GDP is an outdated way

It cannot measure the health of the economy as it doesn’t reflect the health of people or the planet

COMMENT | RADHIKA BALAKRISHNAN | Economics and economic policy need a rethink. This is clear from the scale of inequality, joblessness, insecurity and environmental disasters we see in the world.

People feel left behind, impoverished and unvoiced. They are looking to ethno-nationalist strongmen to help them. Right-wing movements and governments are on the rise.

As an economist who has written for many decades about debunking the neoclassical approaches to economic thinking, I think there is clear evidence that the mainstream ideas and policies no longer work.

The dominant approaches to economic policy focus on a few narrow goals, such as growing gross domestic product (GDP) or suppressing inflation. The use of GDP since the late 1940s to understand the health of an economy has been criticised. What’s needed is a more precise understanding of the broad impact of macroeconomic policies, one that accounts for paid, unpaid and non-market work. The standard economic variables used by mainstream economics don’t consider all these.

Mainstream policies don’t see the huge impact of unpaid care work on GDP. According to the International Labour Organisation an estimated 16.4 billion hours are spent on unpaid care work every day. This is equivalent to 2 billion people working 8 hours a day with no remuneration.

The idea of economic growth is also ill suited to evaluate improvements to wellbeing at the social level. Though growth in GDP can be a useful measure of economic activity, growth itself does not always bring better outcomes in terms of poverty, health or jobs. GDP growth can even worsen health status, pollute the environment, and reduce leisure time.

Many countries are now starting to give indicators of wellbeing a central role in judging how well the economy is doing. The Organisation for Economic Co-operation and Development (OECD) countries, such as New Zealand, have been looking at measuring societal progress in terms of how well people and households are doing.

The human rights approach is another way to judge economic policies and their outcomes. It’s different from the dominant approach in economics, which is mainly interested in the ability of individuals to make choices that maximise their own individual satisfaction, termed “utility”.

If, instead, the purpose of the economy was to fulfil rights, we would have a very different set of policy priorities. Like equality in the right to leisure, the right to an adequate standard of living, and the right to housing, education and health.

A human rights approach

The human rights approach allows for a complex interaction between individual rights, collective rights and collective action. It sees policy as a social and political process that should conform to human rights standards.

It recognises that states can both enable and deny social justice. Individuals need the power of the state to realise their rights but also need protection against misuse of state power.

The human rights framework looks beyond GDP or income when evaluating economic outcomes. It looks to the realisation of economic and social rights over time.

Social justice makes advances when the enjoyment of the rights to an adequate standard of living, education, health, work and social security, among others, improves over time.

These aspects of the human rights framework can be used to evaluate and assess economic policies and their outcomes.

Many of these human rights aspects are implicit in wellbeing indicators but are not clearly stated. The measurement of wellbeing highlights inequalities, focuses on people and outcomes at the individual and household level, and allows for an analysis of inequalities. But the criteria it uses are not well articulated, especially in terms of gender equality.

The environment

One of the serious shortcomings of an approach that regards growth as the solution to economic crisis is that continued growth has environmental limits and potentially catastrophic consequences.

The larger question is whether economic growth is sustainable over time and whether it can be achieved in a sustainable way.

There is some attention to sustainability within the human rights framework. For example, a clean environment is necessary for the full enjoyment of human rights. But this relationship needs to be better understood, beyond environmental crisis.

The OECD has developed a series of indicators to measure wellbeing in many countries. They are: income and wealth; work and job quality; housing; health; knowledge and skills; environmental quality; subjective wellbeing; safety; work-life balance; social connection; and civil engagement. The resources for future wellbeing are natural capital, economic capital, human capital and social capital.

These are attempts at considering wellbeing but are still very economistic and capital oriented.

It’s necessary to go beyond looking at the negative consequences of pollution to radically shift how development is conceived.

Ecuador, for example, is using the concept of Buen Vivir, which is based on indigenous traditions and values of the Andean region. It departs from western ideas of affluence and growth; instead it is about harmony with oneself, the community and nature.

Some of the language around Buen Vivir is around rights, such as the right to a good life, and the rights of nature. The right to a good life includes the rights to nutrition, health, education and water, and uses the economic, social and cultural rights norms.

The concept of Buen Vivir has some problems, though, like its scalability and the gender assumptions of indigenous traditions.

What next

To address the roots of people’s disenchantment and avoid ecological catastrophe, we must develop new approaches to economic policy. Instead of using growth as the measure of an economy’s health, there are other approaches to consider, like wellbeing, human rights and Buen Vivir.

Each approach has its limitations. But bringing them in conversation together is a start when asking the most basic of questions: what is the economy for?

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Radhika Balakrishnan is Professor Emeritus, Rutgers University

Source: The Conversation