a genuine debate on the type of economic paradigm we want for the future. Building on my work on GDP, my second book (to be published in early 2014) looks at political and economic interests behind the growing field of monetary valuation of nature.

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The Gross Domestic Problem by Stephan Schmidt is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.