GDP is an Inadequate Framework for Measuring the Health of an Economy
Standard Gross Domestic Product (GDP) only considers the sum of goods and services produced by a country. As a consequence, even expenditures associated with oil spills and the consumption of alcohol and cigarettes add to GDP growth, but cannot reasonably be said to increase societal welfare. However, GDP has become exactly that: a commonly used measurement for the progress of a state’s welfare. This was eloquently noted by Mark Anielski.
“The ideal economic or GDP hero is a chain-smoking terminal cancer patient going through an expensive divorce whose car is totaled in a 20-car pileup, while munching on fast-take-out-food and chatting on a cell phone. All add to GDP growth. The GDP villain is non-smoking, eats home-cooked wholesome meals and cycles to work.”
In fact, GDP, the measurement which was created by economists Simon Kuznet and John M. Keynes, was never meant to be a measure of welfare, as pointed out by Simon Kuznet himself. : “the welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP…goals for ‘more’ growth should specify of what and for what.”
The most dangerous flaw when only using GDP to measure how well an economy is doing is the fact that it does not take into account the environmental impacts such as greenhouse gas emissions associated with the production of the goods and services that add to GDP growth. (image: Salvatore Vuono)
A new economic paradigm
A new measurement system should be based on well-established national accounting systems, such as GDP, and then adjusted to include the harvest and extraction of natural resources, as well as the damage from air-pollution and greenhouse gas emissions. This was discussed in detail in an earlier article on measuring natural capital.
The World Bank has calculated the costs to natural capital for 20 years already. They estimate the costs of particulate air-pollution in the U.S. alone amounted to $16,308,864,412 (current US$) in 2007.
A new system needs to properly distinguish between economic and natural capital. A framework for growth that only considers the aggregate of economic and natural capital will not meet the criteria of strong sustainability, and arguably, pure economic growth should never be sufficient to offset the decrease in natural capital.
Just consider the current situation of fast-growing economies like China that seem to be doing well on paper due to their enormous economic growth, yet pollute to the extent that citizens in major cities go to the countryside on the weekends just to breathe freely. Not to mention their contribution to global greenhouse gas emissions and, by that, climate change.
Apart from the ethical aspect of polluting to this extent, the social costs of millions of people in need of health care will be, and is, a considerable burden on the economy.
Introducing a new framework and a new goal for governments and businesses to strive for will incentivize a new kind of growth that values clean air and water, functioning ecosystems, and sustainable management of natural resources.
Internalizing the costs of producing the things we consume will be an important step towards correcting the market failure that is currently turning irreplaceable natural resources and ecosystem services into cash.
What are your thoughts?
About the author
Carl Frederik Kontny holds a bachelor degree in environmental science, policy, and management from the University of Bergen, with the final year completed as an exchange student to the University of Minnesota, U.S. While currently London-based, he is from Norway and has interned with Oslo-based environmental consultant firm, Xyntéo, analyzing how economies can decouple growth and emissions. While passionate about a range of environmentally related issues, Carl Frederik has a special interest in energy policy and ways to effectively integrate the value of natural, social, and human capital when measuring economic growth and prosperity.
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