Redefining growth

The Group of 20 (G20) is meeting in Brisbane this week to discuss the global economy. William Bourke says we should focus less on the GDP and instead look at real progress indicators like high employment, a diverse economic base and sustainable resource management.

At the G20 Finance Ministers and Central Bank Governors meeting in February, Australia’s Treasurer Joe Hockey pleaded with participating nations to increase their aggregate Gross Domestic Product (GDP) by 2 per cent per annum. GDP growth will again top the billing at this week’s G20 Leaders’ Summit in Brisbane.

But few if any commentators have paused to ask a simple question: What does GDP growth provide for ordinary citizens?

GDP is the primary indicator used by governments and media to gauge the health of a country’s economy. It represents the total dollar value of all goods and services produced over a specific time period. But there are serious problems with this indicator. GDP theory not only presumes an impossible world of unlimited resources – such as forests, oil, fish stocks, arable land and water – it counts many negative elements as positive contributions. For example, did you know that both cancer and a car crash can increase GDP? They both demand goods and services.

Another major weakness in GDP is that the depletion of our non-renewable environmental resources such as minerals and natural gas is counted as a positive, instead of a negative as is required in proper accounting standards (via depreciation).

It is also improper that the headline GDP figure does not account for population growth. If GDP grows at (say) .3 per cent in a quarter, but population growth is .5 per cent, we are going backwards on the GDP scale. During the GFC Australia had a per capita recession, with negative per capita GDP over two consecutive quarters. But only one or two economists mentioned this, and the myth still exists that Australia has had over 20 years of unbroken ‘growth’. Even today population growth is well over half the rate of aggregate GDP. At the very least we should be reporting GDP per capita.

The bottom line with Joe’s aggregate GDP growth obsession is that he’s forgotten to ask whether ordinary citizens are actually happier. GDP is a useful measure of economic activity, but it doesn’t measure human wellbeing or happiness, or equality.

In a step towards true social justice, we need to redefine ‘growth’ in our finite world. Not just for our sake, but for future generations. If we are to secure a prosperous economy, healthy environment and better quality of life, growth must focus on quality, not quantity. At present, who could argue that Australia’s economy, environment or quality of life are heading in the right direction? Under the current political duopoly, we’re getting much bigger, without getting better.

Australia’s economic prosperity does not depend on the GDP statistic. In fact, GDP is a side-show. It would be more accurate to say that our economic prosperity is underpinned by three key pillars:

1. Investment in better education and skills training to improve job security, workforce participation and innovation

2. Encouragement of a diverse range of productive industries and

3. Maintenance of our natural economic advantage via careful management of food, water, energy and mineral resources.

This third point is often overlooked in economic terms, and like the others, is undermined by rapid population growth. Rapid population growth acts as a disincentive for local training and education, and skews scarce economic investment into relatively unproductive city-building assets, like high-rise apartments.

We should not obsess over Joe’s arbitrary GDP target. In fact we should ignore it and focus on genuine progress indicators. If we achieve high employment, a diverse economic base, and sustainable resource management, GDP will take care of itself. We can be better without getting bigger.

0 Comments

1. 

   Peter Strachan

   November 11, 2014 at 2:37 am

   Redefining Growth

   William has clearly outlined the problem with dogmatic focus on GDP. What matters to folks in the community is their quality of life. What we see is that as GDP per capita rises towards $20,000 per head, it moves very much in line with the Genuine Progress Indicator but beyond that level the two diverge. As GDP continues to rise, the GPI flattens out. Negatives, including inefficiencies caused by congestion, poor air quality and environmental destruction, offset any rise in GDP per person so that as the economy converts finite resources into waste, the end result is ultimately a poorer quality of life. Remarkably, the GDP measure gives no value to a forest until it is chopped down and sold for lumber or woodchips, despite the fact that the forest was busy producing oxygen, which is vital for life on earth! A sustainable population must be the founding bedrock of and community that aims for ongoing improvement is quality of life.
2. 

   Kris Spike

   November 11, 2014 at 2:40 am

   Redefining growth

   Some excellent arguments for taking the spotlight off GDP and moving it on to other indicators which give a much fuller picture of how we are travelling. GDP is such a simplistic measurement as to be almost worthless yet we seem to worship it like a god and are sacrificing our environment and future to keep it getting bigger. Redefining growth makes sense but this is not something our political class is known for.
3. 

   Tabitha

   November 11, 2014 at 2:54 am

   Redefining Growth

   Excellent article. I never understand why GDP is always front and centre while GDP per capita is virtually non existent for most politicians and business journalists. A healthy economy is not defined just by GDP, which does not include leisure, volunteer work, family time, and other productive activities. GDP takes no account of the loss of urban amenity and environmental damage from unfettered population growth. We need to urgently develop a broader societal wellbeing indicator (or indicators) to replace aggregate GDP. Well done to William Bourke and the Sustainable Population Party. Australia can be better, without being bigger.
4. 

   dono

   December 26, 2014 at 5:56 am

   GDP

   The great joy, for an economist, is that growth in GDP is so easy to obtain when the population is growing and it hides most of the bad news. Our growth in GDP could be due to increased gambling, alcohol consumption and the home mortgage debt while manufacturing declines and the service industries take over..