Felipe Curcó – The Post-COVID World needs a Better Way to Measure Economic Growth

Focusing on GDP and economic gains produces distortions in public policies aimed at alleviating basic social needs, especially in emerging economies.

Felipe Curcó Cobo  a full time associate professor and researcher at the Academic Department of Political Science at ITAM (Mexico)

Cross-posted from Open Democracy

One of the countless changes that the Covid-19 (SARS-Cov-2) pandemic will cause in the world will be the way in which we measure the economic health of nations. It will become increasingly evident, especially in the developing world, that GDP measures the size of the economy, but not necessarily the prosperity or the progress of a country. Not only that, but an exaggerated emphasis on using only GDP and economic gains to measure development leads to ignoring the negative effects that GDP has on society. It causes deep distortions in the design of public policies that attempt to alleviate basic social needs, especially in the case of emerging economies.

Counterproductivity: a new category essential for analysis

We owe it to Ivan Illich the creation of one of the most important categories of analysis of our time: the concept of counterproductivity. Counterproductivity describes a phenomenon typical of unregulated markets and late post-industrialization. It points to the fact that, after crossing a certain threshold, institutions, tools, and even economic activity produce negative effects that run contrary to what was originally expected to be gained from such institutions, tools or activities.

Illich presented transport as an example of counterproductivity. While originally designed to improve mobility, once a certain limit is reached motorized transport not only fails to reduce, but instead increases the amount of social time dedicated to mobility. The invention of the automobile also led to a certain kind of urban design which, in turn, eliminated the autonomous act of transporting oneself using one’s own two feet. If the intention of the automobile was to increase our autonomy of transport, it ended up being the exact opposite.

Education, Illich said, is another example. While originally conceived to promote integration and social mobility, education can be a commodity that only a few can afford (as is usually the case in developing countries) and, therefore, a factor of discrimination rather than of social integration.

Counterproductivity, GDP and economic progress

To focus exclusively in GDP and economic gain to measure development and to design public policy is counterproductive, as it ignores the negative effects that economic growth have on society, such as climate change, environmental costs, and income inequality. As Joseph Stiglitz said in Davos: “What we measure informs what we do. And if we’re measuring the wrong thing, we’re going to do the wrong thing”.

For example: GDP considers the cars we produce, but it does not consider the emissions they generate. It adds the value of sugary drinks sold, but it does not account for the number of cases of diabetes and their cost for public health. Among countries with similarly sized economies, it does not consider the cost in terms of the discontent generated by social inequality, as measured by the Gini index.

At the same time, GDP ignores highly productive, cost-reducing activities that nonetheless are not part of its calculation. Among such are household chores (like cooking, doing the laundry, ironing or sewing one’s own clothes) or the contributions of many economic activities to society apart from formal, remunerated work. This causes GDP to create numerous accounting paradoxes: the 2008 earthquake that struck the Sichuan province in China, leaving the area in ruins and killing over 80,000 people, actually increased the measured economic growth in the region, since the physical destruction of homes and buildings does not count against the GDP (even though it takes into account the personal and commercial income loss of those who, for example, lost a business).

Several countries have, therefore, taken steps towards adjusting the manner in which they measure their economic performance. On June 2, 1974, in his coronation speech, the king of Bhutan, Jigme Singye Wangchuck, stated that “Gross National Happiness is more important than Gross Domestic Product”. Ever since, Gross National happiness (GNH) has been the guiding the principle of Bhutan policy and its model of development. India, for example, has also long been working on an Ease of Living Index, which measures quality of life, economic capacity, and sustainability.

The counterproductive recipe for the developing world

The idea of progress based on GDP has proved to be disastrous for developing countries. As it is well-known, its origin dates to the post-war Keynesian mentality and the recipe that recommends strengthening the internal market as an indispensable requirement for economic reactivation. We can summarize this logic in this way: for capitalist economy to work adequately, the processes of accumulation (savings and investments) need to be invested in new productive capacity. The increase in productive capacity translates into higher employment. Higher employment leads to higher income. Higher income creates a market with more purchasing power and consumption capacity, which in turn favors productive investment, leading to the expansion of the cycle.

By following this logic, the usual diagnosis is that what is missing in the internal market of developing countries is a greater effective demand. That is why public policy in those countries aims to stimulate said demand. Such erroneous logic assumes that there can be no progress in the Keynesian circle unless farmers, blue-collar workers and impoverished groups can be assured a purchasing power similar to that of the middle class so that both may buy the same things and strengthen the internal market.

That, however, takes time. It is not possible to lift millions out of poverty and turn them into middle class overnight, so the only option left to the developing world has been to attempt to integrate the market of its national middle class with the greater international market of the middle classes of developed countries, promoting economic integration and an increase in exportations. But such policies, far from strengthening the internal markets of developing countries, have weakened them. What would be needed, then, to bolster the internal markets of emerging economies?

Subsistence economy after COVID-19

For an internal market to grow, effective demand is necessary, but not sufficient. An effective supply is also required. For Jean-Baptiste-Say’s law (known as Say’s Law) to work (“Supply creates its own demand”), it is necessary not only for potential consumers to have the resources to acquire the goods that the market supplies, but the goods that the market supplies also need to correspond to the needs of the most vulnerable, marginalized groups. “Just as, from the point of view of demand, effectivity means having money”, writes Gabriel Zaid, “from the point of view of supply, effectivity means pertinence”. In other words: the obsession with economic growth generates a perverse counterproductive effect when the market only supplies products that do not satisfy real needs, but products that either create more needs than they solve or else are aimed at satisfying interests that do not alleviate the most pressing demands of the population.

Regarding the needs of the population of poor countries as a whole, the global supply of goods is an utter failure. A market that supplies smart televisions, cars, computers, or 5G for cellular phones to a population that for the most part requires drinkable water, food, clothes and basic means of sustenance, is a market that suffers from serious flaws and distortions. A new configuration of timely supply aimed at meeting the needs of the impoverished sectors would work a true economic miracle.

Concluding remarks

The mere fact of rethinking consumption as the foremost national economic issue would change many things, starting with the way problems and solutions are formulated. Avoiding counterproductivity would require economic policy to adapt to the logic of consumption: people need to be adequately fed so they can be clothed, they need to be clothed before they can be offered a car, and so on.

Maximizing Gross Happiness or Ease of Living, as is suggested by the indexes set forth in Bhutan and India, is all well and good, but first we need to specify, in practical terms, how this can be achieved.

A suitable offer for a poor market must focus on providing cheap means of production for the creation of basic goods. For example: bolstering production and the domestic economy does not count toward GDP, but it can have a tremendous impact on the development and well-being of families. Such is the case of domestic, sustenance economy and agriculture (e.g., cultivating small home gardens in plots or pots), as well as the supply of the means and resources that would allow at-risk populations to fend for themselves (instead of offering them luxury products that have nothing to do with their real and urgent needs).

Such strategies involve offering appropriate means of production so that people can grow food, cook, sew clothes and build houses for themselves outside of the exchange relationships of the market, especially when operating within the market is counterproductive for the family economy.

That means breaking free of the dogma of the unconditional value of economies of scale, as well as of the fanaticism of continuing to foster standards of unlimited consumption that are impossible to satisfy. Without a doubt, there are alternative methods for increasing well-being beyond the expansive logic implied in the circles of production and consumption. The COVID-19 pandemic will require new ways of understanding and measuring economic health. The need to reconstruct the world economy demands, now more than ever, that political economy does not sidestep the discussion of how to generate new models of development that are not counterproductive.

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