GDP revisited

Economic progress as measured by growth of the Gross Domestic Product (GDP) has long been the principal objective of economic policy. GDP is however simply a measure of economic activity. By mistakenly conflating such economic growth with improvements in living standards, welfare, and prosperity, politicians and other public policy makers have been persuaded to embrace the growth ethic with almost monotheistic fervour. GDP has as a result become a nigh universal measure of economic improvement and well-being, yet its use for such purpose is certainly inappropriate and almost wholly inadequate, especially if broader-based sustainability imperatives are taken into account. Economic activity, welfare, and sustainability are distinct concepts that are difficult to capture in a single indicator, and GDP was never intended to reflect anything more than productivity, i.e., the level of economic activity as measured by marketed output. Since its modern-day incarnation in the 1930s, economists have been aware that GDP does not measure welfare although Simon Kuznets (1934), one of its architects who is often mistakenly referred to as the father of GDP, argued at the outset that it should endeavour to do so. Unfortunately, the needs of wartime production following the concept’s inception favoured a more pragmatic focus on measurement of the level of economic activity, which is why GDP was eventually structured as it is. It has been suggested by some commentators that this is not a serious problem because there is in any event a positive correlation between GDP growth and economic welfare. Although this may be true in the early stages of economic development, as economies mature the two indicators start to diverge as the sustainability and ramifications of unfettered economic growth become an issue. Negative externalities such as pollution, environmental degradation, and the depletion of both natural resources and biodiversity (none of which are properly captured by GDP) impose significant social costs and start to compromise economic welfare, challenging the idea that economic growth is always synonymous with improved well-being. Because GDP does not properly reflect the economic or ecological sustainability of activity, more and bigger is not always better, a problematic proposition for mega infrastructure projects that increasingly need to dovetail with sustainable development parameters, and one that has been brought into particularly sharp focus by climate change. The essential purpose of economic activity should be to foster human development, welfare, and well-being in a sustainable manner, and not to simply facilitate and promote economic growth for its own sake. Given the complexity and interconnectedness of the multiple social and environmental challenges that are now prevalent at all spatial scales, there is clearly need to go beyond GDP as currently formulated and to embrace criteria that explicitly address the links between the economy, environment, and society by