New measures of prosperity: The case against GDP

By Kusum Wijetilleke

In Sri Lanka and abroad, Gross Domestic Product (GDP), an essential national index used to measure economic growth and analyse relative prosperity, has taken on connotations perhaps beyond what was intended within the boundaries of national politics. At present, it seems common sense to assume that higher GDP translates to a more prosperous nation and populace. 

Nobel Prize-winning American Economist Simon Kuznets, the architect of GDP, stated in 1934 that “the welfare of a nation can scarcely be inferred from a measurement of national income”. Consider that the US has 3.5 million truck drivers, the most common job in 29 states. Self-driving technology, by all accounts, is closer than ever to fully automating what is presently a gruelling job involving long hours and immense stress. Automated trucks will be exponentially more efficient, as there will be no need to rest between long haul drives; this is what incentivises technological development. There are billions in savings to be had, approximately $ 300 billion annually by some estimates from the US alone. 

The efficiencies created by autonomous mass transportation will reflect positively on GDP and a host of other economic indicators. Yet, within this calculus in the US, there is substantive research that automation will not only impact the 3.5 million directly employed, but also the 7 million employed around the country in the service sector that depend on foot traffic created by mass-haul transportation. The average truck driver is a 45-year-old male, usually ex-military; not the ideal demographic for reskilling.

A focus on GDP and similarly obtuse measurements such as unemployment will only further confuse policy proposals. The recent pandemic has led to food shortages, unemployment, and a shrinking of disposable incomes and savings across the western world, as well as Sri Lanka, coinciding with record stock market gains and corporate profits. Many conglomerates, export-oriented businesses, and financial sectors have performed exceptionally well. Despite the low interest rate regime prevalent through much of 2020 and 2021, banks were able to improve their Year-on-Year (YoY) net interest income margins. This means that the benefits of cheaper funds were not passed down to customers, thereby providing relief to the masses. Instead, the benefits were focused on profits after tax (PAT) and earnings per share. 

One of Sri Lanka’s top industrialists revealed that his group of businesses are designed in such a way that it will generate net income, regardless of economic issues, due to exceptionally strategised diversification. 

Sri Lanka, since the new regime came to power, has introduced some of the lowest corporate tax rates in Southeast Asia, with government revenue and corporate tax as a percentage of government revenue at historic lows. There have also been no substantial salary adjustments or increments to match the increased costs to consumers due to inflation, supply shortages, and currency volatility. Stagnant wages are a danger to sustained growth, and Sri Lanka must incentivise the private sector to increase salaries and benefits, which will have a knock-on effect on other facets of Sri Lanka’s consumer economy. 

As per available data, Sri Lanka’s unemployment grew to 5.7% in March 2021, up from 5.2% in December 2020. This figure refers to those that are unemployed but are seeking employment opportunities. 

However, this definition is extremely misleading. Consider the US economy post-2008/2009; the period under President Obama’s two terms, which by some estimates was the longest continuous economic expansion in history, an expansion that largely continued under President Trump. Interestingly, President Trump, as a candidate in 2016, was highly critical of the unemployment figures published by the Obama administration, repeatedly calling them a “hoax” and claiming the real unemployment figure to be around 37%. Candidate Trump, though he exaggerated the figures, did in fact have a point. The unemployment figure commonly used worldwide is called the U3 unemployment rate, but this does not measure, for example, those that were unsuccessful in finding work over a one year period. Nor does it include those that work part-time but would like to work full-time (under-employed). This still fails to include people who have dropped out of the labour force altogether: the labour force participation rates. The most comprehensive measure of unemployment would include most of these variables, what economists call the U6 unemployment rate. 

This shows that basic measures of an economy could be misleading. President Obama stressed towards the end of his final term that perhaps it was not the number of jobs being created that was crucial, but the nature of the work and the benefits one receives; a forewarning about the dangers of the “gig economy”.

Thus, if a country formulates its economic policy based on flawed or incomplete measurements, the proposals will fail to create a sustainable economy. The Sri Lankan economy will grow, as per GDP measures, when more roads and bridges are built, when infrastructure is developed. Does this provide real benefits to Sri Lankans, or improve standards of living and quality of life? Perhaps, at the margins, and perhaps through increased employment, but note that many infrastructure projects in Sri Lanka include foreign labour. Sri Lanka can set its policy proposals based on GDP and unemployment, but it risks leaving a large swathe of people behind in a state of economic paralysis, unable to improve their socio-economic conditions, but being constantly reminded that the country is prosperous.

Considering the unionised worker movements taking place around the country, from nurses to farmers to teachers to engineers, the Sri Lankan working class is waking up. Every political manifesto claims to value and develop Sri Lanka’s human resource, to improve education and outcomes, to enhance availability of affordable higher education. Yet Sri Lanka has consistently had one of the lowest expenditures on education as a percentage of GDP compared to peer countries. 

Andrew Yang, a little known American businessman, entrepreneur, and philanthropist, made an audacious but ultimately futile attempt at a candidacy to challenge Donald Trump in 2020. Surprisingly, while Yang did not pick up any delegates, his campaign outlasted and out-performed those of seasoned politicians with national name recognition, including sitting senators Cory Booker and current Vice President Kamala Harris; Yang even won more votes in Harris’ home state of California. Yang ran on a varied platform, part of which was to establish a new set of measurements to calculate economic and social prosperity. On the trail, Yang would often tell the crowds that they were living in times of unprecedented growth, record high GDP, stock market growth, and corporate profits, but he would ask: “What else is at record highs?” The answers were stunning; the US, by 2020 had recorded three consecutive years of declining life expectancy; record financial destitutions, high levels of anxiety, depression, and suicides, and record levels of foreclosures and evictions, none of which were really showing up in the GDP and unemployment measures that people see on CNN

Yang proposed that the US should measure success and growth using alternate methods, for example, children’s education outcomes, freedom from substance abuse, how many people are starting families, how clean the air or drinking water is, median household income growth, care facilities for the elderly, and protecting women and girls from physical and sexual abuse. These human-centred measurements will help us derive policy that actually improves the day-to-day lives as well as longer term outcomes of the people that make up the economy. This admittedly dramatic shift in economic measurements will require meeting its own set of challenges, specifically improving the data available on several crucial factors. 

Every country, whether large or small, has its own set of structural issues that affect its economy and thus, its people. The technological revolution will pose its own set of problems for the US. A 2020 research paper conducted by the University of Washington, published in The Lancet, projected that China’s population will halve by 2100 to around 730 million, a major structural and demographic challenge for the Chinese Communist Party (CCP). The CCP has already begun taking steps to remedy this through a change to its family planning policy. 

Similarly, Sri Lanka must move away from measuring our country against other nations through GDP and similar indicators. India is a great example which proves that high GDP growth and industrialisation does not always lead to higher standards of living across socio-economic segments. Any future Sri Lankan administration will have to reposition our goals to achieve this new set of outcomes, and it is certainly time that we cease allowing GDP to skew our national priorities. 

(The writer has over a decade of experience in the banking sector after completing a degree in accounting and finance. He has completed a Masters in International Relations and is currently reading for a PhD at the University of Colombo. He is also a freelance writer and researcher, and can be reached on email: and Twitter: @kusumw)

Source: CBSL