Special report: We need more than GDP growth (part 2)

How to more effectively measure South Africa’s progress.
Despite being meaningful and useful, GDP figures can overlook a lot – and conceal a lot. Image: Rogan Ward, Reuters

South Africa is obsessed with its GDP. When Statistics South Africa released the latest economic data last week, it set off an inevitable flurry of news and opinion that showed just how important we consider these figures to be.

Certainly, generating meaningful GDP growth in South Africa has become an urgent necessity. The economy has to expand to be both more inclusive and supportive of government’s finances.

However, it has long been a settled argument that just looking at a GDP figure does not tell you everything about how well a country is doing.

While it is a meaningful and useful measure, it can both overlook and conceal a lot. Since it only considers the value of economic transactions, it doesn’t cover the many other things that are not only vital to a country’s wellbeing, but are necessary inputs into strengthening its economy.

Read: Special Report: Beyond GDP (part 1)

These are much broader, and far more nuanced. For example, they include spending on research and development, access to the internet, and child malnutrition.

Measuring what matters most

Almost every South African must be aware that the country’s GDP growth is currently meagre, but how many know how the country is performing when measured by the UN Human Development Index? This takes into account not just GDP performance, but a range of other factors as well.

As the chart below shows, South Africa has shown steady, if unspectacular progress on this index since 1990.

Source: United Nations Development Programme

Much of this has been underpinned by a generally expanding economy. It is not, however, the only factor, and is often far less meaningful to people who have actually seen tangible benefits from improvements like access to proper sanitation, clean water and better schooling.

In the past decade a lot more consideration has been given globally to whether more emphasis shouldn’t be placed on measuring and designing better policy around all of these other things. Nobel laureate Joseph Stiglitz, who was the most prominent figure in a commission that investigated this question, recently noted in an opinion piece that:

“Political outcomes in the US and many other countries in recent years have reflected the state of insecurity in which many ordinary citizens live, and to which GDP pays scant attention. A range of policies focused narrowly on GDP and fiscal prudence has fuelled this insecurity.”

One number does not rule them all

Put simply, relying on a GDP figure to measure a country’s state of progress can never be enough. Policy needs to be designed to both maximise economic growth and ensure that such growth is translated into citizens living better lives.

“Why do we talk about GDP so much? Why do we measure it?” asks Athol Williams, a social philosopher and a senior lecturer at the University of Cape Town’s Graduate School of Business. “Yes, it is tangible, but it talks to particular interests.”

In the second half of the 20th century the assumption developed that higher wealth and income levels were the holy grail that automatically led to better outcomes for citizens. Broadly, this is true. Countries with higher GDP per capita do generally have higher levels of wellbeing.

This is not, however, a perfect correlation. More money in a country does not mean that everybody is better off.

The US over the last few decades offers a clear example of this. The chart below from the US Federal Reserve shows how net wealth has expanded massively among the top 10% of the population since 1990, but has stagnated or even declined for the bottom 50%.

Source: US Federal Reserve

Measured purely by GDP, the US has done spectacularly well over this time. However, the rise of political extremism on both the right and left in that country has been an obvious consequence of a large part of the population not sharing in that progress.

This is why measuring a country’s state by GDP alone is insufficient. To understand the actual levels of wellbeing in a society, you can’t rely on a single dollar number.

So how do you do it?

The complication is that this isn’t easy. What exactly is wellbeing, and how do you measure it?

A number of different organisations have come up with different answers to that question. The UN’s Human Development Index is one. The Organisation for Economic Co-operation and Development (OECD) Better Life Index is another. The Boston Consulting Group (BCG) has also developed a Sustainable Economic Development Assessment to measure how successfully countries translate economic growth into wellbeing.

There are others too, all trying to produce a more comprehensive picture of how well a country is doing. Governments generally treat these as useful. Few, however, have actually taken steps to foreground them.

Earlier this year, New Zealand did so by introducing the world’s first “wellbeing budget”. Recognising that many of its citizens are not actually seeing the benefit of a growing economy on their daily lives, the country specifically allocated resources to improving its national rate of wellbeing.

“The plan is to try to apply this approach to all of government spending, but the budget allocation this year was just about 5% – just new spending,” explains Andrew Aitken, senior economist at the National Institute of Economic and Social Research in the UK. “It also changed the process to require a more circular and collaborative process. Rather than individual ministries bidding to the treasury for funding, they had to collaborate with each other. The more successful bids were those that involved seeing the linkages between different policies.”

Seeing the bigger picture

The advantages of this approach are that the country has identified specific areas of wellbeing it believes are important. It measures them to track its progress. And it requires government departments to come up with comprehensive plans for improving them.

It is an approach that South Africa could certainly benefit from applying. Obsessing about growing the economy might seem rational in the current climate, but it’s important to know where that growth comes from, and where it leads.

BCG’s Sustainable Economic Development Index shows that even with the economic growth South Africa has achieved, it has been less successful than the global average and some notable peers for translating this into greater wellbeing for its citizens. In other words, a country of South Africa’s economic prosperity should be better off than it is. Policy should be concerned with understanding why this is, and correcting it.

Source: Boston Consulting Group Sustainable Development Index 2019

For Williams, that starts with appreciating that an economy is a product of society. He believes that this is where the discussion in South Africa needs to begin.

“To grow the economy, you have to grow the society,” says Williams. “And our society is broken.

“There is grotesque violence, hatred and mistrust,” he adds. “So to grow our society we have to get down to some very fundamental things. To build a thriving economy, we need to focus on what we put into it.”

He has proposed a framework for measuring 12 priority goals necessary for meeting the needs of both the individual and society. They include basic needs such as nutrition, basic healthcare, and safety, as well as national imperatives like enlightened citizens, effective governance, and social cohesion, which he sees as critical.

“There is strong correlation between social capital, defined in terms of trust and respect, and economic output,” he says. “In many ways this is obvious. The more I trust you, the less we need lawyers and other people involved in our transactions, and so our operating costs go down effectively.”

Some of these factors can be measured objectively. For instance, by tracking the country’s homicide rate. Others are more subjective – such as whether citizens feel engaged and enjoy meaningful relationships. New Zealand has also adopted both approaches in its wellbeing budget.

Putting it all together

Measuring and addressing these things is not just as important as worrying about GDP growth – it is more important. That is because without addressing them GDP growth either won’t be sustainable, or will only lead to greater inequality and social upheaval.

Having a comprehensive picture is particularly vital in a country like South Africa, where averages tell policymakers very little. A single GDP figure does not indicate who is benefitting from economic growth, or how.

“National averages for South Africa are one of the least meaningful of any national averages, because in many senses its two countries put together,” says Enrique Rueda-Sabater, senior advisor at BCG and senior lecturer at Esade Business and Law School in Barcelona.

“In a country of extremes like South Africa, measures of wellbeing should be even more at the forefront of discussions of policy,” he adds.

For economic growth to become a truly virtuous cycle, it has to lead to greater wellbeing for all citizens, who in turn become more productive, and therefore generate higher growth. For South Africa, this is so critical that it doesn’t make sense to adopt any other approach.

“If you want to take wellbeing seriously, you need to get into the habit of getting it in front of you – side by side with GDP and GDP growth: measures of objective wellbeing and subjective wellbeing,” Rueda-Sabater argues. “When you look at those three together, very, very few countries see them evolve in parallel. And when wellbeing measures provide signals different from economic measures like GDP, it is important to pay attention.”

 

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“South Africa is obsessed with its GDP. When Statistics South Africa released the latest economic data last week, it set off an inevitable flurry of news and opinion that showed just how important we consider these figures to be”.

Its the economy stupid.

Even worse…..STATS SA:

The most error filled data producing entity to date

Or, more likely, the data is’massaged’ to keep the herds from panicking

Don’t know why people even follow STATS SA or believe what they report

Sussed years ago already they were lying with their ‘inflation’ figures etc !

@Realitybites

You make a number of statements and I’m trying to make sense of them.
Are you stating facts or a personal opinion when you say the following:

“The most error filled data producing entity to date”
“Or, more likely, the data is’massaged’ to keep the herds from panicking”
“Sussed years ago already they were lying with their ‘inflation’ figures etc !”

I’m not saying StatsSA is perfect or that their studies are, I also question some of the figures and whether they are a true reflection of what we see in this country or if they sometimes paint a rosy picture.

If you have another source of South African statistics, please would you be so kind as to share this source with us Moneyweb readers.

Thank you in advance.

I agree with the things said here, including the following.

“To grow the economy, you have to grow the society,” says Williams. “And our society is broken.

“There is grotesque violence, hatred and mistrust,” he adds. “So to grow our society we have to get down to some very fundamental things. To build a thriving economy, we need to focus on what we put into it.”

My observation however has been that the ANC does not give the faintest…

So the question that springs to mind from my observation is then, what can we (as normal civilians and citizens of SA) do to fix our broken society if the ANC and EFF (who got 68.3% of the votes) look to break and divide the groups in society at every opportunity?

Honestly I can’t see much changing unless the ANC (and EFF) gets voted out of power.

History repeats itself if you don’t learn from it.
Zimbabwe got rid of Robert, kept the ZANU-PF, replaced him with the leader of the Crocodile Gang who lead attacks against white-owned farms in the Eastern Highlands in 1964, followed by his role in the Gukurahundi massacres, in which thousands of Ndebele civilians were killed.

South Africa got rid of Zuma, but kept the ANC and replaced him with a younger man named Cyril who has done nothing to change this country. Cyril was placed in charge of turning around Eskom, SAA and the Post Office 5 years ago in 2014 and yet he only visited Medupi for the first time two weeks ago.
I won’t say anything about his role in talking about a certain frog (group of people) and how the ANC should boil the frog by slowly turning up the heat or how he was around when Marikana happened.

The masses (and ANC) choose not to learn from history, so those that do wish to learn from history so as to not repeat it should look north at Zimbabwe and decide what our next move is.

Some Zimbabweans (like yesterday’s Uber driver) are seeing history repeat itself in South Africa and they left, so we shouldn’t be shocked if South Africans leave in record numbers in 2020.

@ IcedCoffee wrote:

“I’m not saying StatsSA is perfect or that their studies are, I also question some of the figures and whether they are a true reflection of what we see in this country or if they sometimes paint a rosy picture.”

Well….you just confirmed what I stated then ???

The reality is, it does not take a rocket scientist to figure out their stats on inflation/population/unemployment/etc is incorrect

SA needs to factor in the population numbers, economic effectiveness, education, potential capability, and will of these numbers and then use it (at this point in time) as a discount to where SA is at!!

GDP is the responsibility and in hands of too few, and becoming fewer, to be the be all and end all of SA’s measure!

Patrick, lets sum it for what it really is:

A small minority worked and taxed to exhaustion that are keeping this ship barely afloat

In the famous words of that warmonger Churchill:

“Never was so much owed by so many to so few !!!! “

Oh, yay!

Another innocuous comment kiboshed by The Censor at Moneyweb.

All because – I guess – it included a mild criticism of Moneyweb ignoring the subject of family planning.

Gosh! What is driving this super-sensitivity on this subject, Moneyweb?

And to what benefit for SA?

@Jonnoxx….agreed…

I’ve noticed a few people in my circle mentioning this….its apparently happening with Bizweb and a few others too

Its coming to light they are very left wing/liberal based publication, and this is not good for their reputation

Problem is, they are only harming themselves, and lose credibility by doing this !

After all, if they censoring your comments, it means you obviously got some truth that is unsettling someone ?

So where are we now – going back to the communistic Stalin era…?…..is free speech really becoming a thing of the past ?

Patrick,you have a point.
An indicator such as HDI is more of an accurate and balanced reflection of a society’s progress.
Especially the per capita part as it’s a wholesale average.
GDP is important but misleading if used in isolation

“Real wealth, of course, consists in what is produced and consumed: the food we eat, the clothes we wear, the houses we live in.”
― Henry Hazlitt, Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

So, if we want to ascertain the average level of prosperity, we merely have to take a road trip through the rural areas and the townships and drink some water from the Vaal River.

We have the highest level of inequality in the world, not because we have poor people, but because the difference in political systems among the citizens is the highest in the world. We have a small minority who believe in a free-market economy and a large majority who are collectivist. This difference in the belief-system drives the inequality. If we were all collectivist, then we would be an equal society. Equal in poverty. If all of us were individualists who honoured property rights, then we would all be equally wealthy.

We are two countries, two economies and two political systems in one. We cannot compare one with the other and then conclude that society is unequal.

Oy vey, Ryk!

You need to explain your censorship rules and etiquette now to us in the peanut gallery. Publicly.

This is a growing problem, and getting out of hand now.

I agree Sensei but I am starting to think that many of us, Patrick and yourself for example are just too polite. It is the old but very true “emperor has no clothes”. I do not think SA does not really have two “systems”. It has one broadly reasonable, but fatally flawed by being racist then with a stake driven through its heart by a totally venal, self serving and corrupt ANC “leadership” who act only for their own benefit. This is two simple steps; bribe voters to get into power, steal money for personal gain when in power. No more, no less. Fudging about the theory of per capita GDP and two systems just tries to avoid this reality that is at the core of SA’s demise.

Another saying “shifting deck chairs on the Titanic”.

Paul, I am on the same page as yourself, but we have to consider the fact that although the ANC is utterly corrupt, inept, immoral, unjust, a total failure as well as a criminal disaster, this is typical of all socialist governments. This is definitely not a demographics issue, this is a political economy issue.

The disaster that is unfolding around us, is the normal consequence of socialist rule. The mayhem was predicted by Margaret Thatcher more than 3 decades ago. Nothing new here.

“The only thing new in the world is the history you do not know.” – Harry S. Truman

Sensei…on the button here !!!!!!

End of comments.

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