A recent announcement by the Asian Development Bank (ADB) predicts the GDP of India to grow by 6.3% in 2015.
Announcements such as the above are very common. Whenever people – policymakers, politicians, economists, international agencies as well as the media – across the world want to talk about progress they talk of ‘growth’ – pointing to economic growth (GDP Growth). It is not surprising if leaders in India also routinely promise to speed up the ‘GDP growth.’ They ask votes promising “rapid” or “double-digit” GDP growth.
Before we go ahead, it helps to know what the GDP really is. The GDP is just a measure of total marketed activities, money changing hands. The more you consume, waste or spend larger the GDP becomes. It is a useful gauge of the economical aspect of nation’s progress when seen alongside other economic parameters.
However, being a pure economic number it is not designed to represent human or social welfare. It has no direct connection with people’s wellbeing except that a growing economy creates more national wealth. Yet, the GDP must grow year by year till eternity. Why?
Because in industrial economies if the GDP falls for 2-3 consecutive quarters the economic Pandits call it a recession. That scares people – the dread of job-loss and stock market crash start crossing imagination. This is the simple logic that dictates all economic activities of the market.
Origin of GDP
In reality, GDP is a relic of a pre WW2 era. Around the period of the Great Depression, in early 1930s the US government wanted to have some way of knowing how well the economy was doing. In the faltering economy of those years, the idea of combining production and spending was simple enough to do the job. It laid the foundation for what became the GNP (gross national product), and later the GDP. [Difference between GNP and GDP]
Thus, particularly during WW-II, the GNP became the primary way to keep track of the US economy. As the US churned out war machinery from its wartime factories, it helped maximize factory output which not only helped the US better prepare for the war but it also lifted the nation out of Depression.
After the end of war, citizens replaced the military as major consumer but the factories kept churning out products. At that time, bigger factory output and increasing consumption was progress itself. Thus, the GNP (or GDP) also symbolized progress. In the 1950s and 1960s, personal incomes and GDP really moved up hand in hand. But those days are gone.
The compulsion to keep economy growing gave birth to relentless consumerism we see today. The GDP became the primary indicator of national progress and economic ‘growth’ turned into the sole national goal. Here is the thought process that went into that.
“Our enormously productive economy…demands that we make consumption our way of life, that we convert the buying and use of goods into rituals, that we seek our spiritual satisfaction, our ego satisfaction, in consumption…we need things consumed, burned up, replaced and discarded at an ever-accelerating rate.” – Economist Victor Lebow in 1955 in his paper Price Competition
As mentioned, GDP is a pure economic number and reflects only the gross tally of products and services bought and sold. Things which aren’t sold, say household work, have no relevance in GDP calculation, despite the fact that they add value to people’s lives. In fact, they reflect the true human side of people.
Thus, GDP is blind to all activities where money is not exchanged; for example, parenting, community work, volunteering and so on. If you grow your own vegetables and fruit in the backyard and consume, it is not included in the GDP. But if you buy vegetables from the market, it adds to the GDP. If 6 members of a family cooperate and share a mobile phone, it doesn’t help the GDP growth. But if they start fighting and separate six mobile phones will be needed, that’s wonderful for GDP growth. Consequently, the GDP not only conceals the breakdown of the social structure and natural habitat; worse, it portrays such breakdown as economic gain.
In fact, when governments legalize things like prostitution, drug use, liquor bars, etc it is only trying to boost its revenues and prop up the GDP.
When you apply the GDP yardstick to poor nations there is problem. Most of their production takes place in the informal sector, in the household or community, or in the voluntary sector – all invisible to the GDP. When policies are created to raise the GDP in the poor nations, it effectively goes against the informal, cooperative and household economy – and works to degrade the humane and cooperative culture of societies, in other words, increase social chaos.
The truth is: in societies with limited resources the sense of cooperation and community bonds allows people to help each other. As a result, economic size may be small but people have good life. No wonder, over the decades families and societies have been falling apart as a result of forces that boost GDP growth.
No Distinction between Good and Bad Things
The GDP counts every transaction of money as a gain. It makes no distinction between economic activities that enhance people’s well-being, and those that diminish it. It treats all economic activities as making positive contribution, without separating costs from benefits, or constructive activities from destructive ones. For example, natural disasters such as cyclones or floods increase GDP because of the cost associated with repairs, clean up and reconstruction. Increasing crime rates result in bigger expenditure on police, jail and legal procedures; an increase in diseases results in more medical spending; an oil spill results in extensive and costly clean-up; wars and other international tensions increase arms expenditure – all these increases the GDP. Thus, the GDP not only ignores social and natural disasters, it takes them as economic expansion.
Blind to Social and Environmental Impacts
By nature, the GDP is oblivion to the environmental and social impact of monetary activities. The GDP violates common sense and basic accounting principles – it treats the depletion of natural capital as income. As a result, the more a country consumes its natural resources, the more its GDP goes up. Suppose you clear all forests to sell the timber, the GDP will suddenly shoot up. Or catch all fish from lake overnight and sell, GDP will shoot up.
Clearly, it is dangerous to look at GDP as a measure of progress.
GDP also does not account for income distribution or income inequality in a country. Globally, there is a trend of increasing inequalities with just 1 percent richest controlling almost as much as the rest. The GDP no longer reflects the economic experience of ordinary citizens.
Here are some more healthy things that will depress GDP growth
Good Habits. What will happen if people stop eating junk food and regularly exercise or practice Yoga?
People will become healthier and illness will reduce. This will result in less business for doctors, hospitals and pharma companies. It will shrink the economy and reduce the gross domestic product (GDP).
People Live in Peace. What will happen if conflicts and wars vanish and there is peace everywhere?
There will be less demand for weapons and less business for arms manufacturers; again the GDP will decrease.
People become good citizens. What will happen if crimes reduce and criminals transform into law obeying good humans?
There will be less expenditure on police, jail staff, lawyers and courts. This will also hurt the GDP of the country.
These are all desired things that are good for people and societies, but would show up in the GDP in the negative way.
Inefficiencies Increase GDP!
In India, there is a huge market for voltage stabilizers and inverters (UPSs). Why? Because there is wild voltage fluctuations and frequent power cuts. They happen because of inefficiencies in the electricity generation and transmission systems. The battery market has also mushroomed to feed the inverters and UPSs. The purchase of these devices boosts the GDP.
So when we tolerate inefficiencies in one part of the economy – the power sector here – another segment of the economy gets boosted. Here an entirely unnecessary product range has grown out of inefficiency. Further, the more we begin to rely on stabilizers and inverters the more we turn a blind eye towards inefficiencies and shortcomings of the power sector. And the vicious cycle continues.
It is purely a wasteful way to progress and senseless destruction of natural resources – coal, gas, water, and nuclear material here – and we see it as progress in the form of economic growth!!
From GNP to GDP
When nations shifted from GNP to GDP, another subtle deception crept in. The earnings of a multinational company with production facilities, say in India, were counted as part of the GNP of its home country – say Germany, US, UK. But under the GDP rules, the incomes of MNCs are counted towards the GDP of the country where the plants are located – it is another story that big chunk of profits goes to their home country. What does this peculiar little twist means in real life? It means that several poor countries appear to be booming on paper, but in reality, rich nations walk away with the resources of poorer ones. Yet, this gets noticed as a GDP gain for the poor country!
See, how clever rich nations are!
The Way Forward
As long as the GDP is viewed like any other economic parameter, things remain in perspective. The problem creeps in when GDP expansion alone becomes the prime national goal. It is grossly flawed as a measure of people’s wellbeing. For poor nations, it is of little relevance to say that the GDP has gone up. It would be more useful to know if people are better off.
Human life is multidimensional and complex; it should be always seen as such. No economic number can measure status of human life. It is like using litres to count apples!
The only reason GDP has remained popular as yardstick of progress is its simplicity and that it suits the interests of people who rule the world today, particularly the industrial corporate world. The richest corporate houses can easily dominate and dictate any small or poor country, and the rules of globalizations have been framed to suit their interest. However, today their interests are at odds with rest of humanity which is troubled by climate change disasters and ever increasing gap between the richest and rest of the people. Now more and more people are realizing that ever increasing GDP growth is only increasing consumption (depletion of natural resources) without meaningful enhancement in people’s sense of well-being.
One really wonders: if human life is multidimensional why the hell we are stuck chasing ‘GDP growth ‘ year after year, in the name of progress or development?
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