GDP focuses on the amount of growth rather than the quality.
Gross Domestic Product or GDP is the sum of the value of goods and services produced within a country over a given period. Not without reason has it been called “the most powerful statistical figure in human history”121 – so why would a Nobel prize winning economist be calling for it to be abolished?
Using GDP as the yardstick of economic growth is so universally accepted that it seems strange to think that the whole concept was invented less than a century ago122. Its roots in common use lie in America’s struggle to emerge from the Great Depression of the 1930s. At the time, the idea that adding up the total value of economic activity would be a good metric of success, and should be used to guide government policy, was justified. The relationship between economic growth and standards of living was close enough, across enough of society, for the two to appear integrally linked.
So ingrained has this link become in our minds that to even think of questioning it seems ridiculous. Yet that is what Joseph Stiglitz – and countless other economists and leading thinkers – are now doing123. The main problem with GDP is that it focuses on the amount of growth being achieved rather than the quality of that growth and takes no account of the human or environmental cost of achieving it.124 When viewed in these terms, “growth for growth’s sake – at any cost” is not sustainable. As Simon Kuznets says of the statistic, he himself created: "distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what."
Economic growth, driven by globalization and technology, has brought huge benefits for many parts of the world over the last 30 years. But in many countries, it has also driven sharp increases in inequality, which have been heightened by a pandemic that is disproportionately affecting more vulnerable sections of society. Low wage workers and minorities have suffered most from a health and a financial perspective – which has economic as well as social implications125 that central banks are paying attention to126. Particularly worrying is that there is increasing evidence of a ’K-shaped’ recovery127 – where some aspects of the economy and society are recovering far faster than others. Skilled, higher-income workers in knowledge-based industries have fared much better during the crisis; and as things stand, will continue to do so.
Such concerns resonate at a time when governments around the world are investing trillions of dollars in supporting their economies – for the second time in barely more than a decade. Ensuring a return to economic expansion is an entirely legitimate goal, but many are demanding that we should “build back better”128 with Universal Basic Income becoming a topic of mainstream129 political and economic discussion130. With so many companies now embracing the concept of the triple bottom line – people, planet, profit – through their environmental, social and corporate governance (ESG) policies, there is an emerging alignment between the ambitions of governments and leading businesses over the need to change the way in which we think about success.
So, does it matter what statistics we use – and if we are not focused on GDP, what should we be using? Peter Drucker argued that “if you can’t measure it, you can’t improve it” – which certainly supports the argument that we should develop metrics that more fully reflect our progress in tackling societal and environmental issues as well as economic ones. The World Economic Forum’s Inclusive Development Index131 (IDI) is one of the most high-profile alternative measures132. GDP and employment growth feature prominently – alongside measures of inclusivity, equality and sustainability. Scandinavian countries score highly, as they do in research which explicitly ranks countries and cities by ‘happiness’133 – which may be no coincidence given the success Sweden has had in tackling income inequality during previous crises134.
Perhaps the time has arrived to change our fundamental yardstick of success.
Inclusive growth and development
World Economic Forum, Inclusive Development Index
Perhaps the time really has arrived to change the fundamental yardstick by which so many governments are judged - which would have major implications for real estate. If we were re-trained to evaluate government success with a broader measure of progress such as the IDI, national policies would be targeted and implemented rather differently. Not ignoring economic growth – but investing directly, and incentivising others to invest, in areas that benefit society in addition to stimulating the economy135. Just as Larry Fink forecasts a “significant reallocation of capital” in response to climate change136, a widespread shift in policy along these lines would have a similar impact – by design. High among the beneficiaries would be many of our urban areas most in need of regeneration, along with the most vulnerable people in society that typically make up their residents.
Changing how we measure success will not, on its own, make the difference. But it would be a good start. After all, as Joseph Stiglitz concludes, “If we measure the wrong thing, we will do the wrong thing”137.
121. Philipp Lepinies, The Power of a Single Number: A Political History of GDP 2016: https://www.jstor.org/stable/10.7312/lepe17510 122. https://foreignpolicy.com/2011/01/03/gdp-a-brief-history/ 123. https://ec.europa.eu/environment/beyond_gdp/key_quotes_en.html 124. https://www.fidelity.co.uk/markets-insights/daily-insight/what-gdp-doesnt-tell-us/ 125. https://www.frbsf.org/economic-research/files/wp2017-23.pdf 126. https://www.imf.org/en/Publications/WP/Issues/2020/09/25/Should-Inequality-Factor-into-Central-Banks-Decisions-49756 127. https://www.forbes.com/sites/chuckjones/2020/10/24/three-charts-show-a-k-shaped-recovery/ 128. https://www.buildbackbetter.org.uk/
129. https://www.nationalgeographic.co.uk/history-and-civilisation/2020/05/universal-basic-income-is-gathering-support-has-it-ever-worked-and 130. https://www.businessinsider.com/spain-to-approve-basic-income-scheme-response-coroanvirus-outbreak-2020-5?r=US&IR=T 131. https://www.weforum.org/reports/the-inclusive-development-index-2018 132. See also the OECD’s Better Life Index: http://www.oecdbetterlifeindex.org/#/11111111111 133. https://worldhappiness.report/ed/2020/social-environments-for-world-happiness/ 134. https://voxeu.org/article/economic-inequality-during-recessions 135. https://www.imf.org/en/Publications/WP/Issues/2020/09/25/Should-Inequality-Factor-into-Central-Banks-Decisions-49756 136. https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter 137. https://www.fastcompany.com/90435788/a-nobel-winning-economist-says-its-time-to-kill-the-gdp