Simon Rubinsohn asks whether GDP is still a useful target for economic policy.
Simon Rubinsohn, Chief Economist, RICS
28 June 2018
If the recent macroeconomic forecasts from the International Monetary Fund (IMF) are anything to go by, the global economy is set to continue growing strongly over the next couple of years, despite some concerns over the rise in protectionist sentiment; something in the region of 4% is being pencilled in for both this year and next.
Meanwhile, although there are a few more concerns about the prospects for the UK, the IMF assessment still points towards further expansion, albeit nearer the 1.5% mark.
Yet for all the encouragement that can be drawn from such a further period of extended economic growth, justifiable concerns linger about whether this alone will be sufficient to address some of the bigger societal challenges that have manifested themselves in, among other things, the rise of populist political movements and an increasing distrust of what may be loosely described as the establishment.
This prompts a wider debate about the emphasis currently placed on Gross Domestic Product (GDP) as a target of macroeconomic policy and a measure of wellbeing. Put another way, are governments around the world focusing on the right target when they frame economic strategies around this single indicator?
This is, of course, not a new debate. Indeed, there have been a number of initiatives in recent years that have attempted, unsuccessfully, to shift thinking on this issue.
It is not just that GDP is a questionable gauge of economic success. Measurement challenges mean that revisions of the data are frequent and can sometimes be quite dramatic.
Against this backdrop, it is not surprising that policymakers are looking to corroborate data published by statistical authorities with insight garnered directly from industry professionals, usually in the form of sentiment surveys. The RICS suite of real estate surveys, to which I hope many of you contribute, provide a good example of how this intelligence is sought and applied in decision-making.
More significantly, GDP is one-dimensional. That dimension is clearly important but arguably insufficient as the sole objective for a policy framework. It has, for example, little to say about how the fruits of growth are distributed, the increasing insecurity of employment or the implications of growth strategies for the environment.
With this in mind, I want to highlight a piece of work that the World Economic Forum (WEF) is leading. Under the banner Shaping the Future of Economic Progress, the Inclusive Development Index (IDI) was released for the first time in 2017, and a second iteration was published earlier this year at Davos, alongside a back history for the previous five years.
Twelve indicators are measured as part of the process, clustered under three broad headings: growth and development; inclusion; and intergenerational equity and sustainability.
A cursory examination of the results shows a clear disconnect between GDP per head, which is one of the 12 indicators, and some of the other series that form the IDI. This is most noticeable where the comparison is made with the measures grouped under the inclusion parameter.
While the former has been generally moving in upwards in recent years, the same sadly cannot be said of the latter. This could help to explain some of the frustrations that have been expressed in ballot boxes in many parts of the world over the past couple of years.
Among the advanced economies examined, the UK ranks 19th in terms of GDP per capita but its position slips to 21st using the broader approach; for the record, Norway tops the list.
Moreover, over the past five years, the headline IDI for the UK has actually edged slightly downwards. This is disappointing, but not entirely surprising given some of the more obvious intergenerational challenges the country faces.
It is also interesting that the related WEF report explicitly notes that “the country is lagging behind its peers on many dimensions of inclusive growth”. These include areas such as healthy life expectancy and inequality as well as macroeconomic issues such as net savings. By way of contrast, the UK is performing rather better in terms of the falling carbon intensity of economic activity.
While it is implausible that the IDI or a similar construct will replace GDP as the primary objective of economic policy any time soon, I believe there is a strong case for them to be used in conjunction. This could not only help policymakers weigh up more effectively the implications of their decisions but also enable voters to better understand the choices on offer and the potential ramifications.
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