Gross Domestic Product (GDP) is without question one of our most important economic indicators. It tells us about the size and shape of the economy. It helps the government and the fiscal institutions to manage the economy, for example informing us about the likely development of the public finances.
GDP is, however, incomplete. It is often, and incorrectly, used as an all-encompassing proxy for people’s living standards, something it was never designed for and which it doesn’t fully capture. This point is well understood by economists. For example, Richard Easterlin (2018) of the University of Southern California describes GDP as “an abstraction which has little personal meaning for individuals.”
The recently published article by Nasdaq on The 5 Fastest Growing Economies In The World, from which Guyana has been highlighted as the number one ranked economy to grow the fastest in the coming years with a projected growth rate of 16.3% during the four-year period 2018-2021, leaves much to be desired from a developmental economic prospective. As the article noted, with a GDP size of $3.63 billion (2018 Rank: 160), a growth rate of 4.1% in 2018 and 4.6% in 2019, Guyana’s economy is expected to grow by 33.5% and 22.9% in 2020 and 2021 respectively. However, this level of projected growth will not show the real economic value and status of the country’s level of well-being.
As an economist, this is a good indicator which gives a nice pictorial representation of a forecasted economic model, but the GDP is a limited indicator of real effective and inclusive growth, and as an indicator of improvements in the well-being of a country. Joseph Stiglitz (2018) noted that what we measure affects what we do. If we focus only on material well-being – on, say, the production of goods, rather than on health, education, and the environment – we become distorted in the same way that these measures are distorted; we become more materialistic. For Guyana, a projected growth rate does not illustrate a true and fair view for our emerging economy.
For Guyana, we must look beyond GDP to show indicators that are as clear and appealing as GDP, but more inclusive of environmental and social aspects of progress. Economic indicators such as GDP were never designed to be comprehensive measures of prosperity and well-being. In the next five (5) years Guyana needs adequate indicators to address its challenges of an emerging oil producing economy such as climate change, poverty, resource depletion, health and quality of life.
Therefore, as a nation we must not become over-reliance on GDP as the yardstick of economic performance, since that can mislead policy makers during the economic cycle of an evolving economy. Hence, concentrating on the wrong indicators could misguide a government to make inadequate policy choices, with severe and long-lasting consequences for many people. While GDP is the most well-known, and most powerful economic indicator, it can’t tell us everything we need to know about the health of countries and societies. In fact, it can’t even tell us everything we need to know about economic performance. Thus, the future dashboards of indicators for Guyana must reveal who is benefiting from growth, whether that growth is environmentally sustainable, how people feel about their lives, what factors contribute to an individual’s or a country’s success.
As the business landscape reinvents itself, demographics shift, inequality expands, climate change gets worse and technology continues to advance at breakneck speed, GDP is struggling to stay relevant. Blanke (2016) argues, “it’s easy to forget that it was not initially intended for this purpose, it merely provides a measure of the final goods and services produced in an economy over a given period, without any attention to what is produced, how it’s produced or who is producing it.” Put simply, focusing on GDP growth is not the way forward. GDP is a partial, short-term measure, whereas an economy in transition such as Guyana needs more wide-ranging and responsible instruments to inform the way we will build the economy of the future.
Amid this GDP obsession, Simon Kuznets, who defined the modern version of GDP in the 1930s, specifically cautioned against using it as a measure of welfare. Yet its relatively straightforward measurability has led it to be used widely over the decades for precisely that purpose.
Of course, GDP is highly correlated with a lot of the things that we prize in a society: good education, quality infrastructure and functioning markets. And yet, as has been long recognized, as a concept it is missing critical parts of the puzzle.
The shortcomings of GDP as a measure of welfare have become even more striking in today’s much more complex world of rapidly evolving technologies, demographic shifts, rising income inequalities and the urgent need to reduce pressure on the physical environment. Three areas provide particularly good examples of why a more nuanced approach to the discussion is needed:
- The inclusiveness of the economic process,
- The extent to which economic development respects the natural environment, and
- Aa need to measure the improvements in living standards ushered in by new technologies, which can help drive greener and more inclusive growth, but which are not captured in traditional statistics.
Therefore, GDP is like a speedometer: it tells you whether your economy is going faster or slower (Wallis 2016). Above all, the speedometer doesn’t tell you whether or not you’re going in the right direction. A good economy meets everyone’s basic needs. It means people are healthy and happy with life. It avoids storing up potential sources of long-term trouble, such as extreme inequality and environmental collapse. It is, of course, entirely possible for an economy to go faster and faster without getting closer to meeting these goals – indeed, while heading in the opposite direction.
However, what would be the economic equivalent of a compass? We need to measure the direction of economic travel in a way that’s comparable to how GDP measures its speed – easy to communicate, and amenable to being influenced by policy decisions.
The New Economics Foundation (NEF) in 2015 proposed five indicators, for an overall picture of where an economy is, how it is performing and in which direction it is going:
- Good jobs: Employment statistics tell us what proportion of people have jobs. They don’t tell us what proportion of those with jobs are paid too little to afford a decent standard of living or worry about whether they’ll still have work next month.
- Well-being: A growing economy is not an end in itself – it’s a means to improving people’s lives. Few would disagree that the ultimate aim of public policy is well-being; we care about GDP because we assume it means more well-being. So why not also measure well-being directly? The validity of research into measuring well-being, by asking people about their life satisfaction, is now widely accepted. Such measures capture a range of things that people care about and that policies can influence – from income and health to housing and social connections.
- Environment: A national indicator of lifestyle-related carbon emissions, relative to an allocation calculated from global targets for avoiding dangerous levels of climate change.
- Fairness: Research increasingly shows that high income inequality has negative social consequences, while casting doubt on the idea that it incentivises hard work. Compare the average incomes of the top and bottom 10%, over a given time-period.
- Health: “avoidable deaths” as a simple, easily-understandable measure that captures the quality of health interventions – not only treatment, but also prevention.
As such, for Guyana the projected growth rates should highlight other indicators which could inform policy and public debate. These more important and wider range of measures should capture those things not included within GDP. These must include:
1. Valuing our skills and knowledge
Estimates of the value of ‘human capital’. By human capital, what is meant is the stock of skills, knowledge and experience of the Guyanese workforce, which can productively be applied to creating economic value. Measuring the stock of human capital can help us better understand what drives economic growth, as well as help measure the productivity performance of the educational sector. Looking at changes over time can also provide important information for assessing the long-term sustainability of economic progress, given the challenges raised by an ageing population. Higher levels of human capital have been linked not just with improved wages for individuals, but with improved health, lower crime rates, and increased trust and social participation.
2. Accounting for our unpaid work
Look at the value of all the unpaid work we do for ourselves, such as childcare, cleaning, laundry and volunteering, in what’s called the Household Satellite Account. While these aren’t included in GDP, they are incredibly important to our well-being. The household satellite account is vital when it comes to understanding the modern economy. Activities such as organising a holiday or finding the cheapest car insurance, which may have previously been carried out by the market through travel agents and insurance brokers, are now being produced by households themselves, using online services that are often free at the point of use. This movement away from paying for these services could lead to a reduction in GDP, while in practice, people’s well-being may be higher because of these activities. Capturing these free activities is part of the drive to measuring the digital economy.
3. Economic well-being
Various indicators that together aim to provide a more rounded and comprehensive basis for assessing changes in living standards. These indicators include household income, spending and wealth and broader economic indicators that may also affect well-being such as unemployment and inflation. It also includes people’s perceived personal financial situation, which is important to consider alongside the reality, as it is their perceptions that shape how well-off they consider themselves to be and therefore, at least to a certain extent, their behaviour.
4. Better measures of household income and saving
Alternative measures of household income and saving from the national accounts. The national accounts can give us some measures of household income that are very timely. However, these measures also include items such as so-called ‘imputed rentals’ – effectively the value homeowners would get if they rented out their own homes, which is included for international comparability – as well as pension contributions, which households may not have access to for many years. These statistics therefore removes these items to get a ‘cash’ measure of real household disposable income, which reflects the income directly received by households