GDP: Measure of last century?

November 10th - Edition #9

Since the end of the Second World War, global economic growth has offered two conflicting messages. On one hand, the last 70 years have shown a huge GDP growth/per capita and millions have been taken out of complete poverty. On the other hand, there is strong evidence that the rates at which we are utilizing nature and environment in all its forms are unsustainable – science has provided us undeniable facts and data.

The key issue is that economic growth has been achieved at the expense of the Planet, the natural capital that will not be there for us anymore.

It is crucial that we monitor societal, economic and societal progress but, for that to happen, we need reliable metrics to know how we are performing. Unfortunately, our radar to track progress is far from satisfactory. Countries still use a 20th-century metric to measure wellbeing: Gross Domestic Product, or GDP.

GDP provides measurements of output, income and expenditure quite well, but this measure fails when it comes to wellbeing. Its founder, Simon Kuznets, cautioned half a century ago that this metrics is useful mainly (only?) in tracking income. Hence, we need to find a credible tool that captures financial capital, but also “the skills in our workforce (human capital), the cohesion in our society (social capital) and the value of our environment (natural capital)”.

That is what the Inclusive Wealth Index is trying to track since 2012. The recently published 2018 report shows the aggregation of financial capital, natural capital and human capital for 140 countries. Main conclusion: the global growth rate of wealth tracked by this index is much lower than growth in GDP and, in fact, the 2018 data suggests natural capital declined for 140 countries for the period of 1992 to 2014.

In the last 20 years, whilst GDP/per capita has grown almost 100%, Natural Capital/per capita has reduced almost 40%. As other economic indicators rise, the environment suffers.

As the report points out “GDP is a measure of a country’s opulence and not its well-being. But the point is not that opulence misleads; it is that we need to measure opulence, or wealth, correctly. That’s where inclusive wealth comes in. It is the measure, through the ages, of human well-being. It totals up the value of an economy’s stock of manufactured capital, human capital and natural capital. Manufactured capital means things like roads, buildings, machines, equipment and other physical infrastructure. Human capital means things like knowledge, education, skills, health and aptitude. Natural capital means forests, fossil fuels, fisheries, agricultural land, rivers and estuaries, oceans, the atmosphere. These three types of capital lead to the ultimate purpose of an economy – social well-being. They are called the productive base of the economy”.

It is the “integrated wealth” that needs to be measured. Still, there is a long way to go for us all to feel comfortable with the “new metrics” to monitor our progress, NOT at the expense of the Planet.

Have a great and impactful week!
Nuno Moreira da Cruz

Director of the Center for Responsible Business and Leadership
Católica-Lisbon School of Business & Economics