We should be able to agree, without much contention, that the ultimate objective and role of Government is to improve the well-being of society; to make people’s lives better. Every decision made should, from conception to implementation, have this purpose in mind.
However, across the world, with very few exceptions, Governments have used a metric to determine policy and make decisions, which was never designed to measure or achieve this objective: Gross Domestic Product (‘GDP’). GDP is perhaps amongst the most widespread ‘accidents’ of political decision-making and world governance.
The modern concept of GDP was introduced in 1934 in a report drafted by Simon Kuznets for the US Senate, in the years following the Great Depression and the First World War and in the lead-up to the Second World War.
In the years that followed, and in particular after the Bretton Woods Agreement of 1944, GDP saw widespread adoption around the world in measuring countries’ economies. Over time, Governments used it to determine the success of their economic policies and as a proxy for the measurement of societal welfare. The use of GDP in isolation is, however, at best misleading and at worst completely void of logic.
It probably sounds absurd, because its adoption has been widespread and normalised over generations, but even Kuznets in his initial report to the US Senate warned against its use as a measure of welfare. Nobel-laureate economists Joseph Stiglitz and Amartya Sen said that “those attempting to guide the economy and our societies are like pilots trying to steer a course without a reliable compass.”
To put it another way, it’s like using the number of successful passes made in a football match as the sole measure of the success of a manager’s strategy. The primary objective of a manager’s strategy (other than perhaps entertainment) is not to accumulate the highest number of passes, but to win by getting the ball across the line more times than the opposition. So, to devise a strategy aimed at achieving something other than that can only be illogical and destined to fail.
This might sound trivial, and admittedly it’s over-simplifying the issue; but it illustrates how incorrect the use of GDP alone is in determining policy and in measuring its success against the purpose of Government. As already mentioned, GDP was designed to be a measure of economic activity, and not of well-being.
Whilst ‘well-being’ is a concept that is somewhat mercurial and difficult to define, we should all be able to agree quite easily that economic activity is not the only contributor to societal welfare.
To use an extreme but factual example that highlights one of its many flaws, GDP considers the consumption of cigarettes and fossil fuels as positive contributors. Clearly, this is a fallacy. There are several components that contribute to an individual’s and by extension a community’s well-being which extend far beyond the measuring capacity of GDP alone. And yet, since the late 1930s, Governments have used it almost exclusively to guide their decision-making and to determine the success of those decisions.
When GDP is used as the sole barometer of a country’s success, it becomes easy to justify policy-decisions which whilst increasing economic activity might run contrary to the improved collective welfare of a society. Renowned Israeli writer Yuval Noal Harari, author of Homo Deus, draws on this when he says that “production is important because it provides the material basis for happiness. But it is only the means, not the end”.
And this is a fundamental point. Take the construction industry, for instance, as a typical example. Real estate contributed ca. 7.5% to Malta’s GDP in 2018, a statistic often used to exemplify its critical importance to our existence. Taken in a vacuum, GDP growth can reasonably justify policy decisions that seek to protect and promote the industry indiscriminately. But GDP does not factor in the negative implications of the industry on societal wellbeing; the permanent loss of green areas, the increased pressure on our infrastructure, noise pollution, dust pollution leading to the increased prevalence of asthma, and many other negative implications.
In short, it simply does not make sense to use GDP in isolation to determine the contribution of an industry or an activity on society. To determine the true net contribution, whether positive or negative, we must factor in the other costs (or benefits) of an industry like real estate.
To be clear, this is not about abandoning the role of economic activity, far from it. Instead, it is about loosening the grip of GDP on the minds of decision-makers in favour of guiding principles that are actually designed to address the purpose of Government. Policy based on this alternate guiding principle will place emphasis, in addition to GDP, on contributors to well-being such as health status, social connections, civic engagement and governance, environmental quality, work-life balance, housing and others.
Industries like real estate will need to show how they can contribute to the overall well-being of society in order to rank amongst the priorities of Government. This kind of policy will naturally pull economic activity towards that which is the least intensive on our limited infrastructure, and which contributes most to the long-term health of society. The difficulty that many experts have found is in attributing an equally simple metric that factors in all facets of well-being. As a result, the move away from GDP has been slow.
Still, we are seeing a gradual shift taking place, with countries like New Zealand taking the lead. In 2019, the Government launched the first ‘well-being budget’, which effectively dethroned GDP as the measure of its success. Ministries are expected to incorporate the wellbeing-based priorities in each of their bids to the Ministry of Finance for budget allocation. New Zealand has been consistently in the headlines for all the right reasons, this being one of them. Perhaps it is time for Maltese politics to follow suit.
Luke Frendo, is a Maltese lawyer with Frendo Advisory and has a background in international business management and identifying risks for financial institutions.
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