Are we 'obsessed' with economic growth? Experts on a world beyond GDP

The notion that GDP is not comprehensive enough to serve as the sole measure of economic wellbeing has permeated the highest echelons of public policy institutions. Should the world move beyond GDP?

By Pieter Cranenbroek , Senior News Editor

"Many economists remain stuck in an inexorable growth narrative, or at best a 'green growth' narrative," Ireland's president Michael D Higgins said recently. 

This "fixation", he added, has made the economic discipline "blinkered to the ecological challenge – the ecological catastrophe – we now face."

For centuries, economic growth has been the north star followed by nations, promising prosperity. Traditionally measured by calculating the change in a country's gross domestic product (GDP), growth has since then been equated with economic wellbeing. 

The subtext is that if output grows, a country is doing well. If production stalls, alarm bells go off.

Increasingly, prominent economists and politicians have started to question whether the infinite growth model makes sense at all on a planet with finite resources.

Could it be that the drive for endless economic growth has turned the world into a snake eating its own tail? And if the infinite growth model is unsustainable, what alternatives could policymakers pursue?

The limits of GDP as a metric

"GDP reflects a harmful anachronism at the heart of global policymaking," says United Nations Secretary-General António Guterres on LinkedIn. 

"Our economic models and measurements overlook many aspects that sustain life and contribute to human wellbeing, while perversely placing disproportionate value on activities that deplete the planet."

Portugal's former prime minister is a leading voice on climate change who is continuously speaking up about its potentially devastating impact and urging global decision-makers to act more decisively to mitigate its effects. But earlier this month Guterres received support from what many considered an unexpected quarter.

Speaking to the Financial Times, European Central Bank board member Frank Elderson called the need to protect biodiversity "core economics". No less than 72% of eurozone companies are in some way exposed to biodiversity loss. "Destroy nature and you destroy the economy," Elderson said. 

Therein lies the rub. Nature's role as supplier of essential resources for human living as well as industrial activities is largely taken for granted in current economic models. 

That's despite the fact that more than half of the global economy is "moderately or highly dependent on nature and its services". The amount of natural capital used by companies for free amounts to €7tn per year, according to an estimate by environmental consultancy Trucost, and has created an economy in which "businesses privatise profits and publicise costs".

Still, others point out that GDP does have merit, but that these figures should not be looked at in isolation. Some economists say that GDP is a good measure of economic activity but does not offer an accurate picture of economic and social wellbeing for which other metrics may be more suitable.

So, instead of treating it as the one and only gauge, it should be one of many when doing economic health checks.

"GDP is a useful indicator to track economic developments, but it's not the only indicator that we need to look at," writes Kristalina Georgieva , Managing Director at the International Monetary Fund, in an email to LinkedIn News Europe. "As with all indicators, we need to be clear what they measure when interpreting outcomes or projections.

"Building a new fossil-fuel power-generation plant is an investment that increases today's GDP. But looking longer term, the resulting pollution will impact people's health and quality of life, and accelerate climate change that will likely reduce GDP. We need to revisit and update definitions of indicators when circumstances change or when new questions arise."

From GDP+ to life as a doughnut

The need to move beyond GDP as a metric, which essentially reduces economies to market caps on a stock exchange, is evident.

But it hasn't proved so easy to come up with an alternative for the economic growth model. "Green growth", touted by some as a more responsible way of striving for economic expansion, does not address the core issue of limiting growth full stop and staying within nature's boundaries. 

Then there's doughnut economics, thought up by economist Kate Raworth, which is about limiting growth to allow for the regeneration of natural resources and focusing instead on distributing wealth fairly.

If the economy were a doughnut, the doughnut hole represents life without having basic needs met. The inner circle is what the world generally views as minimum living standards: things like clean water, food, sanitation, but also housing, education, and healthcare. The outer ring is the maximum of growth that can be achieved without breaking the planet's ecological ceiling.

The theory currently leaves it up to policymakers to navigate a course between the inner and outer rings and stay inside the "dough". But translating a grand vision into a workable blueprint is hard. The doughnut model has been tested by the city of Amsterdam, but it has yet to report major improvements.

New Zealand announced a "wellbeing budget" in 2019 in which the country deprioritised GDP and started checking general welfare through some 60 indicators, including water quality, trust in institutions, and loneliness. The new system, however, has been dubbed "overly complex" and progress in many areas has been slow.

Bhutan introduced the concept "gross national happiness" in the 1970s, and keeps a close eye on public mood. The country tracks nine domains, 33 indicators and hundreds of variables but if global happiness rankings are anything to go by, then the policy has not lived up to its implied goal.

That said, doughnut economics, and initiatives like New Zealand's wellbeing budget, or Bhutan's gross national happiness index are welcome invitations to try something new and move beyond, in the Irish president's parlance, the "obsession" with economic growth. 

In the meantime, there may be ways to de-emphasise GDP as the be-all and end-all of economic policy, or, at the very least, add some important additional metrics that provide a more holistic view of a country's wellbeing.

"We need a paradigm shift in what we measure as progress, so that we can capture data on the activities and outcomes that societies truly value, and then use the data to better inform our policy and financial decisions," suggests Guterres.

Georgieva agrees. She says the IMF is working on closing data gaps so that policymakers have relevant information about future costs and benefits at hand when making decisions.

"The IMF has a very significant programme geared at rethinking how the functioning of the economy is measured, including looking into carbon intensity, vulnerability to climate shocks – indicators that expand our understanding beyond GDP," Georgieva says.