GDP & POLITICS: Are We Measuring Actual Progress?

by Giacomo Di Capua

Christine Lagarde, newly appointed President of the European Central Bank (ECB) and former Chair of the International Monetary Fund (IMF). Credits: Internet of Business

During the Second World War, the British economist John Maynard Keynes developed the modern definition of Gross Domestic Product, as:

«the total value of goods produced and services provided in a country during one year.»

With this index, Keynes aimed at measuring and assessing Britain’s capacity for mobilization and conflict.

The fact that the GDP has become a worldwide measurement of economic well-being is contingent to the fact that the UK Treasury (which, thanks to Keynes, had already implemented the use of the GDP for civil purposes) provided most of the preparatory paperwork for the 1944 Bretton Woods Conference, where the International Monetary Fund (IMF) and the World Bank (WB) were established. As a consequence, the two financial institutions kept on using the Gross Domestic Product as a measure of economic growth for the following 70 years and states with them.

Nevertheless, economists have warned us on several occasions that the GDP is an extremely specialized tool. It focuses on economic quantity, rather than on economic quality or welfare (or more precisely, it is supposed to measure well-being as a function of GDP/capita). Moreover, its emphasis on quantity has been raising concerns that GDP could even encourage the depletion of social and natural capital, to the detriment of the quality of life of future generations.

Finally, GDP excludes from its calculations fundamental determinants of welfare, such as the quality of the environment, criminal activity, public infrastructure, and even income inequality.

“It measures everything, in short, except that which makes life worthwhile.”

Robert Kennedy on the limitations of GDP, Speech at the University of Kansas, March 1968.
Source: World Inequality Database, Income Inequality in Italy (1980 – 2016); OECD, Income Distribution and Poverty – Italy (1960 – 2018); Aggregate National Accounts, SNA 2008: Gross domestic product

As the above picture clearly shows, the case of Italy presents that income inequality has been increasing from 1975 to 2015, year when the top 10% of the population earned the same share as the bottom 50%, regardless of a steady and consistent growth of the national GDP/capita throughout the period.

The question then arises: how would economic policies change if we had a more holistic idea of well-being and growth?

Do we consider progress as the “result of living off the interest of community capital, or just of spending it down”? (Costanza et al. 2009)

The Index of Sustainable Economic Welfare (ISEW), then renamed Genuine Progress Indicator (GPI), provides a creative solution to GDP’s deficiencies. Its measurements take the GDP as a baseline and make additions for the value of housework, voluntary services, durable goods and public infrastructure while detracting the cost of environmental degradation, crime, income inequality and depletion of natural capital. If we considered ISEW/capita as a measure of growth and welfare, the global panorama of socio-political state performance would greatly vary.

Comparison between GDP and ISEW (or GPI) in Sweden, Italy and the US in the period 1950 – 2000.
Source: Pulselli et al. (2008).

As the data shown above indicate, countries that have engaged in welfarist policies and promoting environmental sustainability would be performing extremely well (e.g. Sweden), whereas countries that did not tackle income inequality nor invested substantially in public infrastructure would be penalized (e.g. Italy). Finally, countries, such as the United States, that instead have been neglecting environmental standards, experiencing rising income inequality, privatizing public services and promoting natural capital depletion would result in having a lower economic welfare than they had in the 1950s.

  • Should GDP considered at all when dealing with growth and people’s welfare?
  • Should states such as the US and Italy undergo measures of respectively environmental and social austerity?
  • Why hasn’t the ISEW been systematically implemented to measure progress? What political assumptions lay behind such inertia?

Suggested Readings

Amit Kapoor and Bibek Debroy, 2019, “GDP Is Not a Measure of Human Well-Being.” Harvard Business Review

Costanza et al., 2009, Beyond GDP: The Need for New Measures of Progress. Boston University Press, Boston, US.

Pulselli et al., 2008, The road to sustainability. WIT Press, Southampton, UK

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