The “dictatorship of GDP”: 4 reasons why the economic growth of a country is not synonymous with success

In the midst of the Great Depression in the United States in the 1930s, economist Simon Kuznets sought to measure the country’s economic activity to help it emerge from the brutal crisis.

Originally, it was asked what activities are truly productive and how well-being is promoted in a country, but when the Second World War broke out, the priority of measuring the wealth generated by a country changed: it was necessary to know how much was produced and how much was left for finance the war.

After the war ended, the US needed to know how the recipients of economic aid for reconstruction were doing, so they all began to use the key indicator for that objective: Gross Domestic Product, GDP.

Kuznets, however, was not very proud of what he had helped create, because in the end a measure that was theoretically going to reflect economic well-being ended up being the sum of all the goods and services that a country produces in a year.

“Distinctions between quantity and quality of growth must be kept in mind,” Kuznets himself said in 1962.

Seven decades later we continue to use GDP to measure the wealth generated by a country.

The problem is not GDP itself, say critical voices, but the ultimate power given to reflect the success or failure of a country.

That is why they argue that “the dictatorship of GDP” or, as the Nobel Prize winner in Economics Joseph Stiglitz says, the “fetishism of GDP” must be ended.

They argue that while economic growth has generated more jobs, higher incomes, and more wealth, inequalities between elites and the rest of the population have deepened in recent decades.

On the other hand, they say that the “dogma” of producing more and consuming more and more has led us to the destruction of the planet.

By contrast, GDP advocates argue that economic growth is what has given the world cancer treatment, access to electricity and clean water, longer life expectancy. In sum, growth has generated well-being.

These are some of the myths surrounding the disputed measure.

Myth 1: The economies with the highest GDP are better than the rest

GDP is how we rank countries and judge their performance. The figure is key because the preparation of the budget by governments depends on it and allows them to have key information to make decisions.

It also determines how much a country can borrow and at what interest rate, as well as influences investment decisions.

However, the richest economies tend to grow less than the rest because they are in another phase of their development, not necessarily because they are doing badly.

It also happens the other way around, when a country’s GDP appears to be incredibly high, but it doesn’t necessarily reflect the entire movie.

Just look at the famous “statistical rebound” What happens when a country’s GDP falls precipitously and the following year grows “spectacularly”, a phenomenon that occurs because the base of comparison is very low.

This is what happened with the covid-19 pandemic. Mexico, for example, grew an incredible 4.8% in 2021, but it came from a brutal drop of -8.1% the previous year.

Bolivia, meanwhile, increased its GDP to 6.1%, but it came from -8.7% in 2020.

On the other hand, there is the case of Venezuela, which this year will be the country with the highest growth in Latin Americareaching an incredible 6.5%, according to the International Monetary Fund (IMF).

Is Venezuela really the most successful economy in Latin America due to the increase in its GDP?

Economists point out that after years of hyperinflation, rising poverty and a recurring drop in economic growth, what we are witnessing is a recovery.

But the fact that it has the highest growth compared to the others is not synonymous with it being the most successful economy in the region.

Another example of a high GDP that has nothing to do with success occurs when there are wars or natural disasters, due to the gigantic public spending that governments must do.

“An increase in GDP can reflect things you don’t want to happen,” Dimitri Zenghelis, co-founder of Cambridge University’s Wealth Economics Project, tells the BBC.

“You can face an earthquake as happened in Japan in the mid-90s. That generates a lot of economic activity due to reconstruction, a lot of GDP,” he explains.

“But no one in their right mind would want that to happen.”

Myth 2: GDP only measures legal activities

GDP does not distinguish between legal or illegal activities because it puts everything in the same bag.

“Kim Jong-un’s nuclear warheads work as well as hospital beds or apple pie”says David Pilling, author of “The Growth Deception: The Wealth and Well-Being of Nations.”

The injection of money into the economy from drug, arms or people trafficking also has an impact on economic growth.

Criminal organizations create jobs, increase consumption, create large production, distribution and sales chains that, directly or indirectly, form part of the GDP.

The United Nations estimates that between 2% and 5% of world GDP is generated by money launderingalthough the figure could be much higher given the difficulties of calculation.

Myth 3: an increase in GDP is synonymous with greater well-being for the entire population

That is relative. It may be that in some countries growth generates more well-being for the majority of the population and that in others it generates more wealth for only a few.

In this sense, GDP by itself is not synonymous with well-being, development or success.

To have a more realistic picture of a country’s performance, say experts, it is necessary to add other measurements such as the GINI Index, which studies the income distributionor the United Nations Human Development Index, the HDI, which pays attention to life expectancy, literacy, education and other elements related to people’s quality of life.

On the other hand, averages in relation to economic growth can be misleading.

The famous GDP per capita is a useful measure to divide the value of a country’s economic activity by its number of inhabitants. It is an average, but it says nothing about the distribution of wealth.

One of the best examples of the illusion caused by averages is that of the Chilean anti-poet Nicanor Parra, who, before dedicating himself to literature, was a professor of mathematics, physics, and rational mechanics.

“There are two loaves. You eat two. Me neither. Average consumption: one bread per person”.

Myth 4: GDP growth has no negative effects

The GDP measurement includes the number of cars built, but not their emissions, which will ultimately translate into higher health spending and other pollution-related effects.

GDP “also counts plastic waste floating in the ocean, burglar alarms, and gasoline consumed in traffic jams,” says David Pilling.

From this point of view, a country can experience high growth and at the same time it can be mortgaging its future.

“If your growth is based on activities that aren’t sustainable, like destroying the environment, then it’s not good,” Zenghelis says.

In recent years, the idea of ​​”sustainable and inclusive growth” has gained space to counteract its negative effects, as proposed by the Economic Commission for Latin America and the Caribbean, ECLAC.

The focus is not to “decrease”, but to pay attention to the quality of growth.

What would Simon Kuznets, the creator of GDP, say if he were still alive? (YO)