GDP is a useless measurement. But what should replace it?
As the planet burns and living costs swell, the need to stop chasing short-term economic growth is clearer than ever
“We must place true value on the environment and go beyond gross domestic product as a measure of human progress and well-being,” said United Nations secretary-general Antonio Guterres in June at Stockholm+50, a meeting convened by the UN to discuss the world’s environmental and ecological crises.
It was an astonishing statement. This once-fringe idea of going ‘beyond GDP’ is finally appearing at the highest level of international policy discussions and inside governments from New Zealand to Wales.
GDP is an economic indicator that measures economic growth – in particular, the value of all goods and services produced in an economy. But it doesn’t take into account many of the issues that actually affect our lives, such as health and well-being, income, gender equality or the state of the environment.
Even Simon Kuznets, the economist who presented the original formulation of GDP, said in 1934 that: “The welfare of a nation can scarcely be inferred from a measurement of national income.”
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Now, especially, as the world is on fire and inflation squeezes our populations, the contradictions of GDP as the primary indicator of a country’s economic success are even more obvious.
GDP took a dive in 2020, at the onset of COVID-19. Since then, however, it has skyrocketed in most countries.
The contrast between overall well-being and economic growth is perhaps most evident in the US. Between 2020 and 2021 US GDP increased by 9.08%, but during that same period, life expectancy actually decreased by 0.39 years. By current standards of development and economic progress, which are centred around GDP, even the recent oil spill in Tennessee is considered a positive outcome because it stimulates short-term cleanup and rebuilding operations.
Now some nations – such as New Zealand – are jumping on board with more holistic metrics. A recent report from the Wellbeing Economy Alliance (which one of us works for) found the countries that prioritised well-being over economic growth during COVID fared better from a health and economic standpoint.
New Zealand implemented a ‘go hard, go early’ strategy led by public health experts, with the support of treasury economists who have centred their budgets since 2019 around a Living Standards Framework. According to this framework, well-being is “when people are able to lead fulfilling lives with purpose, balance and meaning”.
Even though the lockdowns limited short-term growth, the country experienced COVID fatalities that were below the levels of comparable countries in 2020. The world’s 29 highest-income countries together had over a million excess deaths.
Australia's new treasurer Jim Chalmers has now announced plans to develop measures that go beyond economic growth, inspired by New Zealand’s Wellbeing Budget.
Other countries and multilateral bodies are also making significant strides to move ‘beyond GDP’. Members of the Wellbeing Economy Governments partnership (WEGo) – which includes New Zealand as well as Iceland, Scotland, Wales, Finland and Canada – have also outlined actions they are taking to achieve this.
For example, Wales’ intergenerational justice legislation is fundamentally changing policy-making approaches from short-term to long-term oriented; Finland’s environmental policies are being guided by a holistic One Health approach; and Bhutan’s Gross National Happiness (GNH) model has led the country to reduce poverty rates from over 32% to 10.2% in a decade – all while becoming climate neutral.
And at a recent gathering in front of the Berlaymont (which houses the headquarters of the European Commission) several more European policymakers said they were ready to move beyond GDP, including Barbara Trachte, secretary of state for economic transition for the Brussels region, and Thomas Arnold, former sustainable development goals advisor at the European Commission.
But as we suffer the consequences of worsening crises – from cost of living to inequality, biodiversity loss and climate change – we need the rest of the world to follow suit and institutionalise better metrics to guide policy-making. A global and unified approach must guide this project.
So here are some guiding steps to drive this transformation:
We need coherence in our ‘beyond GDP’ metrics
With GDP, consumption and productivity are defined by the globally accepted System of National Accounts (SNA). This makes it simple, comparable, and widely applicable. However for ‘beyond GDP’ there is no internationally agreed standard – just a variety of terminologies and methodologies.
We recommend creating a new body to articulate and create a global and unified ‘beyond GDP’ metric. It could be called IP-WISE: the International Panel on Well-being, Inclusion, Sustainability and Economy.
In Europe, at both the national and EU level, there are several monitoring frameworks and indicator sets measuring social, economic and environmental progress, such as the Euro Stats Quality of Life Index. Policymakers should reflect and produce recommendations on how these existing metrics can be streamlined for their own policies.
We need better modelling
More coherent metrics will improve policy decision-making – but that will not be enough. Policymakers also require additional models that will forecast outcomes and impacts of their decisions.
For example, economists have developed Integrated Assessment models such as the LOCOMOTION models that can show the effects of policy-making beyond GDP throughout all aspects of the economy, including socioeconomic and environmental impacts.
Policymakers should also be aware of the existence of models that show better (and greener) results are possible beyond growth policymaking. In some countries, this process is already under way. For example, the aforementioned Wellbeing Budget of New Zealand is a method by which national priorities are set and the government budget is allocated.
Democratic empowerment is crucial
It is crucial that citizens play a significant role in shaping policy priorities and solutions. As such, policymakers should implement public decision-making processes. For example, many countries have been experimenting with citizen climate panels, including Scotland’s Climate Assembly that was launched in 2020.
Policymakers can consult the Wellbeing Economy Alliance Policy Design Guide – which has already been used across the globe – to design policies in local participatory processes that prioritise what it means to actually live well in communities.
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