Moving Away From GDP: Suggestions for Metrics to Assess Economic Performance

Gross Domestic Product (GDP) is, most certainly, an important yardstick for the economic performance of a country. Economists, policy makers, and central banks use GDP to gauge the health of the economy and direct fiscal and monetary policies to boost it.

GDP, along with unemployment rate, are some of the most popular metrics discussed in newspapers and on cable news. Political pundits and lobbyists use GDP to buttress positions, especially on immigration.

Despite the high esteem GDP figures are held to in media and political circles, politicians rarely mention this metric while campaigning for public office. This makes common sense, as GDP figures have very little bearing on the lives of ordinary citizens. At a macro level, rising GDP figures might speak of a productive and growing economy, but the benefits don’t necessarily seem to trickle down to enhance the well-being of the average Joe and Jane. The employment of the word ‘trickle’ should not be construed as a call for a heated debate on ‘trickle-down theory.’

China’s 2016 GDP was estimated to be around $11 trillion, close to two-thirds of that of the US, which was estimated to be in the vicinity of $18.5 trillion. Third on the totem pole was Japan, just shy of the $5 trillion mark. But neither does China fare well than the US in areas of individual liberties and economic freedom, nor does it outdo Japan in securing prosperity and welfare for its masses.

The same principle can be applied in cases of India and Russia, both of which finish above The Netherlands, Switzerland, Australia, and all of the Nordic countries.

Perhaps, a rising GDP and other such titular accomplishments, like undertaking the cheapest Mars mission in the world, aren’t issues to gather around and feel cheery. Perhaps, there are other subtle factors that maximize individual liberties, create wealth, bring prosperity, and provide opportunities to individuals to better their socio-economic condition over time.

Most important of all of these subtle and not oft discussed factors, is economic freedom. Simply put, economic freedom, as conceived in the work of Adam Smith and defended through the efforts of Milton Friedman, is the ability of members of society to trade freely with one another, to buy and sell at prices determined by markets, and to own and defend private property. All of this set within a diligently enforced legal framework constitutes economic freedom and makes up the central idea of Laissez-faire.

Economic freedom dovetails with prosperity and growth, as illustrated in Adam Smith’s ‘The Wealth of Nations’ – a landmark work in the field of classical economics. When people pursue their economic interests in a market free of government intervention and undue regulation, thus, resulting in mutually agreed exchanges, not only do the individuals benefit, but also a greater good emerges.

This ‘greater good’ manifests in the form of a highly industrialized, organized, wealthy, and prosperous society, where resources are plentiful and life for the ordinary citizen is livable.

More importantly, a Laissez-faire arrangement provides its partakers with opportunities to better their socio-economic condition.

The Heritage Foundation, every year, releases an index of economic freedom, based on twelve qualitative and quantitative factors, grouped into 4 categories: Rule of Law, Government Size, Regulatory Efficiency, and Open Markets. Countries are ranked by the net average of their scores on each of the twelve factors.

In the 2017 edition of the economic freedom index, the countries that are designated ‘free’ and ‘mostly free’ are all, but for a few exceptions, developed, industrialized, and provide a high standard of living and superior quality of life to their citizens. The countries that are labeled ‘mostly unfree’ have become hotbeds for economic misery, social problems, poverty, corruption, and offer their citizens an inferior quality of life. Much worse is the predicament of those countries that are grouped under the ‘repressed’ label.

The United Nations Development Programme, each year, publishes a Human Development Report (HDR) which exposits and measures human development in different countries around the globe. The report acknowledges that income growth is a means to an end – individual development – than an end in itself. It works off of the conviction that people’s ability to better their lives, the abundance of opportunities, and the freedom to make beneficial choices lead to human development over time.

The HDR publishes the Human Development Index (HDI) – an attempt to quantify the development potential of a country. While not comprehensive and deeply insightful, the index is a composite measure of life expectancy, access to education, and standard of living that people of a certain country get to enjoy. Gross National Income (GNI), which is one of the dimensions of the index, enters the index in its logarithmic form. This is done to indicate the diminishing ability of increase in income to spur human capabilities.

A close comparison of the GDP and HDI rankings reveals some incredible findings.

  1. Except the US, Canada, and Germany, none of the countries that make the top ten on the GDP rankings, makes it into the top ten on the HDI rankings. Iceland, which finishes 9th on HDI, is placed at 105 on GDP, below Sudan, Algeria, Kenya, and even Yemen.
  1. The BRIC economies – Brazil, Russia, India, and China – that are among the top fifteen by GDP don’t make the cut on HDI. In fact, India, the worst performer in the bloc, is ranked under ‘medium’ category on HDI.
  1. With the exception of a few petrodollar economies and a few developed Asian countries, most of the top 50 entries on HDI, categorized under ‘very high development,’ are western, industrialized, developed economies. Only 21 of these nations make it to the top 50 on the GDP rankings.

This undergirds the initial premise that while a rising GDP heralds a growing national economy, the benefits of this growth rarely reach the masses; and that certain other factors like opportunities and freedom of choice determine the well being and prosperity of individual citizens.

Businesses are the heart of an economy. Not only do they create valuable goods and services, they also create jobs, catalyze innovation, create affordability through competition, and help raise revenues for the government through taxes. Even more important is the role of small - and medium - sized enterprises (SMEs), which account for more than half of formal jobs created across the world. SMEs also hold keys to solutions for development issues like energy, clean water, sanitation, and education in third world countries

Thus, it should follow that countries, regardless of the stage of development, should encourage entrepreneurship and create a business friendly environment, not just for large international businesses, but also SMEs.

The World Bank, in 2002, started a project to quantitatively measure business environments in 190 countries and rank them based on their ease of doing business. It is no wonder that the top 50 entries are packed with mostly developed, high- and upper-middle income economies of Europe and North America. A similar trend can be seen in innovation according to the Global Innovative Index.

Entrepreneurship, innovation, and commerce cannot thrive without trade. Trade helps exchange not only goods and services, but also capital, know-how, business culture, and ideas. It also opens up business opportunities abroad for domestic businesses, while the entry of foreign businesses enriches the markets with a variety of goods, sparks competition, lowers prices, and creates jobs in the local economy.

It’s no surprise that countries that have encouraged open trade have flourished over time, while those that have pushed back against it have penalized their people with economic suffering. The Enabling Trade Index (ETI) published by the World Economic Forum illustrates this very fact: wealthier, more prosperous countries also happen to be the staunchest promoters of trade, while the ones who hold a feeble or antithetical position on trade also happen to be poorer.

So far, the suggested metrics have yielded an approximately homogenous trend, providing far better insights, than a cursory and obfuscating metric like GDP can, into an economy’s potential to deliver progress and welfare for its citizens.

The pièce de résistance, however, of this verbose article is the index of global migration flows. As Milton Friedman put it, to judge a country’s economy empirically, we only need to see how people vote with their feet; that is to say whether people are leaving a nation, like rats off a sinking ship, or are clamoring to get in.

In a report, accompanied by a brilliant infographic, released by The Wittgenstein Centre for Democracy and Global Human Capital, investigators estimated immigration and emigration by regions and countries. Looking at the recent estimates (2005 – 2010), one would be hardly surprised to see a net influx for most European countries along with the US and Canada, while a net efflux for South Asian nations and many African, East Asian, South-east Asian, and Latin American countries.

Gross Domestic Product (GDP) is just part of the story of economic growth; the real narrative, however, rests in the subtleties of every day life for the average individual. These subtleties are determined by the degree of economic freedom, the abundance of opportunities, the freedom to choose, the support for entrepreneurship and enterprise, and the openness to trade; all of which lead to prosperity, growth, wealth creation, and a high degree of social mobility. Migratory flows remain a firm testament as to whether an economy provides its people with sufficient freedom, resources, and choices to better themselves.

Saurabh Malkar

An ex-dentist and a business graduate who is greatly influenced by American conservatism and western values. Having born and brought up in a non-western, third world country, he provides an ‘outside-in’ view on western values. As a budding writer and analyst, he is very much stoked about western culture and looks forward to expound and learn more.

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