GDP - grossly distorted picture?

By Gouranga G. Das

The world economy is facing myriads of problems such as climate change, sustainability, development debacles, growth failure, and above all, the problem of inequality and abject poverty leading to deprivation for those at the bottom of the spectrum of income distribution.

What is it that indicates the extent of such deprivation, non-egalitarian income polarization, falls in living standards, and disparities across the regions, nations, and the populace that live within the territorial boundaries of nation-states.

In other words, what are the metrics that optimally capture the differences in performances across nations, and their resultant impacts so that ― to borrow from Adam Smith's classic ― we can inquire at a deeper level: the "nature and causes" underneath the "wealth of nations," and their impact.

For shared prosperity and inclusive growth, we need to do that, as the most widely used indicator ― gross domestic product (GDP) or gross national product (GNP) ― used for judging the national economic performance is often inadequate in offering the "true" picture.

If we look at the history underlying the evolution of GDP and its rise to popularity as the single most important indicator of economic activities, although John Maynard Keynes in his "General Theory" extensively used the concept for his theory of Aggregate Demand to explain the Great Depression in the 1930s, it was first proposed in the 17th century by Sir William Petty, followed by British Chemist Colin Clark and then, refined by Nobel laureate Simon Kuznets trying to explore the sources of "modern economic growth."

All of them devised this concept as a "political tool" giving power to the governments to impress the citizen and hence it was ― as Philipp Lepenies has chronicled in "The Power of a Single Number" ― "technology for the government."

Thus, the measure is used as an "economic means" for a "political end" by the government machinery in order to portray their achievement in terms of production (supply) of goods and services which enters into the consumption baskets of citizens.

However, in the modern era that was understandable as the world economy was transitioning through different phases across time and space where political changes ― such as, world wars, the great the depression, international economic order, globalization's first and second waves ― shaped economic thinking, and led to the emergence of theories explaining economic growth and development.

Robert Solow's 1956 model ― based on several precursors such as Harrod and Domar ― explained growth in terms of investment and physical capital accumulation as the drivers of augmented GDP.

But, at the current juncture especially after the financial crisis hitting the global economy and the well-being of the populace hard, this view needs to be replaced with a soft, people-centric view addressing gross domestic problems by a "new" vision of GDP.

As John Kennedy opined, GDP measured all "except that which makes life worthwhile." Although new genres of theories of growth and development since the 1990s offer human-centric explanations of economic development aided by human capital and socioeconomic institutions, the imperfectness of GDP as representing a "grossly distorted picture" can no way be overlooked.

One alternative is based on the U.N.'s HDI-adjusted indicator. But, that is not complete. With climate change and changes in world politics where nationalism and populism are taking control over goodwill hunting, we are on the cusp of changes.

For sustainable inclusiveness the domain of definition of GDP should be broad enough based on what the Sen-Stiglitz-Fitoussi Commission on the Measurement of Economic Performance and Social Progress (CMEPSP) suggested in 2009, i.e., the necessity of shifting from sheer production to well-being aspects encompassing not just consumption and production, but going beyond those material standards to include non-market activities side by side with the usual ones.

Otherwise GDP will offer a grossly distorted picture (GDP), rather than curing the gross domestic problems (GDP, too). The point is: For any policy for inclusiveness these shortcomings need to be overcome for the purpose of measuring what matters most in our life.

Reclassifying GDP to include the values of human welfare should include parameters encompassing different aspects of life contributing to the creation and maintenance of a decent standard of living, such as a work-life balance, gender balance, environment for human capability expansion, creativity, health-care facilities, R&D investment, freedom from poverty, deprivation of mind, etc. that encompass economic well-being.

Without going to the core, India adopted a different methodology in 2015-16 for inflating GDP measure via redefining manufacturing value-added via corporate data, and achieving progress and prosperity.

Currently, South Korean government's policy for scaling up the minimum wage and promoting income-led growth has created enormous furor and social tensions because although it is well-intentioned, the lack of innovativeness in going beyond the traditional straitjacket of GDP-based measure makes the true picture murky.

While the purpose of the minimum wage as subset of policies of inclusive growth is to close the income gap, conventional statistics like GDP and KOSPI or KOSDAQ industrial averages are erroneous, and result in representing affluence per capita. If we think about severe real estate bubbles and the purchasing power in Seoul and other cities, these measures are too anomalous and welfare-denouncing than just raising the minimum wage.

Not only in case of South Korea or India, even for the United States where the minimum wage has undergone rounds of escalation indexed to state level GDP, the measure is imperfect at its best and therefore, it has led policymakers and academia to think outside the black box of this aggregative statistic.

Studies by Thomas Piketty, Emmanuel Saez, Joseph Stiglitz, and Amartya Sen are worth mentioning. As wealth inequality and income disparities have increased and the Fourth Industrial Revolution is knocking at the door, the apprehension of jobless growth or retrenchment of the working-age population is magnified due to the proposal of a hike in the minimum wage, causing cost escalation.

To ensure the benefits of sustainable inclusiveness, the imperative is to build up social and intellectual capital, a conducive socioeconomic structure based on trust and cooperation, social protection and the minimum wage indexed not to typical growth of output per se (i.e., traditional GDP measure), but indexed to a broad measure adjusted with a multi-dimensional index of well-being and growth of human capacity, entrepreneurship and productivity based on a new social contract enhancing innovation in the broadest sense.

After all, the attempt is not quixotic. Policy and politics are two sides of the same coin of economic benefits. However, better policy deserves "reasonably good politics." Reclassifying and redefining GDP beyond its "political history" would usher in a new history of inclusiveness.

South Korea pursuing the noble mission of inclusiveness via plans such as the minimum wage should also think along the path about shifting the discourse in a direction so that policy reflects reality in terms of better statistics.

Gouranga G. Das (dasgouranga@yahoo.com) is professor of economics, Hanyang University, Erica Campus in Ansan, south of Seoul.