Decoding GDP

It has become an established fact that GDP has become synonymous with economic growth and a higher value of GDP has become a sine qua non of a country’s progress. Citing an example in India, the recent initiative of demonetisation of 500 and 1,000 rupee notes has generated a big debate on its implications on the GDP and economic growth. A 2% loss in GDP post-demonetisation is supposed to have cost India dear in the view of many economists. Over the years, India’s growth story has assumed a critical importance as observed in the recently held World Economic Forum summit in Davos and India in the near future is supposed to be the world’s fastest growing economy as per IMF’s predictions.

However, very few thinkers pause and critically examine the nitty gritty involved in calculating the GDP. What does the GDP really comprise of? Can all human activity be squeezed into a single number? Is there something relevant to human and national progress which the GDP is leaving behind and at the same time, is there something irrelevant which is getting counted? And last but not the least, why has GDP acquired such critical importance and is this importance getting turned into an obsession?

David Pilling, a reporter and editor for the Financial Times, goes deep into the making of GDP and analyzes it in a historical, social, economic and international perspective. He writes extensively about its futility considering the obsession that countries across the world have got for it. Pilling in his first chapter describes that practice of measuring the size of an economy of a country evolved only after the wall street crash of 1929. That was when measuring economic indicators became important and it’s also only after that event, that the calculation of GDP came into existence. Pilling acknowledges Simon Kuznets to be the father of GDP (for the uninitiated, Simon Kuznets is a Nobel Laureate who won the coveted prize in 1971 for his empirically founded interpretation of economic growth that has led to new and deepened insight into the economic and social structure and process of development) and his good intentions in formulating the number have been highlighted. However, Pilling follows it up with the economic indicator that Simon Kuznets could not create by excluding items detrimental to human welfare like defense spending, gambling, extortion etc.

The negative shades of GDP have been brought to the forefront in many ways. Startling revelations like inclusion of drugs in Columbia and prostitution in UK in calculating it, healthcare becoming costly because of giving it an undue importance, the obsession around it leading to a potential ecological catastrophe and banks getting a free run to lend indiscriminately thereby leading to financial bubble’s and economic collapses- are all attributed to increased emphasis on GDP growth. The unreasonableness of significance given to calculating national GDP has also been explained in the context of globalized world with a high level of technological progress. Companies today are registered in one country, their products manufactured in a second country, sold in the third country and the taxes being paid in the fourth country. So this so called economic growth is spread across countries.

Apart from all these, GDP does not consider aspects like inequality and job creation. Pilling comments that it is entirely possible to have a high GDP value with a high level of inequality and very low levels of job creation.

Though not precisely quoted in the book, I feel India is the best example of the above situation wherein we have exhibited a period of jobless growth between 2004-09 (the growth in the corresponding period being the highest in India’s history). As far as inequality is considered, reports from the rights group Oxfam have been continuously quoting for years that more than 50% of national wealth is being held by just 1% of the population.

There are chapters devoted to the developing world and third world on how GDP is calculated in such countries. The difficulties and errors involved in calculating GDP like extrapolating the formal sector to the informal sector, which invariably constitute a bulk of the economic activity, have also been dealt with.

The book has been written in a witty and sarcastic style in many parts. But while finishing about a little over half the book, I felt an overdose of cynicism. It looked like a one way bashing of GDP. But that’s when the author starts to elaborate about the various alternatives to GDP. These are alternatives that have been tried and tested by various economists across countries. While these efforts are appreciated, Pilling does not get carried away by them and also mentions their limitations. He starts off with Chinese green economist Niu Wenyuan’s concept of Green GDP and then goes on to explore the methodology involved in economist Partha Dasgupta’s theory of evaluating economic progress. Pilling further states that Dasgupta’s theory includes the value of stock of country’s natural, human and physical assets. In fact Partha Dasgupta submitted a report many years ago to the Government of India to shun the GDP based model of growth.

Pilling feels that the concept of happiness, popularly known through the indicator of Gross National Happiness has been unfairly hijacked by Bhutan. While that opinion of his can be contested, Pilling does a great job in elaborating various other concepts of happiness including  the Utilitarianism theory of Jermy Bentham and the studies on Happiness economics in the London School of Economics.

He does a critical analysis of the unique India-Pakistan economic collaboration developed by Indian Nobel Laureate Amartya Sen and Pakistani Economist Mahbub-ul-Haq -the Human Development Index (HDI). He wittingly writes that an index sends the signals you want to send. The better the HDI, the more Scandinavian is the country (as Scandinavian countries generally perform better on HDI). Finally, I had a sigh of relief when Pilling in the concluding chapter writes that he does not recommend the scrapping of GDP. While it is true that it has many deficiencies, it can be termed as the least inaccurate method of calculating growth. Economics enthusiasts will surely love this book.