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.
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.
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%.
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.
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.”