How do we measure a nation's growth - The Growth Delusion

The Book

After reading about 23 things, they don't tell you about Capitalism. Instead, I develop a yearning to read about Capitalism and finance, especially after working in finance and doing short courses. I would like to say and believe that I have a more than average knowledge of it. However, it will seem that everything was not necessary as we have been made to believe, and we have all been lied to and deceived over the years by our governments and some brilliant people  - like Alan Greenspan (Chair of the Federal Reserve of the United States from 1987 to 2006.) and some others. Maybe I am hard on them because they were telling us what they believed to be the truth, as they were apologetic when it turned out not to be so. With the technocrats and the financial wizards who had developed complex algorithms that will detect any changes in the market immediately, we put our faith in them. They had complex financial instruments that were hedged. Either way, the underline entity of any financial transaction was covered, protected, and insured. People had so much confidence in the financial markets and that it would correct themselves that Gordon Brown, the then Chancellor of the Exchequer (Minister of Finance) - later Prime Minister announced the end of "Boom and Bust" in Parliament in 1997.

David Pilling

David Pilling is the author of this book and is the current African editor of the Financial Times. He was previously Asia editor, and his column ranges over business, investment, politics, and economics.

He joined the FT in 1990 and has worked in London as an editor in Chile and Argentina as a correspondent and covered the global pharmaceutical and biotechnology industry.

Gordon Brown

Most of us believe that the increase in GDP in many countries is synonymous with an increase in their economy. But underneath, we knew something was wrong despite what the experts told us otherwise. Wages were not increasing for the middle class and only for the wealthy - i.e. the top 1%. Things were also getting more expensive. Jobs were moving overseas from advanced countries to the developing world. People were becoming angrier and angrier .... the populist was gaining in every sphere, and UKIP, BNP, and other far-right and far-left parties were increasing. We were told there was the belief that the market would always correct itself, and we should allow it. All the laws and regulations put in place since the great depression to protect us were repealed or modified (Glass-Steagall Act Repealed) over the years. It turns out the world was running on debt (and credit cards) - and it seemed Chinese debt, the cycle of Chinese buying US Treasury bonds to finance the US buying evermore things being made in China.

GDP is the Gross Domestic Product. The GDP is the total expenditure of the economy. The total expenditure includes consumer spending, government spending, investment, and net exports. For a GDP to be maintained, there has to be continuous production. For an industry to continuously produce, there has to be a demand for that particular product, hence continuous consumption. Companies are incentivised to make things that break or can't be maintained but replaced. This model is unsustainable over time, but it is pushed by advertising, social pressure, and culture. The problem is that the GDP is average and says nothing about the level of inequality in a society. Other things it does not consider include crime, the informal sector, etc. With increasing inequality, the result is skewed, with the top 1% seeing their wealth or portion of the economy increase by a factor of four. At the same time, the rest have become poorer relatively. GDP says nothing about which services, technology and products are available. Also, it did not discriminate between the cause, i.e. it could be rebuilding construction after a devastation war, hurricane, crime wave, etc. It could be people spending more on the rising fear of crime, buying burglar bars and alarms and beefing up security. Also, there is a lot of stuff not counted and goes under the radar, general health, quality of education, second-hand goods, private transfer or payments, illegal business activity, unreported legal activity, intermediate goods, informal business activity, etc.

Cheated Monkeys

Happiness is a relative term as it depends on others and what you see. Happiness is not directly proportional to GDP. When people are working harder for an increase in GDP but are constantly stressed and tensed. Does having more money make you happier, or is it dependent on the people around you? Capuchin monkeys who have been seen to be reasonably happy and contented with cucumbers after doing a simple role become frustrated and angry when they feel that they should have received sweeter grapes, as researchers in Atlanta, the US, found out. Hence, most of the time, it depends on our environment and what is happening, and a situation where only the top 1% get richer will lead to problems.

Hence, the measure of the growth of wealth of a nation is measured as a new term. We have the Domesday book, which recorded in 1086 everything in England, and after the Norman Conquest, as a means of raising the tax. Usually, the kings did not need to know whether the nation's economy was growing or not. They just wanted to know whether they could raise money for war, hence giving them more money - and that is how nations grew their economy in the fixed agrarian pre-industrial economies by conquering more land and getting more subjects to pay tax.

The author reminded us of the saying, "if you cannot measure it, then you cannot manage it". Hence African countries with a variety of degrees of success. It is hard to obtain accurate statistics due to a large informal sector and "lack of institutional capacity". One way in developing countries is to measure light intensity via satellite, which has been found to correlate well with GDP. The GDP has done well, but it should not be alone in measuring the economy's growth. Another thing is that they measured the GDP and other parameters and believed that people are living on less than $1 a day - using the old method and not calculating the informal sector. But they found out that most people had access to mobile phones, and there were a lot of credits based on these. If they used the western way of calculating GDP, many people would be starving or dead. Hence, it seems their financial model was not correct. By applying some creative accounting estimation, they found that Nigeria's economy increased by more than 65% and overtook South Africa, now becoming Africa's biggest economy.

Also, how do we measure development? The GDP is excellent but does not measure the environmental damages, like pollution? China has been damaging its country due to its rapid rise in GDP. "In cities, you have wastewater from measure development, the GDP is great but does not measure the environment sewage, shops, factories, and agriculture, which add other pollutants like persistent organics and heavy metals. It's usually not fit for drinking or crops," explains Dr Wolfgang Kinzelbach from the Institute of Environmental Engineering in Zurich, Switzerland, an expert on China's water management. But China is extreme. The question is whether we should use only the GDP for development. 




In the middle of the Pacific are some islands known as the Easter Island, and when the Europeans arrived on Easter Day, 1722, they were confronted by substantial massive statues. They believed they would meet a vast and advanced civilisation responsible for these massive monuments. But all they met was a few people living in squalor and neglect who were living as fishermen and hunter-gathers. So what happened to this once vibrant civilisation? It is now believed that it is to do with their resources. "They ate all the food, cut down all the trees, and were left to squabble over the remaining scraps. With no more trees left, they couldn't build boats to leave the island and look for more food. So they fell into war and cannibalism, leaving only a few thousand people to greet the Europeans." That is a warning to us!

The answer is although GDP is important other things are as well. As countries develop, they should not take their eyes off the ball. Instead, they should protect their natural resources and limit the damage as alternatives always exist. These might be costly in the short term but brings in more money, substantive growth and benefits in the long term.