Wednesday, February 10, 2016

The GDP Obsession

A few days ago the Central Statistics Office (CSO), declared the GDP for the period October to December 2015. India grew by 7.3% they said. Looking at the quarterly results of listed companies, it's hard to believe the 7.3% number, but that's another story for some other day. This post is to express my views on the concept of GDP itself.
The gross domestic product, (GDP), is today blindly used as a standard measure of success by every one- from the economist to the politician. It can be such a misused tool in the hands of the politicians, that the Indian government last year tweaked the formula to calculate the GDP so that the numbers showed the government performance in better light .
GDP counts the value of goods and services made in a country each year. But it has a glaring problem, it leaves out some really important facets of reality. For starters, GDP doesn’t account for the unequal and unfair distribution of wealth or look at how healthy, satisfied, or fulfilled people are. That’s why the GDP of India has grown at more than 5% and China's by more than 10% for years while the incomes of its workers have not grown in the same time period—the wealth has got stuck at one spot in the system.
But the biggest problem with how the GDP is calculated is that the true ecological and social costs of growth are not accounted for. Industries are usually permitted to “externalize costs,” which is a fancy phrase economists use to describe the fact that, while companies are busy producing and selling goods, they’re not paying for, or even tracking the side-effects they cause, like contaminating groundwater, exposing communities to carcinogens, or polluting the air.
So GDP counts activities that cause pollution and cancer (such as factories making pesticides or PVC) as well as activities to clean up that pollution and treat the cancer (such as environmental remediation and medical care), there is no deduction in the GDP for the pollution released into the air, soil or water or the loss of a forest.
I read a very interesting, but true story in the book Deep Economy by Bill McKibben which highlights the failure of GDP to measure success: "for years in Africa, the non-native water hyacinth was clogging waterways, and herbicides had done nothing to solve the problem. Then someone discovered that dried water hyacinth made great material for growing highly nutritious mushrooms, and that when the mushrooms broke down the cellulose in the hyacinths, it made a great medium for earthworms. The worms chomped that down and created high-quality fertilizer, then were themselves feed for chickens. The chickens, of course, provided people with eggs, while their droppings could be used to fuel biogas digesters that produced power, and this reduced the need to cut down more trees for firewood from the already deforested regions in that part of Africa. Because monetary transactions—like the purchase of fertilizer—were reduced, a solution like this actually shows up on a measure like GDP as diminished growth"- Shocking, but true. Yet it’s clear to anyone with eyes, a brain, and a heart that the hyacinth-mushroom-worm-chicken solution is true progress: healthy and sensible.
So in a blind race to compete for a higher GDP we are completely ignoring the effects it is having on our environment. As I experienced the air in China, during my short visits there, I have come to believe that GDP is gross destructive product rather than gross domestic product.

Have a nice day.