Elsewhere in this edition of Acumen, we talk to Professor Lorenzo Fioramonti about his new book, Wellbeing Economy – Success in a World without Growth. In it, Fioramonti argues that GDP growth is a deeply flawed measure of economic progress that encourages destructive as well as constructive activity. We invited GIBS’ Professor of Economics, Finance and Strategy to comment on Fioramonti’s ideas.
When it comes to setting goals and assessing the performance of a country, or more specifically the performance of a country’s economy, the barometer that is applied in almost every instance is growth in gross domestic product (GDP). Such growth is widely regarded as the primary way of measuring and assessing the performance of an economy and in setting goals in terms of economic objectives.
When it comes to South Africa, the goal that has been set is well known. It’s captured in the National Development Plan (NDP), where the objective is 5.4% economic growth per year. The argument is that if the economy is able to achieve and sustain growth of this order then this would correspond to, or manifest in, the transformation of the economy and broad-based improvement in social well-being.
It’s not governments or policymakers that are alone in emphasising economic growth. Ratings agencies also are fans of economic growth as a way of assessing the prospects, health and success of a country’s economy and its society. If we take South Africa’s position, it’s widely established that the ratings agencies have downgraded South Africa in part because of sluggish economic growth. In fact, a rule of thumb runs that ratings agencies look for an economy to achieve economic growth of one percent ahead of population growth. In short, by a wide set of standards, economic growth counts as a front-and-centre factor in assessing the performance of an economy.
If growth matters so much, then the evidence that comes from the recent performance of the South African economy is deeply concerning. Since 2012 economic growth has steadily ratcheted lower and has sat below population growth for three years running. To add to this parlous state, at the end of 2016 and the start of 2017, economic growth went negative taking the South African economy into recession.
When it comes to broad-based evidence, there’s no doubt that growth matters. Indeed, when we look at the relationship between economic growth and things that correspond with the wellbeing of societies, a strong relationship exists between economic growth, income per person, employment rates, human development indices and general socioeconomic wellbeing. Of this set, human development indices are a good illustrator of the relationship between economic growth and wellbeing, because human development indices capture not just income per person but also measure other important aspects like female participation in the labour force, unemployment rates, the number of doctors per person, infant mortality rates, education levels, safety and security, life expectancy and much more. If we take the relationship, then, between human development indices and GDP per person, which is the result of economic growth, the result points to a strong positive correlation. This reinforces the argument for setting economic growth as a primary objective in terms of national policy and a country’s developmental imperative.
Notwithstanding these arguments and evidence, in his book Wellbeing Economy, Professor Fioramonti puts a question mark over the central role that we give to economic growth in setting policy and in measuring the performance of an economy. His argument is that whilst growth might matter, there are many key aspects that are lost or misinterpreted, ignored or overlooked and miscalibrated, in measuring growth in GDP and the size of the economy.
To explain, economic growth might be recorded as a high number, but this could be the consequence of an extractive or unsustainable industry. Forcing a commercial fish stock into extinction, destroying a timber plantation or pulling ore out of the ground are all examples of extraction that would be recorded by statisticians measuring economic growth as a positive contribution, yet are destructive and unsustainable. If we look around the world, we find some standout examples of countries whose growth or economy is influenced disproportionately by extractive industries: chief amongst them, Chile, Australia, Brazil, Russia and South Africa.
To put a second aspect into the pot: the activity might not be extractive or depletive, but it might be “bad”. For instance, building jails, the activity of divorce lawyers, and efforts to hide a commercial crime would all count as contributions to economic growth because they would represent activity, but it’s fair to argue that high incarceration rates, societies filled with litigative action and businesses that are filled with hidden commercial crimes are not good outcomes for society. Yet the statistics for GDP growth would faithfully measure and record this activity as being a contribution which would then translate into higher incomes per person. This really is a perverse outcome.
Another way in which we need to be careful in using economic growth as a primary guide is that growth can be exclusive and unequal. To explain this point, we could have an economy that runs along at 5% growth per year and, in the fullness of time, that would compound into a larger economy. But then the statisticians take this total figure and divide it by the size of the population to measure “income per person” as if everyone in the population is average. Yet we know from every society that there’s no instance in which incomes and opportunities are spread equally and proportionally. Therefore, growth needs not only to be “sustainable” and “good”, but it also needs to be “inclusive”.
The idea that we need to be cautious about using economic growth as a primary guide is not new. The late Bobby Kennedy, as far back as 1968, reminded us that America’s gross national product “counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them…It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities…[It] does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning…it measures everything in short, except that which makes life worthwhile.”
This leaves us with a requirement that we rethink this factor that we have put front and centre, as if it is the objective to achieve in driving and measuring the performance and success of a society. To return to Lorenzo Fioramonti, he argues that economic growth needs to shift its emphasis and its attention away from “more of what we have” and in favour of what he refers to as “the wellbeing economy”. Where a wellbeing economy, by definition, is adaptive, which means it learns by doing, it can change and transform itself from extractive to inclusive, that it’s integrative, that it recognises the various components and parts and aspects that make up the whole, that it is empowering and that it is equitable.
This better definition of prosperity and improved approach to measuring progress points us to some intriguing prospects. An example of activity that goes in the direction of wellbeing is that of Norwegian chemicals group Yara, which has just announced a battery-powered, zero-emissions, fully autonomous cargo ship to replace some 40 000 diesel truck journeys made annually to take fertiliser from its plant to the port. Another example is Costa Rica which has pledged to be carbon neutral by 2021. Incidentally, Costa Rica’s per person income is similar to South Africa yet its wellbeing is ranked as amongst the highest in the world. As a last point, we should not forget the mountain kingdom of Bhutan, which has replaced the measurement of gross national product with the measurement of gross national happiness.
The pursuit of growth cannot be for growth’s sake but needs to be growth for the greater good.
“...there’s no doubt that growth matters”
“It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities”