When GDP falls short
Economic growth and GDP, such a successful partnership to date, are encountering ever more cracks in terms of their joint ability to assess “successful” economies. There are several reasons why.
1. Income inequality
In search of economic growth, countries have ended up with massive income inequalities. Economic development typically comes at the expense of more income inequality, especially among less developed and less competitive economies. This is something that we have observed at the IMD World Competitiveness Center over the last 20 years, with countries such as Malaysia, Thailand and Estonia that have moved up our competitiveness rankings; as they have risen, inequalities in these countries have also increased.
2. Quality of life
Economic growth is easy to achieve when countries depend on natural resources and do not need sensible industrial policies that create jobs and generate salaries and tax revenues. This means such countries could see high growth levels in output without really improving the quality of life of their citizens; this would be the case if, for example, the export gains are captured by corrupted governments or foreign powers.
3. Accuracy
GDP also measures some contributions to country value in a questionable way; various activities – such as domestic work – are not included, while others – particularly the value of the public sector – are wrongly accounted for.
4. Sustainability
Finally, sustainability is not being accounted for well in GDP measurements. If GDP measures success, and sustainability is a key success factor for economies in the coming years, countries should grow more as they implement more social and environmentally driven policies. However, by and large this is not the case. If, for example, countries substitute domestic coal production with imports of biofuel, the country’s GDP is penalized. And yet it is a desirable move from an environmental point of view.
Generally, too, economic development based on economic growth has not yielded satisfactory results in a big part of our world, particularly in Africa and Latin America.