Financial and Monetary Systems

The growing disconnect between GDP and wellbeing

Anantha Duraiappah
Executive Director, International Human Dimensions Programme on Global Environmental Change (IHDP)
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Financial and Monetary Systems

The link between economic growth and human well-being seems obvious. Indeed, as measured by gross domestic product, economic growth is widely viewed as the ultimate development objective. But it is time to rethink this approach.

In fact, there is a rising disconnect between countries’ per capita GDP and their citizens’ well-being, as rapid output growth exacerbates health challenges and erodes environmental conditions. Given this, people increasingly value non-material wealth just as highly as monetary wealth, if not more.

But persuading policy-makers and politicians of GDP’s limitations is no easy feat. After all, it is far simpler to defend a well-understood, long-accepted framework than it is to champion a new world view.

To be sure, GDP provides valuable information about a country’s production, expenditure and income streams, as well as the flow of goods across borders. Moreover, it has provided crucial guidance to countries, helping them to track economic gains that have improved citizens’ quality of life considerably – in many cases, lifting them out of destitution.

But GDP fails to account for changes in a country’s stock of assets, making it difficult for policy-makers to balance economic, social and environmental concerns. Without better measures of well-being – including health, education and the state of the natural environment – policy-makers cannot gain the insight needed to ensure the long-term health of the economy and the individuals who comprise it.

This imperative underpins the concept of “sustainable development”, which has gradually gained acceptance since its introduction in the mid-1980s. But, even as countries have recognized the need for a more comprehensive understanding of development, they have largely retained GDP growth as their central objective. This has to change. Even US-based Nobel Laureate Simon Kuznets, the depression-era father of GDP, said in 1934 that “the welfare of a nation can scarcely be inferred from a measure of national income.”

The good news is that a robust, simple and effective framework for measuring sustainability already exists. Developed by a group of leading economists, including Nobel Laureate Kenneth Arrow and Partha Dasgupta of the University of Cambridge, it assesses an economy’s income flows in the context of its stocks of assets, including human and natural capital. In other words, it accounts for the economy’s productive base, rather than just its monetary wealth.

Based on this framework, United Nations University and the UN Environment Programme unveiled the Inclusive Wealth Report (IWR) at the 2012 Earth Summit in Rio de Janeiro. By providing a long-term comparison between GDP and “inclusive wealth” for 20 countries, the report aimed to motivate policy-makers to take a more comprehensive, longer-term view of their economies’ development.

This November, a second IWR will be released, with many more countries represented and a stronger focus on human capital in national-account indicators. To this end, collaborating experts will convene in Malaysia this month for a series of meetings, culminating in a public symposium entitled Beyond Gross Domestic Product – Transitioning into Sustainability.

Transforming the world’s understanding of economic development requires a dynamic approach. Experts in various fields – including economics, sociology, psychology and the natural sciences – must work together to develop an integrated suite of indicators that provides a comprehensive picture of humanity’s productive base, on which people’s ability to pursue their interpretation of success depends. While final decisions should rest with policy-makers and citizens, the process must be guided by the best available science, uncompromised by political demands or vested interests.

Moreover, one fundamental truth must be recognized: the planet cannot accommodate high-income status for all 7 billion of its inhabitants. For every country to attain per capita GDP of $13,000 (which, according to the World Bank, delineates high-income status), global GDP would need to rise from roughly $72 trillion today to $91 trillion. If, however, we already use the equivalent of 1.5 Earths to provide the resources we consume and to absorb our waste, the planet can sustainably support a GDP of only $48 trillion to $50 trillion.

And if the planet already exceeds its sustainable carrying capacity, we should be reducing our demands on it – not adding new ones. Simply put, we can no longer depend on GDP growth, and the limitless wealth accumulation that it implies, to solve our social and economic problems.

The world must align its value systems with this reality. We must learn to do more with less, decouple economic growth from resource consumption and nurture the social and spiritual aspects of our existence.

This shift will be impossible without fundamental changes in our education systems, political structures and institutions. It is a tall order, but our future depends on fulfilling it.

Authors: Zakri Abdul Hamid is a member of the UN Secretary-General’s Scientific Advisory Board and Science Adviser to the Prime Minister of Malaysia; Anantha Duraiappah is Executive Director of the International Human Dimensions Program on Global Environmental Change.

Image: An employee works at a garment factory in China, July 15, 2013. REUTERS/Stringer

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Related topics:
Financial and Monetary SystemsEconomic ProgressFuture of the Environment
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