GDP, the economic illusion

A country with high rate of GDP growth is mostly regarded as economically healthy. But is it on the right track of development? Is the growth sustainable? Is GDP a good indicator of prosperity? Is this really the best we can do?

We always think of economic growth in term of GDP - short for Gross Domestic Product. It is basically the total amount of outputs produced domestically by a nation, mostly measured in annual term. GDP is measured in USD. Then we have GDP per capita or GDP per person (GDP divided by total population). These are the most prevalent economic indicators used to date to identify the stage of development in which a country situated. The downside of using GDP  to measure development is the fact that it forces people to think of development with reference only to its monetary value. For instance, when a country reaches a certain cut-off, they will move up the rank from, say, low-income nation to lower-middle-income nation, and as a result, most would think that it is now better off. Though this is true in economic sense, this type of classification still misleads our judgement of what development really is.

First of all, development should be clearly defined so to prevent confusion. Development is not about climbing up towards the status of high-income country. Development is not entirely about increasing the GDP. It should not be just about a nation's wealth. Development is the improvement of the general well-being of the people. We do not just want a developed country, but a well-developed country.

So GDP is certainly overrated. GDP is the aggregation of the monetary value of consumption, investment, government spending and net export (export - import). None of its components involves equity, equality, justice, freedom, institutional efficacy, transparency, accountability, health, education, general level of satisfaction, and the list goes on. It does not say anything about income inequality, racial discrimination, corruption, educational inefficacy, etc. GDP might be a good indicator for the aggregate economic growth of a country, but its strength as a development indicator is only moderate, if not weak. 

Imagine this scenario in which a country, Narnia, (with a population of 100) has GDP per capita of $2000. That means that an average Narnian earns about $2000 annually. That is not too bad actually. But what if I tell you that 50 Narnian generates as much as $3900 per year, and the other 50 can manage to earn only $100 per year. Shocking? You should not be. $2000 is the mean income. In fact, you can try doing the math.

$2000 = total income (GDP)/100 = ($3900x50 + $100x50)/100

As mentioned, the calculation does not say anything about the wealthy half of the country and the much poorer half. This much contrast within the society results in what we call "social disparity" (a broad term), or to be more specific, "income inequality".

This is why the United Nation developed another development indicator known as Human Development Index (HDI) comprising income, health and education as its elements. This is far from a perfect determinant of development, but still, it is better than solely measuring growth with total output (GDP).

We are constantly seeking a more holistic approach in measuring a country's overall development, especially the welfare of its people. Believe it or not, aside from the HDI, in Bhutan, they have something called GNH or Gross National Happiness (yes, it has been officially used in Bhutan). It is an attempt to determine living standard or life quality by looking beyond the conventional economic measurement of GDP. I guess happiness is a good enough indicator? Who knows?

So the next time you hear Narnia brags about its GDP growth, remember that GDP does not say much about the country. Try asking Aslan about Narnia's Narnian Development Index (Human Development Index) or its GNH, Gross Narnian Happiness. If the scores are too low, you can just return, close the wardrobe, lock it, and never go back. Because now you know that Narnia is not a happy land for you to conquer!