Why GDP fails as a proxy for progress
Progress. It’s a concept beloved by politicians for being indisputably good and yet hard to actually define. The result is that elections become arguments of definition. We have record employment, but the NHS is in crisis. Are we making progress? The US economy has shown strong growth, yet life expectancy is falling among white working class men. Are we making progress?
The problem of “progress” is that our yardstick is fundamentally flawed. GDP has become entirely synonymous with national success. There are good reasons for this – the relationship between rising wealth and social development at the bottom of the wealth distribution is strong. But, as countries get richer, this becomes much less pronounced. The commitment to GDP growth as the political priority, however, does not.
Social progress is, at its core, a measure of what’s going on in people’s lives. Until we can capture that accurately, we risk failing the people who most need our help.
GDP growth is necessary, but it's not sufficient
There is nothing wrong with GDP as a measure of progress; the issues arise when it becomes the measure. As Texans and Floridians rebuild their homes and lives after Hurricanes Harvey and Irma, they will take little solace in the fact that over the long-term, the devastation will likely prove positive for overall GDP.1
There is some sense, though, that our perceptions are shifting. The aftermath of the Financial Crisis has emphasised the divorce between economic and social progress in the richest countries in the world. Wealth is rising, but other measures of progress are not. Wealth per capita may have increased 4.4% on pre-crisis peak in the US2, but this was not enough to hold off the anti-establishment protectionism of Trump.
GDP is not the enemy, just a misapplied measure. It is often treated as an end in itself, rather than an important means to a broader end. The result is wealth created, but not invested. A recent IPPR report argued that too much economic growth in the UK has been going into profit and not wages.3 This is something of a false distinction.
- CNBC, Interview with William Dudley (New York Fed President), 8th September 2017
- Own calculation based on World Bank data, GDP per capita PPP (2011 International $)
- Interim Report of the Commission on Economic Justice, IPPR, 2017
We need to capture gross domestic progress – not simply product
The real problem is that profit is not being invested in things that drive productivity and wage growth. This social development, in turn, drives greater wealth creation by shoring up strong human and social capital. The problem with progress is that measurement has not kept up.
But this measurement deficit hasn’t happened because the relevant data does not exist. Countries measure a lot of important outcomes, particularly in the OECD. The issue here is finding a measure of progress with the simplicity and explanatory power of GDP. So how do you approach the challenge of measuring progress beyond GDP?
One possible answer: social progress is a list of goals we're trying to achieve
One approach to defining and measuring progress, is to develop a list of goals or targets that countries should aim to hit. The UN’s Sustainable Development Goals (SDGs) – a list of 17 universal goals for all nations between now and 2030 – is the most prominent example of the targets approach. Some countries have experimented with national progress targets, such as the Measures of Australia’s Progress indicators, published alongside GDP data.
The challenge here is how to reconcile the pursuit of multiple goals when they conflict. For example, SDG 13 urges nations to take urgent action to combat climate change and its impacts. SDG 1 is about ending poverty in all forms everywhere. What happens when the necessary climate action limits the economic growth that can drive poverty reduction? How do we determine the trade-offs? Goals are useful indicators of the issues that policy should be trying to address, but they are not a match for the simplicity of GDP as a measurable outcome.
The Social Progress Index is another alternative to GDP
A second approach to the problem is to produce a single measure of social progress independent of GDP that enables us to see if growing wealth is delivering social development.
The Social Progress Index does this by taking into account basic human needs, like shelter and sanitation; foundations of wellbeing, such as education and the environment; and opportunity, covering themes like tolerance and advanced education. It reflects the path of social development taken by countries and in doing so, accounts for some of the trade-off decisions necessary.
A single measure of social progress has the potential to be an important counterweight to GDP, however, looking at social progress independently of wealth means that the mechanisms of interaction between the two are missed. If GDP moves but social progress does not, it suggests that there is a problem, but provides little indication for policymakers on what the problem is and how to tackle it.
The Human Development Index combines measures of wealth and social progress
The UN’s Human Development Index is one of a number of indices that combine both aspects of GDP and social outcomes into a single measure of national progress. The HDI does this at a very simple level, by combining life expectancy, years of schooling, and GNI per capita into a single measure of human development.
However, a little like the Social Progress Index, despite including economic output, the measure says little about the mechanisms that help nations turn economic growth into social development. It also highlights some of the challenges of building indices of progress. While life expectancy is an output, years of schooling is an input – a cruder measure of education quantity that does well at distinguishing between development outcomes in poorer countries, but is less discerning at the top end, where quality becomes more important.
There are measures that combine both economic and social outcomes
The OECD Better Life Index and the Legatum Prosperity Index measure progress as a detailed combination of economic and social outcomes. The former looks only at developed nations, while the Prosperity Index covers 149 countries globally with measures that can distinguish between progress in Afghanistan and Pakistan, but also between Norway and Sweden.
The two indices are similar in measuring the mechanisms through which the economic and the social interact, such as innovation and social capital. They also capture some of the trade-offs, such as the environment and wellbeing. Neither measure GDP directly, but include key measures of economic development.
The OECD Index looks at how economic progress is experienced at a human level with measures like household wealth and disposable income. The Prosperity Index has some measures of how people feel about their income and living standards, but it also measures the ability of a nation to create wealth. This includes measures of economic openness, regulation, and trade barriers.
Combining economic and social development in detail gives an additional layer of information to policymakers. In the complex relationship between wealth creation and social progress, these indices can identify exactly where obstacles lie. Is progress failing because a country is not generating wealth efficiently, or because it is not investing it properly? Or is it because the country lacks the mechanisms that allow social progress to deliver an economic payoff that drives further progress?
Of course, these more complex measures have their own complications
There are many ways in which measurement is trying to better reflect ‘progress’. However, as with GDP, more complex measures of national success have their own problems. Broadly speaking, GDP is a pretty independent measure of progress. Other measures can prove susceptible to political capture. When the Measures of Australia’s Progress started to reflect badly on the government, for example, funding for the programme was withdrawn.
Nor can these measures fully escape the argument of definition. They may be better measures of progress than GDP, but they still ultimately take a stand on what progress looks like, and in some cases, how it is best achieved. Some may argue that free markets are the best way to drive the economic element of progress, others will disagree. Measures of progress cannot fully escape this value judgement.
But even the most nuanced progress measures are only "average"
Perhaps the biggest challenge to any and all of these potential measures of progress is that they only reflect average progress. They say nothing of the distribution of outcomes, nor whether progress is felt evenly. As the Simpson Paradox shows, a trend in the overall average can actually reverse when the population is broken down into groups. There have been efforts to break these measures down within a nation and to adjust them for inequality.
But if we are only measuring broad averages, we are measuring nothing at all.