MYSay: GDP should no longer be the only measure of progress

This article first appeared in Forum, The Edge Malaysia Weekly, on September 28, 2020 - October 04, 2020.
MYSay: GDP should no longer be the only measure of progress
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One of the main lines of attack taken by the opposition in the run-up to many elections, including ours, is the low gross domestic product (GDP) growth under the incumbent. While this may seem to be an intelligent argument in a political campaign, it also unfortunately reflects a long-standing misconception about economic success among political leaders and decision-makers.

In the 70 years and more since Bretton Woods, GDP — developed in 1934 and reformulated in the 1940s by John Maynard Keynes — has been the sine qua non of economic progress, used by governments almost entirely as a benchmark of progress and to compare the quality of life in different countries.

Guided by success stories in Latin America and East Asia, it became the central goal of economic policy in the high noon era of free trade and industrialisation in the 1980s through to the 1990s. Numerous books and articles were published to hail the lessons of the “East Asian Miracle” to promote pro-growth and pro-

business policies. Even the World Bank decided to commission research to explain the miraculous feat. It quickly became the best-selling publication in the bank’s history.

Such focus on growth is not entirely misplaced. A rising tide lifts all boats. Much of the social gain — poverty alleviation, job creation and increase in wages — can be attributed to economic growth.

For most of the last three decades, the average earnings of the bottom 50% have nearly doubled. World Bank data shows that the number of those living in extreme poverty has dropped by more than half since 1990, from nearly two billion to around 700 million.

In Malaysia, the poverty rate dropped from almost 50% in 1970 to below 2% by end-2010, while the income of the bottom 40% increased by 33 times from RM76 in the 1970s to RM2,537 in recent years.

But there is a limit to growth. It evaporates. It shifts from one region to another. In the decade before the 21st century, Malaysia was a high-growth centre for Southeast Asia. At the turn of the century, the baton was passed to Vietnam. The change happens not just because of economic crisis, but for a variety of reasons that economists have been unable to explain.

Mexico and South Korea both experienced a period of high growth and the deep end of the financial crisis in the 1990s. Today, South Korea is a member of the rich nations’ club, while the former remains trapped in middle income status.

Apart from its fickle nature, GDP is an incomplete barometer of progress. It takes into account the number of factories and the growth of industries, but ignores, for example, the environmental degradation they cause. It includes public consumption in its overall calculation, but does not discount the amount of debt accumulated to fuel the spending. And in a more recent case, it celebrates the phenomenal growth in profits for glove makers in the time of Covid-19, without regard to the reprehensible wages these companies pay to their workers. In short, GDP only measures the size of the economy, not its well-being.

As I traverse the land of Sabah during the state election, the shortcomings of GDP as a yardstick of economic performance are even more striking. As the political opponents argue, its economy indeed grew from 4.6% to 8.2% in 2016 and 2017, and for the 10 years prior, GDP was averaging 7.6%. Yet, any visitor to Sabah can see how the high percentage levels have little to do with realities on the ground.

Kota Kinabalu is probably the only city outside Kuala Lumpur that can boast the presence of most of the international hotel and residential brands, indicating the high demand for luxury accommodation and properties in the city. But a news report chronicled how the whole population in a village had to walk for three hours to get access to clean water. As the need for online learning due to the pandemic recently revealed, about half of the students in the state do not have access to internet, smartphones or gadgets. With a Gini coefficient of 0.402, it is no surprise that Sabah is the most unequal state in Malaysia.

This incongruity calls for a more comprehensive metric to drive policymaking and a policy paradigm that growth is not the end but the means to the overall well-being of the people. There have been attempts by institutions and governments to introduce new frameworks to measure overall well-being. The Organisation for Economic Co-operation and Development (OECD) has developed the Better Lives Index as an additional marker of progress and quality of life.

Malaysia, to its credit, publishes its own Well-being Index. But these indices will not have a meaningful impact or change the way we design policies without a departure from our model that prioritises economic growth.

After all, it was the inventor of GDP himself, Simon Kuznets, who in 1934 cautioned against using GDP growth as an indication of economic health and well-being.

Nazim Rahman works in private equity and is head of the Asia Parliamentary Network on the World Bank and IMF’s secretariat

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