There is no doubt that the coronavirus pandemic has been the most prominent teacher of the year. It has opened our eyes to so-called secondary issues like health care and other basic support systems. People have been forced to notice the grave inequality gaps that exist in the society. In addition to the millions of people falling critically sick, the pandemic has disrupted the entire economy. Millions of informal workers have fled from urban areas, industries had to hit the pause button and cities like Mumbai, that never slept, stayed comatose for weeks on end. So news about the economy slowing down or growth becoming negative should not really be surprising, which is why the hue and cry over the large negative numbers during this time somewhat highlights our lack of understanding of why these GDP numbers mattered in the first place.
GDP is essentially a quantitative and imperfect measure of how an economy is doing. Defined as the final market value of all the goods and services produced by a country in a year, it largely ignores moral compasses like health care, basic education system, sanitation care etc. The major benefit of looking at GDP numbers is to compare against past years and across countries. GDP growth thus becomes essential for policymakers and investors to understand whether a country is growing or not. But while a negative growth rate, in general, spells bad news, the context surrounding the numbers must also be considered.
Word of caution that these numbers can’t even reliably be compared across countries because each country uses its own definition of GDP. This is predominantly because of the differences in goods and services produced and the institutional setups across these countries. According to the IMF, India has a 83% informal workforce, which makes measuring the final value of goods and services not only challenging but also unreliable. Moreover in India, drugs and prostitution, which typically are sizeable economic activity are not included in the GDP numbers. While morally and legally understandable, when we consider that modifying the definition of GDP to include drugs and prostitution added 10 billion pounds to the UK GDP, it becomes obvious that we cannot consider these GDP figures as a sacrosanct measure.
If you remain unconvinced, consider the following outrageous example: An economy growing at 200 billion dollars experiences a shock (due to COVID-19) and contracts to 150 billion dollars – a 25% contraction. In the following quarter, the economy revives to 200 billion dollars – a 33% growth. So future revival numbers of the economy must be carefully considered with relevant context and taken with a pinch of salt.
Welfare
Simon Kuznets, the man credited with inventing the GDP measure was known to have warned that “the welfare of a nation can scarcely be inferred from a measure of national income.”
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We are made to believe that these numbers are associated with higher living standards. While that has been true in a lot of cases, it is not strictly accurate. For example, Costa Rica, a country that is not even in the top 50 in terms of GDP per capita (GDP divided by population) is one of the happiest countries in the world according to the Forbes, while India, whose GDP growth rate was more than twice that of Costa Rica has made the world’s unhappiest countries list. In reality, there are many ways of thinking about welfare. For example, the prime minister of New Zealand has started focusing on the well-being budget, which prioritises caring for vulnerable people and tackles issues of wellbeing such as mental illness, family violence and child poverty.
In times like these, we should focus on necessary changes in the structure of the economy that will improve quality of life. After all, an essential role played by the GDP numbers is that they make us feel that our lives are improving on a day-to-day basis. It would be refreshing to evaluate the change in the number of hospital beds available per thousand or identify if there has been an improvement in food security. What a breath of fresh air it would be if the entire nation focused on improving the conditions of food warehouses and the food distribution system, during these trying times.
The pandemic induced recession is deepening the cracks of inequality that exist in the country and even though we believe that a rapidly growing economy is a better one for everyone (and hence the subconscious focus on GDP), the trickle-down effect has been minimal in practice. A more equal and well-nourished society sounds more prosperous than an ever growing economy with only a handful of people benefiting from it which is why some economists have emphasised on changing the focus to Gini coefficient, a measure of inequality.
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This is not to say that GDP is not a useful measure. Studying the trend and fluctuations of GDP in a country is integral to policy and investment decisions. Compared to conceptual measures such as happiness or well-being, GDP is much easier to measure and is a good yardstick. But it is integral that we do not extend the entire focus on GDP and miss the point - GDP is being used to measure the progress of our society. It is the view of many leading economists today that the measure to track progress should be more inclusive. Even a minor change such as looking at a spectrum of measures (including GDP) can go a long way in improving overall welfare. We will leave you with the following tweet from the World Economic Forum that stresses on the need to reinvent GDP.
Is it correct to say that GDP is the resource (money) that an economy created, and welfare is decided not only by the amount of total resource, but also by the allocation of the resource across sectors and population?