The Church in Malta has commissioned a study on a set of indicators that would go beyond the GDP, which three leading economists approached by whoswho.mt agree is an imperfect yardstick and could even be misleading.
Over the past good 80 years, Mr Fabri explains, economic growth has been the primary goal of economic policy, and the principal measure of an economy’s success. The world went through a sustained long-term trajectory of rising income levels, employment and investment. However, he points out, the strains of this model started becoming more visible with increasing inequalities, lower scores of well-being, environmental degradation and a general dissatisfaction with the economic model.
These developments, the co-Founding Partner of Seed Consultancy, noted do not mean that economic growth should be abandoned as a goal of economic policy but they force attention to the form of economic growth that a country experiences and aims to achieve. It is not enough for GDP to be rising if the underlying patterns of growth are generating significant damage at the same time, Mr Fabri remarks, adding that it is the type of economic activity that matters.
“This is why I strongly believe that politicians and policymakers need to go beyond growth and GDP. They need to ensure that, alongside rising GDP – and as a result of it – economic policy is achieving a wider set of objectives and measures of economic and social progress. We can no longer rely on economic growth on its own to make our societies better off.
“Economic policymaking objectives need to be centred around four main aims: environmental sustainability, rising well-being, falling inequality and system resilience. Countries that seek to achieve these four goals, rather than giving overwhelming priority to growth, will experience a more balanced path of economic and social development, with fairer outcomes for both current and future generations,” he maintains.
The economist notes that this concept has started to be felt in international policymaking with terms such as ‘inclusive growth’ and ‘green growth’ being used more frequently. However, he thinks there is now need to ensure that such concepts move from being just buzzwords to actual policy practices and, to this end, there are three crucial actions that need to be taken for this to happen.
The first is the adoption of a wider set of primary economic indicators to guide policymaking. Mr Fabri remarks that it is now well known that GDP is not a good measure of overall economic performance and, therefore, there is need for a broader set of indicators to show the story behind the numbers. However, he continues, the adoption of a set of indicators is not sufficient on its own because they have to become the accepted measures of the success of economic policymaking.
“Going ‘beyond growth’ needs to be an explicit political aim, in turn reflected in a new public narrative and discourse on the nature of economic and social progress. For this to happen, the level of national debate needs to reflect this and it is the duty of the business community, civil society, political parties and the media to ensure that the country is thinking beyond growth and GDP,” Mr Fabri insists.
He reveals that his consultancy firm, Seed, is involved in a research project spearheaded by the Justice and Peace Commission of the Archdiocese of Malta that is aimed at looking at a set of indicators beyond GDP.
He insists it is crucial that the new economic indicators are attached to policies designed to improve them for is no use adopting a new measure of performance but then not having the mechanisms to influence it.
Joseph F.X. Zahra
Mr Zahra, Director of corporate and HR consulting firm, SurgeAdvisory, and a former chairman of Bank of Valletta, notes that the GDP became an official tool to measure the economic health of a country soon after World War II when countries were devasted by the rampage of war and the main concern was that of getting the economies back on their feet and measuring their annual performance. As such, he points out, it is a proven economic tool that serves the objective of measuring economic performance whether it is in the movement of expenditure, production or incomes but it is not a measure of human and social well-being or welfare.
In his view, the pandemic that the world is going through at the moment proves the point. The world’s wealthiest country, the USA, has the largest number of infections and deaths, much higher than that of a country considered to be an emerging economy such as India. Economic progress is underscoring other variables in the matrix that reflect the quality of life in society, welfare and general well-being.
“GDP measures can, therefore, be misleading if we are trying to read in them things they do not measure. The risk is that as a country strives to improve on the measured GDP the actions could, in fact, lower society’s well-being," the economist explains.
He cites some examples: the sustainability of current consumption, dysfunctional employment opportunities through the growth of the gig-economy, the divide between the “financial economy” and the “real economy” (take the case of London and the whole of England), the effect of globalisation and inequalities within society. He also mentions the growth in violence, corruption and fraud as countries focus on economic growth with the false idea that this will improve the welfare of the country.
The problem is that short-termism and single focus on economic growth robs future generations of a better quality of life, Mr Zahra cautions. By disregarding climate change and global warming and making bad decisions on health and education, posterity will be burdened with ill-health and ignorance, he continues, noting that the investments in this sector will still show up in the annual GDP.
The number of deaths due to the pandemic in high GDP countries (the USA, the UK, Italy) is also a result of wrong decisions in the health and elderly care sectors made in the past, he observes.
“The GDP is an economic measure, and the economy is a tool to achieve human and social progress and development. It is, therefore, misleading to rely only on this tool. The problem is that, so far, no agreement has been reached on a single measure that goes beyond economic matrices, adding sustainability, environment, society as other factors.
“Sadly, economies can grow at the expense of inequality, environmental decay and the decline of rule of law,” Mr Zahra asserts.
There is ample evidence and authoritative literature that GDP measurements are a very imperfect yardstick of well-being, Mr Mifsud says, classifying main imperfections under four headings: inequality, quality of life, zero price activities and bad work.
He remarks that the GDP fails to identify issues of inequality. If economic growth, no matter how high, flows to a select few who can use their economic power to gain political influence to advance their rent seeking operations, the country’s overall economic well-being would bear no correlation to the GDP numbers.
The GDP does not capture quality of life issues like the number of annual holidays, working week hours, and environmental damage through pollution (in all its dimensions: air, sea, light and sound).
Neither does it capture zero price activities even though, Mr Mifsud notes, they could make a significant contribution to a country’s well-being. Own work, the black economy and free digital services like social media are not captured. Also, barter activities prevalent in developing economies do not get reflected in the GDP numbers.
On the contrary, the GDP captures priced services, even if they produce nothing new. For example, repair work after natural disasters boost GDP even though, in reality, nothing new is being added to grow the economy.
The former chairman of Mid-Med Bank and former Deputy Governor of the Central Bank of Malta notes there have been many suggestions of how GDP should be amplified or extended to give a better reflection of the well-being it purports to represent. Many of these included quality of life add-ons or subtractions.
Adds-ons would include high longevity, low poverty measures, generous holidays and low working hours. Subtractions would take into account the obverse measures as well as environmental degradation, grave inequality issues and lack of social cohesion.
Suggestions have also been made to include non-priced activities in GDP measurements.
“The difficulty to agree on widely acceptable criteria for such often subjective add-ons and subtractions mean that we have to continue relying on traditional GDP statistics while producing other measures that would have to act as a backdrop for interpreting the GDP numbers,” Mr Mifsud says.