The GDP paradox

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By: Moin Qazi

The pursuit of growth over social justice, which has been the defining credo of classical economists, has brought prosperity to most developing societies. But it has also created huge inequalities. The argument that economic growth is the road to social justice has been relentlessly advocated for a long time, with several negative consequences for poor societies.

In search of inclusive growth: The question that has for long engaged development economists and proponents of social justice is, does accelerated growth translate into inclusive growth? Amartya Sen believes that to think in terms of only income rather than achievements of particular living conditions, like health and well-being, is to miss something critical. Despite considerable economic growth and increasing self-confidence as a major global player, modern India is a disaster zone in which millions of lives are wrecked by hunger and by pitiable investment in health and education services, he argues.  It is now an acknowledged reality that economic growth has failed to quell social dissatisfaction around the world.

India continues to systematically under-perform on most social indicators – education, health, sanitation, life expectancy, child mortality, gender equality – for its level of income. It’s also systematically under-performing on improvements in these indicators for its rate of Gross Domestic Product (GDP) per capita growth over time. In other words we can also call this phenomena, “growth without development.” Large inequalities exist between men and women, between urban and rural areas and between regions. The donor and Government-supported social assistance programmes that sought to address these lags have not succeeded. This follows a long history of failed Government and aid programmes to address social lags.

Equity is now considered instrumental to the pursuit of long-term prosperity in aggregate terms for society as a whole. This can ensure that economic benefits of growth are broadly shared. All this calls for research on the relationship between growth, inequality, poverty and health. We need to ask hard questions rather than assuming the answers

GDP is a partial picture: It is now being widely argued that GDP is far from a robust indicator of social welfare. GDP simply totals up everything made within an economy in a year, from widgets to whizzy financial products, at their market value. Dubbed as one of the greatest inventions of the 20th Century, GDP has long been a closely watched metric for politicians, administrators, policy doctors and journalists alike. But it is no longer lionised and our love affair with it may be coming to an end because, as economic historian Adam Tooze calls, it is “a narrow and somewhat arbitrary slice of reality.” Economic indicators such as the GDP were never designed to be comprehensive measures of prosperity and well-being. Initially used to measure the effectiveness of the US economy during World War II, the concept quickly became a universal measure of economic health and progress. An increasing GDP is often seen as a measure of welfare and economic success. However, it fails to account for the multi-dimensional nature of development or the inherent shortcomings of capitalism, which tends to concentrate income and, thus, power. GDP is not, on its own, an adequate gauge of a country’s development. Development is a multi-dimensional concept, which includes not only an economic dimension but also involves social, environmental and emotional dimensions.

One of the dangers of excessive focus on GDP growth is manifested in the tunnel vision it has created among viewers. Issues affecting the poor and the marginalised have been sidelined and their status quo continues to persist. The rich continue to accumulate wealth, both by legitimate and illegitimate means. The result is a no-brainer, a greater inequality. GDP growth does not take into account a number of important things such as equity in distribution of wealth or quality of life and well-being. GDP growth also does not consider the extent of institutional corruption, which is one of the biggest obstacles in achieving equitable, quality growth and distributive justice. A major example is the miserable state of the banking sector which is plagued with a gigantic size of non-performing loans and where defaulters are enjoying near-immunity.

A multi-dimensional approach: There are several social economists who believe that inclusive growth has to be grounded in inclusive governance. In the absence of inclusive governance, the people at the grassroots, that is, the intended beneficiaries of social programmes, are left desperately dependent on a bureaucratic delivery mechanism over which they have no effective control. The alternative system would be participatory development, where the people themselves are enabled to build their future through elected representatives responsible to the local community and, therefore, responsive to their needs. Successful development practitioners have always recognised the richness of this local wisdom.  It is in this context that real development paradigms based on participatory processes argue for involvement of local communities in all strategies and approaches designed for their well-being. Development expert Dani Rodrik laid major emphasis on the importance of local knowledge and argued that standardised blueprints must not emphasise at the expense of local learning and local experimentation. He believed that participatory and decentralised political systems are the most effective ways for processing and aggregating local knowledge. By involving local communities in development, we can ensure more equitable and just growth — something which is not captured by the GDP.

The GDP is a challenge for the credibility of economics or that of the policymakers who rely on it for ideation. GDP was not meant to be an anchor metric for targetting national economic performance or a measure of national well-being. It had several other purposes but at some stage in its journey it became a universal indicator for all things.

There are many alternative measures, including the Human Development Index (HDI), introduced by the United Nations in 1990, and the OECD’s (Organisation for Economic Co-operation and Development) Better Life Index, which are far superior measures of the quality of life and well-being.

We need to have a broad and integrated view of development. This emphasis on inclusive growth should not imply that we should not pursue growth as a key deriver of financial progress or that inclusive growth is an oxymoron. Both theoretically and empirically, growth and changes in income distribution should go hand-in-hand in order to achieve inclusive growth. But this positive relationship should neither imply that an increase in income inequality is inevitable, nor that it is desirable.

Growth is actually the size of the pie increasing. In principle, a bigger pie makes it feasible to give everyone a piece of it and if it is growing, the size of the pie should increase, not necessarily in the same proportion. This is the essence of the so-called Pareto criterion invoked by economists. But markets do not guarantee that all the slices of the pie will increase – they can also get smaller. It is here that policy planners will have to work out a prior balance so that both growth and equity get a leg-up. This tide should lift both the boats.

Why balance?: A robust inclusive growth strategy requires a combination of policies that stimulates economic growth and fosters equality of opportunity, while providing a social security net to the most vulnerable. As such, economic policies directed at promoting structural transformation and creating productive employment for poor people will have to be complemented by investments in human capital and other interventions that advance social inclusion, and equal access to jobs. There is consensus also on the need for social protection measures for the most vulnerable groups in society. It is also being emphasised that Governments must widen their tax base to meet social spending expenditure to sustainably support inclusive growth.

Our original ideas of development were quite well-grounded and realistic. However, at some point along the way, we have ended up reducing the very concept of development to soaring GDP growth rates and lost sight of the very purpose of development itself: Improving people’s well-being.

Growth is a necessary but not sufficient condition for robustly raising median living standards. Accordingly, policymakers and citizens have been asking for an alternative, or at least complementary, bottom-line metric that measures the level and rate of improvement in shared socio-economic progress.

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