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The trouble with GDP

A performance metric doing more harm than good

Readers of this publication will be well aware of the value of performance metrics. They will also know that metrics and indicators that are poorly thought through have the potential to do harm.

For an example of the latter, see our interview with Bob Watson, outgoing chief scientist at the Department for Environment, Food and Rural Affairs, on page six of this issue. Gross Domestic Product or GDP may be the mother of all performance metrics, but according to Watson and others it is past its sell-by date.

GDP was invented in response to the great depression of the 1930s, so that national governments could monitor economic health.

It is compiled from a simple linear equation that adds up a country’s consumer spending, government spending, investment and exports; and subtracts from this the value of imports. When GDP goes up that is seen as good. If it falls repeatedly, then panic ensues and remedial action is required. This usually involves a heavily indebted country having to borrow large quantities of money from other countries—as has now happened in Greece.

GDP’s great attraction, of course, is its simplicity, which makes it accessible to anyone and in that sense it is a great democratising tool, and an aid to better public understanding of economics. But how accurate is GDP? According to Watson and a spectrum of voices including Nobel prizewinning economist Amartya Sen and President Nicolas Sarkozy of France, GDP is not only inaccurate but dangerous. Trying to understand economic health using one single index, they argue, is a bit like flying a plane with only one instrument display to look at. If something goes wrong, the pilot is unlikely to know what the problem is or what to do about it.

There is much, much more to economies than spending, or trading. GDP for example doesn’t properly measure human health, quality of life, educational attainment, or environmental degradation. Indeed, when it comes to the environment, degradation might actually show up as a positive element in GDP figures—for example, a coal-fired power plant pumping greenhouse gases into the atmosphere will show up as an example of investment or spending.

Had GDP been a mere indicator, a source of interesting information, it wouldn’t have been so bad. What concerns critics is that it is a tool used to shape policy decisions, which is what causes the problems.

Last week, Watson and fellow winners of the Blue Planet prize addressed their concerns directly to the world’s environment ministers at a UN conference in Nairobi. That represents progress of sorts.

However, the ministers who stand in the way of creating an alternative to GDP are not found in environment departments but in finance ministries. That is something that Watson, a former chief scientist to the Clinton White House and also to the World Bank, knows very well. Without movement from the men and women who hold their countries’ purse strings, GDP will continue to be a diagnostic tool, whose effect is to make the patient worse rather than better.