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Special report: We need more than GDP growth (part 1)

Why measuring GDP is not enough.

By gross domestic product (GDP) per capita, Equatorial Guinea is the second richest country in Africa. According to the World Bank’s latest figures, the country ranks 55th in the world on this measure. It is on a par with Russia, and richer than Mauritius.

On the United Nations Human Development Index, however, Equatorial Guinea ranks 141st. This is below the island states of Vanuatu and Micronesia, both of which have a GDP per capita more than seven times smaller. Mauritius ranks 65th.

While the small oil-rich west African country might be an extreme example, its situation does illustrate the shortcomings in using GDP as a country’s sole measure of progress. Girls in Equatorial Guinea only attend school for an average of four years, and life expectancy in the country is 58. This is lower than in Eswatini, which has the highest adult prevalence of HIV in the world.

This illustrates why focusing on GDP on its own is not particularly helpful when trying to understand a country’s state of wellbeing. It is also inadequate when considering how to improve it.

“I don’t think you want to ignore economic growth,” says Enrique Rueda-Sabater, senior advisor at the Boston Consulting Group (BCG) and a senior lecturer at Esade Business and Law School in Barcelona. “But it’s a question of thinking about the things that are not captured in the GDP measure, which are many.”

Focusing on the wrong thing

Over 10 years ago Nobel laureate Joseph Stiglitz was the central figure in a commission that identified “the limits of GDP as an indicator of economic performance and social progress”. The commission’s work was pretty universally accepted. Practically, however, it has changed little. Countries still see GDP as the most important, and sometimes the only, measure of their progress.

On one level, this is reasonable. GDP is a single, immediate and understandable figure. It can stand as a proxy for a lot of other things. The higher a country’s GDP per capita, the more likely it is to deliver high levels of wellbeing for its citizens.

That correlation is not, however, perfect.

“One of the shortcomings with GDP is that it uses averages,” explains Andrew Dittberner, chief investment officer at Old Mutual Private Client Securities. “So when you have a country like the USA where the top 1% own more than 50% of the wealth, when that 1% is doing well it looks like the whole country is doing well. In reality, however, a large part of the population is being left behind.

“So by just focusing on GDP you are potentially focusing on the wrong thing,” he adds.

This is a critically important consideration when thinking about government policy.

“We all agree that wellbeing is the goal,” says Rueda-Sabater. “But if you don’t measure it, you are not going to make any progress towards taking it more seriously. This is why BCG has developed a broad, relative measure of wellbeing.”

In a recent opinion piece, Stiglitz himself put it like this:

“What we measure affects what we do: if we measure the wrong thing, we will do the wrong thing. If we focus only on material wellbeing – 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.”

What we are missing

As a single number, GDP lacks both nuance and context. There is a lot that it doesn’t show. The methodology for measuring it was built in the 1930s, when mass production was the dominant economic model. There is however a lot that it overlooks

Read: GDP is a flawed but magical indicator

“It was built to measure products and services with a transactional value attached to them – where money changed hands in a formal way,” Dittberner says. “So volunteering at your local charity is not counted as part of GDP, but surely that’s good for society? Other very simple examples of non-transactional items that would be overlooked include someone babysitting my kids or me cleaning my home. There is undoubtedly a societal benefit from that, but it does not count towards GDP.”

While GDP measures actual production, it also does not capture the potential for production. This includes factors such as the health of citizens, education outcomes, and whether a country has adequate infrastructure.

Conversely, GDP can be boosted by things that are detrimental to society. For instance, a major natural disaster like a flood or an earthquake would obviously be bad for an economy – it would destroy wealth and damage productivity.

It could, however, result in a short term boost to GDP. This is because the rebuilding activity would register as added production.

“The other thing it doesn’t take into account is the distribution,” points out Andrew Aitken, senior economist at the National Institute of Economic and Social Research in the UK. “Stiglitz argued that we need to look at the distribution because GDP per capita could be going up but inequality could be rising at the same time. If you look at median household income and compare that to GDP per capita, there is a big divergence.”

GDP has to come from somewhere

In the South African context, these questions are particularly important because, as Athol Williams, a social philosopher and a senior lecturer at the University of Cape Town’s Graduate School of Business, notes, GDP measures outputs, not inputs.

“GDP is a meaningful measure, but it shouldn’t be the only measure,” Williams says. “Our economic system is a function of our social system. The things we do and how we do them have an economic output.”

Put another way, economic growth is always the result of a lot of other things. So when the national obsession is that we have to grow the economy, it doesn’t actually help that much to only measure whether the economy is growing or not. We have to consider, and measure, those things that are necessary to deliver economic growth, such as adequate nutrition, access to healthcare and safety.

It’s not that South Africans don’t know that these things are important. The issue is that they are not properly and regularly measured or given the same level of prominence as the GDP figures. Yet, they are of far more immediate concern to the average citizen.

This might also force a rethink of policy assumptions. Is creating jobs a result of economic growth, for example, or does economic growth result from businesses operating in a supportive environment in which they are able to create more jobs?

Fix what needs fixing

It also demands that consideration is given to the root causes of issues impacting on the economy, and not simply trying to address them as symptoms.

“How do you address gang violence on the Cape Flats, for example?” asks Williams. “You don’t send in the army. You fix the society. Until we can provide economic alternatives for them, they will keep doing it. Sending in the army doesn’t take away the need to pay for school fees or their parents’ medical care.”

This may not sound like tangible economics, but it has to be to get a full picture of a country’s state of progress. Only measuring wealth or income assumes that everything can be explained in rand and cents terms. This is the fallacy that a one-dimensional focus on GDP has perpetuated.

What is actually imperative is understanding whether wealth and income translates effectively into improved wellbeing.

“There are countries with similar wealth and income that have fairly different levels of wellbeing,” says Rueda-Sabater. “So that proves that there is something else there. And that’s also a reason for optimism. It means that there are things you can do, regardless of your income level, to do better.”

Seeing a shift

This does not mean that we shouldn’t measure GDP, or disregard its significance.

“GDP does have its uses,” says Aitken. “For example, it is important for deciding monetary and fiscal policy. I don’t think we want to get rid of it entirely.”

However, it is important to recognise its inadequacies. Focusing too much on whether the economy is growing or not, does not answer questions about the kind of society that is needed to support growth, or the kind of society that such growth should foster.

Those are the really significant, and more complex, questions that policy makers should be concerned with.

“I think there are signs in a quite a few different countries of things starting to happen in this regard,” says Aitken. “The OECD [Organisation for Economic Co-operation and Development] is working on this area a lot and it does seem like gradually things are probably starting to change. But maybe that’s just wishful thinking.”

Tomorrow: How to more effectively measure South Africa’s wellbeing

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We need a LOT more but are far from getting it.
We need SA to be an attractive investment destination , with simple business starting processes.

We need to:
1. Fire 75% of Police Generals-and get effective crime fighting leadership.
2. Get Eskom right.
3. Get education right-fire Blade!
4. Get a culture of learning and innovation going
5. Attract rich people from around the globe.
6. Manage water resources with someone clever running it
7. Deport Lindiwe Sisulu, Julius Malema etc to a hot prison in the Northern Cape
8. Stop BEE and EE
9. Jail all corrupt people-the lot
10. Bring back the death penalty
11. Clean up the captured judiciary
12. Make friends with the US-they have a big chequebook
13. Beg the Israelis to help us with water, tech, farming and police intelligence

We need more effective SOE’s
We need more accountability for failing SOE’s
We need more independent SOE’s without government and union interference
We need more policy consistency
We need more business and investor friendly environment
We need more a more effective government
We need more law enforcement

We need less cANCer

I wonder how long it took this economist to get this ground breaking conclusion..

and got to love how “they” talk about “we”,

Will it dawn on “them” they are the only ones finding this novel?

What we will get however is more of the same nothing and no growth until the ANC is ousted.
It is like saying that the beatings will continue until morale improves ne !!!

We break our heads about the ways in which to measure poverty in such a way, as to make it look like we are wealthy. The obese person, who should go on a healthy diet, rather shops around to find the clothes that make him look slim. The patient suffering from the metabolic-syndrome would rather keep on searching for the miracle medication, instead of cutting out sugar.

Our reality is a manifestation of our habits, or, as prof. Williams said, “Our economic system is a function of our social system. The things we do and how we do them have an economic output.”

It is clear then, that we can have the economic outcome we desire so much if we simply select and implement the social system that leads to prosperity. It should be a straightforward, logical process. If you want to look and feel like an athlete, then do what athletes do.

We can simply look at the social systems of highly successful countries and emulate them. This is not rocket science, it is basic logic. We have a GDP growth problem, declining economic activity, rising unemployment, rising debt and social unrest because we chose, and implemented, the social system that leads towards this situation. Now, as we reached this reality that we have designed, we look around for metrics or measurements to make our terrible situation look better than what it is.

If I want to look and feel better, I should change my lifestyle. If people want to enjoy a good standard of living, they should abandon socialism and adopt free-market capitalism. It is that simple really.

Realistically though, with the work ethic of the SA workforce and their tendency to complain, shifting from socialism to capitalism will result in most of the workforce starving without government intervention. Free markets imply that capital can move without hindrance. Why should capital stay in SA when workers are cheaper and more productive in China. The only type of capital that could be invested here would relate to services based capital (of which of a small minority of the population has the expertise to handle).

SA is between a rock and a hard place; stay in socialism which will remove everyone eventually or move to free markets which will remove the inefficient quickly (which represents that vast majority of the workforce). Since the state of affairs it seems is that the inefficient manage, and steal from the inefficient and blame the efficient for the theft, I can’t see socialism ending in SA.

The key problem in SA is very simple yet highly complex to solve and I am not sure it has a solution. But I will raise it here so maybe somebody smarter than I can figure out a solution….

The key problem is this (now don’t you all jump up in disgust but consider the point):SA was never really a country (in the spirit of the word).

When I travel to other countries, especially North America and Eastern Europe, I notice a sense of patriotism. The flags are flying from ordinary houses and generally the population views itself as from that country (even though these may be immigrants). Also, there is a sense of integration in the host society (though admittedly this has dropped some in the US from 2008 onward).

In SA, from my experience, I noticed that SA is essentially a land carved between groups with little shared identity (i.e. British, Dutch, Afrikaans, Indian communities, Zulu, Xhosa, etc). These groups essentially fight each other caring for their own interests ahead of the overall interest of the country and future generations (which history has proved). Conflicts between these groups had hurt SA in the past but now this issue is likely to cause fatal wounds.

Essentially its tribalism and this best explains the behavior of the ruling party towards the non-party individuals as well as minorities and immigrants (including BEE, tender gate, SOE mess up, phobia of immigrants). It also explains how, and why, state funds have been looted (for trial cheifdoms).

It also questions the realty of established media catch phrases such as “ubuntu”. From my experience, based on the tribal nature of SA, including battles within tribes, ubuntu is a fantasy cooked up without actually any basis in real history (i.e I wonder if Shaka shared the sentiment of ubuntu seeing as he killed more in his community in a few years than 100 years of “colonialism”).

Unless an enlightened individual finds a way to end or limit tribalism, SA is likely is to end up like Zim. All the economic puffery talk, world cup parades etc merely distracts from this fact.

@ZARrealist…true

Except for one simple fact…..:

The majority of ppl in this country just want to work together !

Its the government that is DIVIDING everyone [ believe me, all that xenophobia and sparked protests on universities and around the country etc all have placed firebrands who get the ‘party started’ very nicely…. ]

And, study your history – its no fact that the term ‘Divide and Conquer’ applies for those in power

Nothing worse than an educated citizen force all standing together hey ?!

From my experience, that’s remotely true. I would not say the “majority” of people want to work together. That is simply wishful thinking. Regarding facts, here is an interesting one:

If what you say is true, why does the ruling party consistently get about 50%-55% of the vote (even more in cases) when its manifesto is inherently divisive? Then look at the rest of the radical parties sitting around say 5%. So you are looking at 55% to 65% minimum of vote going to divisive parties. That does not sound like “a majority of ppl want to work together” to me.

I think you are mistakenly applying the truth that some middle class folk really want to work together, but that “some” is not equal to “majority”.

I have to agree with ZARealist here.

The narrative that “the majority of people in this country just want to work together” is a slogan often used and I have to question how true that statement is.

When 17 million people are receiving grants and more than 10% of the country’s entire revenue is budgeted to come from just 120 751 individuals – 0.2% of the population, or the top 1% paying around 61% of personal income tax while around 87% of South Africans pay zero personal income tax.

If you tell me the majority want to work together to live in a socialist state then I would agree with you, but otherwise I’ll stay skeptical.

@IcedCoffee – agreed.

Add to that the following:

1. The majority of those who pay tax are vilified as colonizers by BEE (as I was, never mind that my family did NOT benefit from the previous regime and I was not yet old enough to commit the crimes I am vicariously being accused of).

2. Those who get paid undeserved amounts (from the current labor practices) often dodge tax.

And it is clear the situation is not sustainable regardless of the positive spin people try put on it.

@ZARrealist wrote:

* ” I would not say the “majority” of people want to work together.”

Its common knowledge any human being wants nothing more than a job and to be able to feed themselves and their family, regardless of political beliefs

* “If what you say is true, why does the ruling party consistently get about 50%-55% of the vote (even more in cases) when its manifesto is inherently divisive?”

Please dont confuse human aspirations with politics

Time to apply some critical thinking – bear in mind you are dealing with the unwashed masses, who are uneducated and wouldn’t know a hidden agenda if it came up to bite them in the bum !

In case you are not aware, the ANC purposefully keeps these masses uneducated, a masterful agenda employed for millennia by those in power

Case in point, one just has to look at the USA where education is plummeting…and, surprise surprise, socialism is on the increase …a recent survey reveals that 50% of the youth there believe socialism is the future !!??…..

* “So you are looking at 55% to 65% minimum of vote going to divisive parties.”

Obviously !

Thats because yes, MANY people are unhappy with the ANC …..and are looking for an alternative to the ANC, which is a good sign !

Unfortunately, what are the alternatives..?….mmm…lets have a look..:

DA – the perceived ‘white middle class’ snobbish party which for obvious reasons the majority are reluctant about given the historical history here in SA…

EFF – which draws from the uneducated masses again [ see the recurring pattern here ?…]

And so we find ourselves in a feedback loop destined to spiral downwards in a race to the bottom, as you have a perpetual state of ignorance in the majority maintained by those in power, and those in power stay in power as maintained by the uneducated masses in perpetuity.

Cairns we need growth. That should be all we eat, sleep and drink. Lefty journos and academics like you good self is part of the problem not the solution.

Constantly trying to make a relatively easy concept way harder than it should be.

We need more growth, less government and less corruption. Simple.

But then again you are the one always scolding us for being too negative…as I sit by candlelight

Notwarren: For growth, we need foreign MARKETS for what we can produce or offer, when we talk services. In the absence of these MARKETS, foreign capital will be of little use. It is common knowledge that the South African private sector has enough capital to finance all our needs to expand and that NO enterprise with the potential to grow remains stagnant for lack of capital now.

Question is whether South Africa puts enough energy into establishing these MARKETS? Maybe not, because it is the DIFFICULT part to do.

Sorry not sure how your comments are relevant to my comment nor the article. I believe the discussion is about measuring or defining growth.

Not sure where capital or the lack thereof comes into the equation.

Just a reminder that all caps is viewed as the online equivalent to shouting or raising your voice.

GDP and ALL that erroneous data as released by STATS SA is nothing more than ‘cooking the books’

Their inflation figures are so absurd its a joke

The arguments in the article are well and good (surprisingly “Gini coefficient” did not feature) but the most significant numbers in SA are unemployment and the knock-on malnutrition.

With unemployment at 30% (and under-employment much higher) it is difficult to imagine how this can be reduced without an increase in “the economy” — GDP.

Like indicators like blood pressure or temperature, GDP is not perfect, but in many cases it is a proxy. For instance, due to the latest power outages (“load-shedding” in ANC euphemism-spin) several mines were asked to stop. Their loss of production will be measured in the GDP, also indicating a loss of wages and possibly jobs → more hunger.

Expressing my views much more eloquently!

PC has a strong tendency to try and discredit datapoints that illustrate how deeply we are in trouble, to advance his view that things are not as dire as we may believe.

No economic growth? Question the need to measure growth.

SA bond yields, which reflects future government borrowing costs, continues to climb? Question the stats showing foreign bond holders selling.

@Notwarren…agreed !

You also question the stats coming out – ‘massaged’ stats especially from STATS SA !

I pointed this anomaly out in Pt 2 of this article and got flamed

Ppl still falling for propaganda

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