Why GDP is not an accurate measure of economic growth

The focus of the recently concluded G20 summit was economic growth. The final communiqué begins:

“Raising global growth to deliver better living standards and quality jobs for people across the world is our highest priority.”

The word “growth” is mentioned 29 times in the three-page document.

Climate is mentioned only in article 19, out of 21. While the parties pledge to “support strong and effective action to address climate change”, this is clarified to mean support for “economic growth, and certainty for business and investment”.

Yet there has been no real growth in the global economy for decades. The policies the G20 advocates will only exacerbate this unfortunate trend.

Many people will question this claim and ask, hasn’t gross domestic product been growing consistently since the second world war with only the occasional downturn? We have had growth of GDP, but since around 1980 this growth has been “un-economic”. This is in the sense that human welfare per capita, adjusted for the costs of inequality, environmental damage and other factors that affect welfare, has not improved.

The real economy – including all things that support human well-being – is much larger than the market economy estimated by GDP. GDP was never designed as a measure of overall societal well-being and its continued misuse for that purpose needs to stop.

Why GDP is not an accurate measure of economic growth

The real economy includes our natural capital assets – all of the gifts from nature that we do not have to produce – and the immensely valuable, but non-marketed, ecosystem services those assets provide. These services include climate control, water supply, storm protection, pollination and recreation.

These natural assets have been estimated to contribute significantly more to human well-being than all the world’s GDP combined. But our cavalier overlooking of these contributions has led to massive depletion of these assets.

Since 1997, we have lost at least US$20 trillion a year globally in non-marketed ecosystem services. This figure is larger than the GDP of the United States.

We have also overlooked the contributions of social capital – all of our formal and informal networks, institutions and cultures – to supporting human well-being.

G20 countries in particular have become much more unequal since 1980. This rising inequality has resulted in growing social problems, a poorer ability to build and maintain social capital, and lower overall quality of life. Most of the gains in GDP over the last several decades have gone to the top 1% of income earners. The remaining 99% have seen stagnant real incomes, in the context of deteriorating social and natural assets.

Perhaps the most compelling conflict is how we talk about and deal with climate disruption. Climate is one of our key natural assets. Yet investing in and maintaining a stable climate is seen as a hindrance to economic growth. It should be regarded as protecting an asset that underlies the operation of the entire human enterprise.

Climate disruption needs to be included as a cost to GDP growth that is at least as important as the loss of factories, roads and houses.

Likewise, the depletion of social capital caused by rising inequality needs to be counted against any gains in GDP.

A new indicator that includes social and natural costs

One indicator that accounts for changes in social and natural capital is the Genuine Progress Indicator (GPI). GPI adjusts personal consumption by income distribution, adds non-marketed services like volunteer and household work, and subtracts the costs of natural capital depletion like air and water pollution. Globally, GPI per capita has not improved since 1978, even though GDP per capita has more than doubled.

What this means is the world has been experiencing “un-economic growth” since 1978.

Two states in the US, Maryland and Vermont, have adopted the GPI to help guide policy. Several others are considering the same. It is time for the rest of the world to realise the reality of our un-economic growth policies and practices and move to build a real economy that provides sustainable and equitable prosperity for all. The UN Sustainable Development Goals process is an important move in this direction.

Perhaps at the next G20 summit, world leaders can discuss how to improve real economic performance – genuine progress – rather than merely increases in environmentally disruptive, inequitably distributed marketed goods and services.

This article is published in collaboration with The Conversation. Publication does not imply endorsement of views by the World Economic Forum. 

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Author: Dr. Robert Costanza is a Chair in Public Policy at Crawford School of Public Policy.

Image: A man walks past buildings at the central business district of Singapore February 14, 2007. REUTERS/Nicky Loh.