Beyond GDP: Rethinking How We Measure Economic Success

For many years, the most common way to evaluate a country's economic success was to look at its gross domestic product, or GDP. However, wealth distribution, quality of life, and environmental sustainability are not taken into consideration by GDP, which primarily calculates the total value of products and services generated. This narrow focus raises the question: Are traditional metrics like GDP enough to gauge true societal progress? This blog explores alternative measures such as the Human Development Index (HDI), Multidimensional Poverty Index (MPI), and Gross National Happiness (GNH), examines case studies of countries adopting these metrics, and discusses whether policymakers should shift towards well-being-focused indicators.​

Limitations of GDP as a Measure of Economic Success

Despite offering a glimpse of economic activity, GDP has some important drawbacks:

1. Distribution of Wealth: While GDP totalises economic activity, it does not disclose the distribution of wealth among the general population. Significant income disparity can coexist with a high GDP, concealing differences in living standards.

2. Quality of Life: GDP doesn't consider factors like health, education, and environmental quality, which are crucial for overall well-being.

3. Sustainability: GDP growth can result from activities that deplete natural resources or harm the environment, leading to long-term negative consequences.

Alternative Measures of Economic and Social Progress

To address these shortcomings, several alternative metrics have been developed. The United Nations Development Programme (UNDP) introduced the Human Development Index (HDI), which provides a more comprehensive assessment of human development by combining data on life expectancy, education level, and per capita income. The UNDP also created the Multidimensional Poverty Index (MPI), which provides a more nuanced perspective on poverty than income-based metrics alone by taking into account a variety of deprivations in living conditions, health, and education.

Bhutan pioneered the concept of Gross National Happiness (GNH), which emphasises holistic development over merely economic growth and measures progress based on elements including psychological well-being, cultural diversity, and ecological resilience. The Organisation for Economic Co-operation and Development (OECD) introduced the OECD Better Life Index, which compares well-being across nations according to factors like housing, income, employment, community, education, environment, governance, health, life satisfaction, safety, and work-life balance. Lastly, the Happy Planet Index (HPI), created by the New Economics Foundation, evaluates sustainable well-being by taking into account ecological footprint, life expectancy, and experienced well-being.

Case Studies: Moving Beyond GDP

Several countries have adopted these alternative metrics to better reflect their citizens' well-being. Bhutan, which has promoted the Gross National Happiness (GNH) index since the 1970s, is among the most well-known instances. Bhutan's policies are influenced by variables like ecological resilience, cultural preservation, and psychological well-being rather than just economic productivity. This alternate strategy has produced sustainable economic policies that put social welfare and environmental preservation first, guaranteeing that growth doesn't come at the expense of the welfare of the country.

With the introduction of a Wellbeing Budget in 2019, New Zealand has also become a pioneer in this movement. In contrast to traditional economic planning, which places a higher priority on GDP development, New Zealand's budget distributes funds according to metrics including environmental sustainability, child welfare, and mental health. Instead of concentrating only on output and income generation, this change in fiscal policy shows an effort to better match economic decisions with social concerns.

The United Kingdom has also been exploring new economic measures. The UK’s Office for National Statistics has been developing a more comprehensive approach to assessing national progress, referred to as inclusive income. This measure integrates non-monetary contributions to economic activity, such as housework, renewable energy, and voluntary childcare. The initiative reflects a growing recognition that traditional GDP calculations overlook significant elements of economic value that contribute to social well-being and long-term sustainability.

Should Policymakers Adopt Well-Being-Focused Metrics?

There is a strong argument for policymakers to reconsider their approach to economic planning given the growing reliance on well-being-focused measures. It would be possible to design policies that are more comprehensive and guarantee that economic advancement results in actual improvements in people's quality of life if GDP were no longer the primary indicator of success. Governments can create policies that support social justice and long-term stability rather than immediate financial advantages by taking into account more comprehensive metrics like income distribution, environmental sustainability, and health results.

The potential to promote sustainability is an additional benefit of implementing alternative approaches. Policymakers are more inclined to support measures that preserve natural resources, lower carbon emissions, and advance green energy solutions when they place equal weight on ecological well-being and economic performance. Failure to incorporate sustainability into economic models puts nations at danger of long-term environmental deterioration that could impede future development.

Despite the benefits, transitioning away from GDP as the primary economic metric is not without its challenges. Unlike GDP, which provides a clear and universally accepted measure of economic output, well-being indicators are more complex and difficult to standardise across countries. There is also the risk that governments might selectively use alternative indicators to justify policy decisions, potentially leading to inconsistencies in how success is measured. However, as more nations experiment with these new frameworks, global efforts to develop reliable and comparable well-being indicators could pave the way for a more meaningful and inclusive approach to economic assessment.

Even if GDP is still a vital economic indicator, it is becoming more and more evident that it does not give a whole picture of a nation's development. Smarter policymaking and a more successful society for all could result from a more balanced approach that incorporates sustainability and well-being metrics with traditional economic statistics.

Conclusion

While GDP has been a longstanding indicator of economic performance, it's inability to capture the full spectrum of human well-being necessitates the adoption of alternative metrics. By embracing measures like HDI, MPI, GNH, and others, policymakers can better assess and promote the true progress of societies, ensuring that economic growth translates into improved quality of life for all citizens.

References:

United Nations Development Programme (UNDP), 2024. Human Development Index (HDI). [online] Available at: https://hdr.undp.org/data-center/human-development-index#/indicies/HDI 

Organisation for Economic Co-operation and Development (OECD), 2024. Bhutan’s Gross National Happiness (GNH) Index. [online] Available at: https://www.oecd.org/en/publications/well-being-knowledge-exchange-platform-kep_93d45d63-en/bhutan-s-gross-national-happiness-gnh-index_ff75e0a9-en.html

Organisation for Economic Co-operation and Development (OECD), 2024. OECD Better Life Index. [online] Available at: https://www.oecdbetterlifeindex.org/#/11111111111

Wikipedia, 2024. Happy Planet Index. [online] Available at: https://en.wikipedia.org/wiki/Happy_Planet_Index

New Zealand Treasury, 2022. Wellbeing Budget 2022. [online] Available at: https://www.treasury.govt.nz/sites/default/files/2022-05/b22-wellbeing-budget.pdf 

The Guardian, 2024. Inclusive income: The rival to GDP for measuring economic growth. [online] Available at: https://www.theguardian.com/business/2024/nov/19/inclusive-income-rival-gdp-measuring-economic-growth