‘The rules of GDP have been weighted in favour of richer countries’: Ehsan Masood
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Gross domestic product is one of the best-known formulas for measuring economic growth and national prosperity. But today it has serious limitations and needs to move with the times, says author Ehsan Masood.
“Where we’re heading is a confluence of economics meeting the physical world, and that includes the world of engineering and technology,” says Ehsan Masood. The period when economics was a discrete discipline in its own right and was allowed to develop independently of other disciplines is effectively over, and “economists are aware of that”. The author of ‘GDP: The World’s Most Powerful Formula and Why it Must Now Change’ goes on to say that the idea that we could press on with the development of technologies such as a new jet engine without factoring in its impact elsewhere in the economy “is where the challenge lies”.
Before picking up Masood’s new book we need to manage two assumptions. First is that a nation’s growth and prosperity should and could only be measured by deducting what we import from our industrial output and spending. Second is that an extended essay on the history (and possible future) of an apparently simple textbook economic equation is inherently boring. To counter the first, Masood explains that GDP is not the only measure, but it is much loved by politicians because it is superficially easy to understand by people who are “time poor and don’t have long attention spans”.
Taking on the second assumption, in ‘GDP’ we have a tale of cloak and dagger intrigue, intense rivalries and political machinations you’d expect in a spy thriller. Economists jet between the hemispheres of communism and capitalism to joust with their economic nemeses in the way that chess grand masters once did, while politicians reinvent the post-Second World War industrial landscape. As the world’s finest minds jostle to expound their theories on how to measure and monitor economies, the politicians move their figurative chess pieces around the international board. Meanwhile, everyone it seems takes it as axiomatic that growth is good.
In essence, GDP is an estimate of national prosperity that predates the Second World War, extracted from the equation Y = C + I + G + (X - M), where C is what consumers spend in shops, I is what businesses spend, G is government spending, X is what we export, and M is what we import. The all-important Y is the total gross domestic product, or GDP. There are other ways of calculating it, and there are other (often far superior) indexes of national prosperity, says Masood, but this is the one politicians understand and like because it has an air of certainty to it. When the figure goes up politicians look good, and when it goes down you can lose the next election.
This doesn’t necessarily make a great deal of sense in terms of economic theory but, then again, reading Masood’s book you get the feeling that the author doesn’t have much faith in politicians’ intellectual capacity to grasp a concept more complex than ‘up good, down bad’. Recalling his own training in economics: “Intriguingly, we were never taught that growth is automatically a good thing. On the contrary, as students we were encouraged to understand and debate the pros and cons and then make up our own minds.”
‘GDP: The World’s Most Powerful Formula and Why it Must Now Change’
Governments need to know how prosperous the nation they govern is (see extract). And in the early decades of the 20th century gauging this by how much stuff was produced seemed as good a way as any, so in a pre-digital age production estimates were entered into ledgers while the economists in charge of the exercise had access to and influence over America’s top politicians. “Emerging from the Great Depression there were voices in Congress saying: ‘how do we know we’re getting more prosperous? What’s the measure? Is there a measure?’ And so, Simon Kuznets was asked to do these accounts.”
As an exercise, Masood says, this was “an important thing to do at the time, and it was necessary. But part of the problem we are seeing today is that it is not so much the intrinsic information itself which is valuable for researchers and policy makers, but what you do with it.” Masood’s objection to GDP is that we have “tethered” this information to the “single most important measure of national prosperity”. What started as an exercise in business information became a critical barometric reading for how governments were performing.
Realising this, governments have tended to manipulate the system so that the figure rises, in order to maintain their popularity in the polls. This in turn creates the knock-on effects of environmental stress and social inequality. If the figure goes up because you are producing more cars, for example, but your air quality goes down, you’re still winning. If the new wealth created by increased production falls into the hands of the few, while a significant proportion of your population falls below the poverty line, so long as GDP goes up, you’re winning.
“Historically, the rules of GDP have been weighted in favour of richer countries,” says Masood. “The rules were set at a time when experts and policy makers from Europe and the United States were in a stronger position to set terms for the rest of the world.”
One of the recurrent themes of Masood’s book is that GDP is a blunt instrument being applied to purposes it was never intended for. And yet, when asked if we should just rip it up, he emphatically advises against such an action on the grounds that there are risks of unintended consequences. And yet, part of the subtitle of his book clearly states that GDP ‘must change’, and this is because in its current form GDP is being used in a way that its architects never envisaged.
It’s unlikely that Kuznets, in sampling output figures of factories in the USA, was looking for a formula to keep large parts of the world in poverty, to punish poor countries for being poor, or to encourage environmental degradation. What Masood is saying is that if GDP is accelerating climate change and speeding up biodiversity loss, it makes sense to tweak the formula.
The next revision of the GDP rules will be finalised in 2025 and it will be the first time that the environment will be factored in. “And that will be no small achievement.”
‘GDP: The World’s Most Powerful Formula and Why it Must Now Change’ by Ehsan Masood is from Icon Books, £9.99
Working out the worth
Governments from the earliest times have wanted to count and measure that which falls into their domain of influence. They have sought to map the distances between towns and cities; they have looked for ways of quantifying the nation’s stock of natural resources, such as water and fossil fuels. They also love to know how much citizens earn, so that they can levy the appropriate amount of tax.
Before Simon Kuznets’ 1932 report on national income, governments in the western hemisphere had a weaker grip on this knowledge. Unlike the more centrally planned states in the Soviet sphere of influence, countries such as America and Britain knew less about what their citizens earned, or the state of their economic production and consumption. There was no agreed method to work out how much money was coming in and how much was being spent.
Countries didn’t know how much businesses were producing, nor did they have much of a sense of consumption patterns. This is what GDP was partly intended to fix. Forged in the fires of the Great Depression and the Second World War, the rationale behind GDP was that governments needed such data. For arguably the majority of economists, GDP provided nations with an accurate account of their economies.
The act of measurement also enabled, or coincided with, their nations becoming wealthier. The world’s richest nations belong to a club called the Organization for Economic Cooperation and Development. According to the OECD, today’s nations are ten times richer when their GDP of today is compared with their GDP in the early 1800s. This increase has coincided with the 80 years in which calculating GDP has been a global activity.
Edited extract from ‘GDP: The World’s Most Powerful Formula and Why it Must Now Change’ by Ehsan Masood, reproduced with permission
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