What gets measured, gets managed… A look at GDP and alternatives to measure wellbeing.
Earlier, we wrote about the ideas of the circular and sharing economy, the purpose economy and doughnut economy and gave you our working definition of a New Economy:
The New Economy is an economic system that is embedded within society and the earth and serves them. It is a system that works with nature, in which money and growth aren’t priority number one, where businesses create value for all stakeholders, not just shareholders. A system that is eventually regenerative by design, a place where all animals, including humans, can thrive and be well, and live a happy, peaceful and fulfilling life…”
Unfortunately, in the current paradigm, it seems that the health and wellbeing of earth and society are actually secondary to the economy. In fact, it seems more as if in the current system the earth and society are merely here to serve the economy.
How did that happen, how did we get here? Well, as the saying goes, what gets measured, gets managed — and if there’s one number that takes center stage, it’s GDP. But does it measure what’s important?
GDP
GDP is the abbreviation of Gross Domestic Product, and measures the monetary value of all finished goods and services made within a country in a year.
GDP is an estimate of market throughput, adding together all final goods and services that are produced and traded for money within a given period of time.
GDP as a measuring tool was developed in the US in the 1930’s — during the Great Depression — as part of a bigger system to understand the country’s productivity and find ways how to deal with this enormous downfall and was part of a more comprehensive set of measures.
Most economists, politicians and other people in power refer to economic growth, and more specifically GDP, as the ultimate indicator to measure progress, success and a country’s wealth and hence, wellbeing. This follows the idea that when the economy grows, collective wellbeing grows with it.
But does it really? Would you believe that people in a country with a higher GDP are also happier than those with a lower GDP?
GDP only measures the monetary transactions related to the production of goods and services. And the lead economist who developed it, Simon Kuznets, actually warned about the simplicity of GDP and urged its use as a specialized tool.
Indeed, if we look at what GDP measures, it actually becomes pretty ridiculous to think GDP tells us anything about the wellbeing of a society. This goes two ways: things that are included and things that are excluded in its calculations,
- Lots of important things that add value to our lives and society are not taken into account and externalized when measuring GDP: any unpaid work, like cooking, cleaning, raising children, taking care of elderly, volunteer work; but also people’s health, clean air , and what about love, friendships, gender and racial equality, a good community — cornerstones of human wellbeing. Oh, and it also doesn’t take into account how money is divided within the country, so the wealth gap? Doesn’t matter for GDP.
From this perspective, you can see how the focus on GDP and GDP growth might even incentivize things that are destructive… Good health is not taken into account, but the sales of medicine is. Clean air or nature, have no monetary value, hence a tree isn’t counted, until it’s cut down for wood.
- On the other hand, the consumption of cigarettes, but also drugs and fire arms? Positive effect on GDP. A massive traffic accident that requires medical care, vehicles pulled off the road and repaired or replaced, and the road itself that needs to be fixed? Positive effect on GDP, as these are goods and services exchanged. A famous example is hurricane Katrina back in 2005, a natural disaster that destroyed large parts of New Orleans, where too many people died, and many lost their home and livelihoods. However, in the years after, GDP went up. Disasters like this are clearly horrible for people as well as the planet, but they give the economy an enormous boost, because of all the cleanup and rebuilding, recovery spending and one-time consumption.
Let’s get real: the well-being and prosperity of humans and our planet are not outcomes driven solely by economic activity. Changing what we measure will not only help to change the global narrative of what’s important, but will also change what gets managed.
Thankfully, more and more people are questioning the value of GDP (and more broadly, economic growth) as a singular indicator, and are exploring and developing different tools and indices. Let’s look at a few of those.
GNH: Gross National Happiness
Back in 1972 (!!), the Buddhist Kingdom of Bhutan declared the country would stop seeking GDP growth, but instead, aim to grow their GNH: Gross National Happiness.
GNH is measured by having several Bhutanese households answer an extensive list of 148 questions. It looks at nine categories: psychological well-being, health, time use, education, cultural diversity and resilience, good governance, community vitality, ecological diversity and resilience, and living standards.
BLI: Better Life Initiative
In 2011, the OECD launched the Better Life Initiative and it’s corresponding “How’s Life” report, to help governments put well-being at the centre of policy-making and move beyond GDP. In 2020, Norway topped the list as best country to live in.
It’s based on 15 dimensions that reflect what the OECD has identified so far as essential to well-being in terms of material living conditions and quality of life.
In addition, they launched The Better Life Index as an interactive tool that allows each individual to think about and reflect on 11 of these dimensions and consider what you find more important to well-being and ranks countries accordingly.
HPI: Happy Planet Index
In 2006, the New Economics Foundation introduced the Happy Planet Index.
The Happy Planet Index combines only four elements to show how efficiently residents of different countries are using environmental resources to lead long, happy lives, using data from the United Nations, Gallup World Poll (that also produces the famous World Happiness Report) and the Global Footprint Network.
To get a country’s score, they use this equation: (life expectancy x experienced wellbeing) x inequality of outcomes divided by Ecological Footprint.
Taking the ecological footprint into account changes the perspective quite a bit: where the World Happiness report currently ranks Finland as the happiest country; in the Happy Planet Index Costa Rica tops the list. Finland only comes in at rank 37.
GPI: Genuine Progress Indicator
Aware of Kuznets warnings about GDP, and seeing a stagnating GDP in the economic dip in the early 1980’s, US economists started to look at different ways to measure welfare and progress and developed GPI; Genuine Progress Indicator.
GPI is measured by 26 indicators which can be divided into three main categories: Economic, Environmental, and Social — (and hey, don’t those sound very familiar?)
Using the earlier example of the traffic accident, GPI takes into consideration all the same factors as the GDP, but will also account for things like lost earnings, travel delay and damage to the environment.
Bottomline, GPI seeks to measure whether the environmental impact and social costs of economic production and consumption in a country are negative or positive factors in overall health and well-being. It’s calculations are complex and can be subjective, and how indicators are measured can differ per country or practitioner. This in turn makes it hard to compare data — and thus less useful on a wider scale.
Moving beyond GDP
These four alternatives are just a few of the options. As said, many people are questioning GDP and are exploring alternatives, and many initiatives, reports and indices are popping up on global and local scales: the UNDP created the Human Development Index, based on the idea that “people and their capabilities should be the ultimate criteria for assessing the development of a country”. The UK and Wales have its Thriving Places Index, and since 2018, The Netherlands publishes a Monitor of Wellbeing.
Overall, the call to move beyond GDP as a guiding indicator is getting louder, and countries are starting to not only measure, but base policy-decisions on other criteria. We’re slowly moving away from a focus on economic growth and aiming to achieve well-being and happiness, with countries like New Zealand, Finland and Iceland at the forefront. (More on that in a next buster!)
And this goes for business as well. For large listed corporates in the EU it was already mandatory to report on Sustainability. In April this year, a proposal was adopted to extend this requirement to all listed companies, including SME’s. If the proposal is adopted, over the next few years (the timeline is set until 2026), around 49.000 companies will be required to report more than just their financial results.
This is great news, but let’s not wait for sustainability to become a mandatory requirement. The best time to act is always today! We’re happy to help you on your journey.
Happy Sprinting,
Minou & Pamela
