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What an Obsession with GDP Denotes

Amiya Kumar Bagchi (amiya.bagchi@gmail.com) is Professor Emeritus at the Institute of Development Studies, Kolkata, and Adjunct Professor, Monash University, Melbourne.

The World after GDP: Economics, Politics and International Relations in the Post-Growth Era by Lorenzo Fioramonti, Cambridge, UK and Malden, US: Polity Press, 2017; pp viii +276, £15.99 (pb)/£50 (hb).

Lorenzo Fioramonti’s book is a well-grounded assault on the fetishism of international development agencies, governments, and run-of-the-mill economists. The book starts with the illustration of Nauru, a tiny island state in Micronesia, which its “discoverer” Captain John Fearn described as a “pleasant island.” Things began to change after World WarII, when it was found that the island contained a large reservoir of one of the purest grades of phosphate in the world. Its exploitation catapulted Nauru to a nation with one of the highest per capita incomes in the world. However, in its rush to “develop,” the Government of Nauru overexploited the mines and destroyed the local flora and fauna. In its scramble to protect its income, Nauru turned itself into a tax haven and money laundering centre like the Bahamas and Jersey Island.

With no visible economic opportunities, broken infrastructure, ecological mayhem and a dishevelled education system, mass emigration is the only long-term option for Naurians, most of whom have sought better economic opportunities in New Zealand and Australia (p 4).

Inadequacies of GDP

The rise of the gross domestic product (GDP) ideology can be traced back to William Petty, the 17th-century polymath who designed the political arithmetic with which he measured the wealth of Ireland and Britain, among others. The idea of measuring national wealth received a further boost from Adam Smith with his concept of national dividend. Conjoined was the concept of accumulation, the proportion of which to the national dividend provided a measure of the drivers of economic growth.

Today’s apparatus of measuring GDP, however, owes its origin to Simon Kuznets, who presented his system of national accounts to the United States (US) senate in 1934. Kuznets was building on the pioneering work of Colin Clark in the 1930s in the United Kingdom (UK). Parallel work was conducted in the UK by James Meade followed by Richard Stone in the 1940s. All these scholars were profoundly influenced by John Maynard Keynes and his macroeconomic approach to economic policy. During World War II, national accounts were systematically used to monitor the supply of war materials and the civilian economy, both in the US and UK. National accounts were also used to motivate fiscal policy, of which Keynes’s How to Pay for the War (1940) is an outstanding example. Interestingly enough, for all its brutal authoritarianism, Nazi Germany failed to develop a proper system of national accounting and its war economy was far more disorganised than that of the Allies and had, therefore, to depend on the savage exploitation of the occupied countries.

After World War II, in most of the West European countries—whether social democratic or Christian democratic—national accounts were used to rationally allocate fiscal resources on such heads as old-age insurance, health insurance, unemployment insurance, education, old-age pensions, and healthcare. During the Cold War, along with the measurement of military forces, the GDP also became an index of the relative strength of the potential combatants. One basic reason for the collapse of the Soviet Union was that it could not match either the military or the economic power of the Western Bloc.

Long before the end of the Cold War, with the end of the dollar’s connection with gold, the social welfare measures in most West European countries came to be greatly attenuated. Conflict with workers was leading to a decline in the profitability of business and in a counter-attack, pro-business governments largely succeeded in dismantling trade union power.

In the new era with unabated inter-capitalist competition, the growth of GDP became the primary measure of success and GDP attained its status of a monomeasure of economic achievement.

Neo-liberal ideology has pervaded not only the countries of the West, but also most of the third world countries. Part of it has been embraced even by communist China, except that there the state plays a major role in guiding the market while state enterprises continue to play a major role in the domestic economy and even more, in investments abroad. In China, too, GDP growth was the main driver of economic policy although there have been efforts to rein in soaring inequality by spending more money on public services and directing investments away from the coastal region.

Fioramonti points out that the obsession with GDP and marketability not only distorts values, downgrading qualities like sympathy, sociability, and willingness to engage in collective action, but also erects boundaries about what counts as productive, thereby excluding activities like unpaid childcare and other domestic work, including do-it-yourself maintenance and repair work. The usual GDP also hides costs, such as environmental degradation caused by the excessive use of polluting non-renewable resources and the tolls on workers’ health under insanitary and insecure conditions. The costs are also unequally shared between poor and rich countries, marked by a tendency to shift polluting industries to lower-wage, poor countries with the eager cooperation of the rulers of the latter. The author points out that Kuznets
himself had warned about the limitations of GDP as a measure of human welfare. He wanted not only to subtract the depreciation of machinery and buildings from GDP, but also the wear and tear of people engaged in work.

The first attempt to correct the GDP, by including excluded variables, was made by William Nordhaus and James Tobin “in the 1970s when they developed an index called the Index of Economic Welfare, which ‘corrected’ GDP by the economic contribution of households and by excluding ‘bad’ transactions, such as military expenses and what they called ‘the disamenities of urbanisation,’ which included some environmental impacts” (p 77). The battle against the conventional GDP was taken further by feminist scholars who insisted that the GDP must account for women’s unpaid work such as childcare, cooking and performing other household chores.

Another major defect of the GDP is its neglect of income distribution. In recent times, economists working on the Human Development Index (HDI), besides including indexes of women’s empowerment, longevity, infant mortality and so on, have also constructed an inequality-adjusted index of both the HDI and the GDP.

Inefficiencies of GDP

The economies that pursue GDP growth at the cost of everything else suffer from manifold inefficiencies. First and foremost is the inability to tackle income distribution either at the domestic or the international level. Second, it fails to tackle the environment costs of blinded economic growth. Third, it pays no attention to the social costs such as the wear and tear of human beings in the workplace in unsafe domestic environments and insanitary conditions of living and work.

Table 3.1 (p 89) gives the hidden costs of the GDP economy: top environmental costs (US billion $) in 2009 prices. By far the highest costs are recorded by coal power generation in East Asia ($452.8 billion) and cattle ranching and farming in South America ($353.8 billion). However, since the population of South America (422.5 million) is larger than that of the US (323.1 million), in per capita terms the US generates higher costs. The disparity is much greater when compared with East Asia, because the population of China alone is 1,378 million, that is, more than four times that of the US. With almost the same natural cost, the US coal power industry generates nearly 30 times the revenue of the South American ranching industry, thus underscoring the enormous gulf between the first world and the third world.

Some analysts have described the modern corporation as an “externalising machine,” appropriating profits while benefiting from an institutional system that neglects overall costs which are ultimately socialised through additional taxation, climate change adaptation, and rising inequalities. (p 91)

At the same time, the author emphasises that environmental costs are just one kind of loss excluded by GDP:

Social costs are equally important. All forms of centralised production, indeed tend to increase negative social effects, including long-distance commuting and fragmentation of the workforce: important factors that lead to alienation. Top–down structures are also likely to trigger inequalities, with economies of scale separating managerial and operational roles and salary gaps widening dramatically. (p 95)

Figure 3.2 (p 96) shows that globally while the difference (in per capita terms) between nominal costs and environmentally adjusted costs was one-third of the former, by 2002 it had increased to 60% of the former. In fact, alarmingly, from around 1978, the environmentally adjusted cost had flattened out to 60% of nominal GDP.

Fioramonti points out, as many other perceptive analysts have observed, that behind the concept of the GDP lies the idea of man as Homo economicus: that man is concerned only with his own utility, to the exclusion of all other considerations. A similar objection has been raised by Amartya Sen (1977), indicating that this concept leaves out extremely important areas of human motivation and behaviour, namely sympathy and commitment. For instance, while we may never have been subject to torture, we would be likely to protest it and take appropriate action against it. Similarly, because of our commitment to our family and friends, we are willing to make sacrifices even though it may diminish our utility in a narrow sense. The same thing may apply to our commitment to a cause such as patriotism, socialism, etc. Why else have millions been willing to die in defence of their homeland or in the course of a revolution? The concept of the self-centred economic man has been extended to that of the household, but there the decision-maker is supposed to embody the collective welfare of all the members of the family—a patently absurd assumption.

The GDP man only exists in so far as he works and spends. He dislikes pure leisure, unless it is priced and commercialised. For the GDP man, time spent in the family or in the local community is wasted because it does not count for development and growth. (p 97)

Since the GDP man counts anything he owns as his exclusive private property, he has no compunctions in polluting the environment. In fact, R H Coase, one of the chief proponents of deregulated markets, in the so-called Coase theorem (1960) advanced the argument that the polluter and the victim of pollution can negotiate with each other and come to an amicable solution. Apart from the fact that this fallacious theorem disregards the fact that there can be no parity of economic power between a Maruti Suzuki and a Haryana farmer, this solution would keep the pollution intact.

The GDP man is also at the heart of the tragedy of commons as Garrett Hardin (1968) pointed out. If there is free access to common resources such as a forest, pasture, fishing ground or underground water, it is likely to be overexploited. The market can tackle this problem only by closing access to the common property barring a few, whereas the state can solve this problem by regulating access and imposing conditions of use. However, in many cases, especially in rural areas, the community has been able to act as the coordinating body and prevent a tragedy of commons. The situation is, of course, not as idyllic as Yujiro Hayami (1980) portrays it: not every Asian village has a relatively undifferentiated corporate body which acts as the deciding body in the collective interest. But not every village is individuated as Samuel Popkin (1979) portrays it: according to him, the “rational peasant” believes only in reciprocal obligations.

One of the best accounts of the contrasts between villages in which the elite act as a coordinating body, and villages in which it fails to do so, has been provided by Robert Wade (1994). Village panchayats (to be distinguished from constitutionally mandated panchayats) were found both in the canal-irrigated villages and dry villages of Kurnool district in Andhra Pradesh. Not all of them had panchayats elected by the village. But the main factor in the cases which did have village councils regularly elected year after year was risk aversion and cost reduction. Field guards generally prevented theft or destruction of crops. And common irrigators, especially in villages at the tail end of canal irrigation as well as in dry villages (both clusters suffering from water scarcity) acted as cost-saving factors.

Fioramonti, greatly influenced by Elinor Ostrom (1990), rightly focuses on the concept of “public trust” in the management of common or shared resources. He points out that replacing vertical management by horizontal management can be both cost-saving and time-saving, and not to say, much more equitable for all the stakeholders, from workers and suppliers to small shareholders having a say in the management. The author notes:

Whether it is schools of fish in the ocean or flocks of birds in the sky, complex systems operate through a decentralised system of rules that are interacted upon through local exchanges. In these adaptive systems, it would be extremely inefficient to generate order through top-down, competitive, utility-maximising processes. (p 10)

Contentious Alternatives

Fioramonti celebrates in the rest of the book various kinds of co-production and horizontal management systems all over the world, for instance the technology giant IBM’s adoption of Linux as an endorsement of “open-source initiatives” in the late 1990s (p 111).

The author also thinks that household-based work challenges the GDP economy in two ways: they are provided for free and are based on self-production (pp 119–20). Unfortunately, this is too optimistic a reading of the situation. Household-based work in third world countries belongs generally to the informal economy and provides only a pittance in the name of wages. In India, for example, most self-employed persons, especially, fall below the poverty line. Globally, including the advanced capitalist countries, forcing people to work at home is capital’s strategy of continual cost reduction: it serves, in fact, as a major instrument in the game. If there is an outstanding defect of this interesting book, it is its overly optimistic picture of the possibilities of co-production and horizontal management.

Quoting Joe Kraus, one of the leaders of the dot.com boom, the author argues that new technologies permit the diversification of production, the generation of multiple markets and ease in shifting from the vertical to the horizontal economy. Advocating and noting some phenomena of peer-to-peer co-production, Fioramonti argues that

A set of regulatory mechanisms such as subsidies and limited liability, which have been essential to support the economies of scale of the GDP economy, will need to be revised according to principles of equity and sustainability. Patterns of ownership may need to change accordingly, with social enterprises and hybrid organisations that connect for-profit with non-profit activities becoming increasingly common, as is the case with the introduction ofL3Cs (low-profit limited liability companies) which allow organisations to draw on foundations and non-profit funding to operate as socially oriented businesses. (p 135)

Possibilities of a Post-GDP World

Turning to post-GDP politics, the author argues that data revolution, in the sense of availability of massive volumes of data on anything imaginable, permits the access of myriads of people to necessary data and thereby permits horizontal decision-making in all sorts of ways. Data also allows people to challenge the conservative GDP narrative. For instance, the victory of Margaret Thatcher was made possible by the false propaganda that the British economy was going through a recession under her predecessors (p 141). On the other hand, the easy availability of data allows certain critical decisions to be quickly made, for instance, fire data provided by credible sources along with the geographic information system maps enabled paper companies to respond to wildfires more effectively as well as governments to clamp down on illegal burning (p 143). More generally, the sustainable development goals proclaimed by the United Nations for the year 2030 will require enormous amounts of data to be processed by civil society, the private sector and governments at every level in order to act in a coordinated fashion. The data revolution can help track the spread of infections and diseases, and take corrective action, as well as redress the evils of discrimination and violence against women and children.

Governance structures can also be horizontally distributed, involving civil society, markets, governments at all levels, and social movements to “develop shared institutions that are often more adaptive, accountable, resilient” (p 147). Adaptation, however, requires innovation, and innovation involves risk. Risk-taking can be distributed more equitably in a shared economy than in a typical top–down decision-making and ownership structure. Encouraging competition-based innovation could be disastrous as it would ultimately result in more exclusions and divisions. In contrast to vertically guided innovations (as in a company which internalises negative externalities), it is out of cooperative patterns of interaction that governance, as a multi-actor decision process, can innovate effectively and successfully (p 150).

Fioramonti favours open innovation models, for instance, crowdsourcing companies such as InnoCentre and Yet2.com, that promote the sharing of ideas and knowledge in a collaborative economy (pp 152–53). He further adds,

Civil society’s self-organisation is also challenging the vertical structure of traditional political parties. In Italy, a new political organisation, the Five Star Movement was founded in 2009 by using the online social network MeetUp as an organising tool. Through flexible horizontal participatory structures, open consultations, online primaries for the selection of all candidates and various web-based communication systems, the movement gained massive popular support. (p 155)

The author then moves on to Gandhian concepts of village-based society, and social governance through local leadership, which he believes India has adopted partially but successfully. Fioramonti then paints an idyllic picture of Bharat Nirman volunteers and gram panchayats, who, according to him, produce biogas at the local level, manage the environment by getting rid of solid and liquid waste, create roadside vegetable gardens, revive traditional waterbodies, and plant trees as part of social forestry schemes. Many of these activities are “smartly” connected by electronic networks. He then goes on to detail the inefficiencies of centralised production of electricity in Africa, including the Union of South Africa. In many countries, such as Ecuador and Bolivia, laws have been passed giving special rights to nature or in
Costa Rica, a commitment has been made to preserve at least 25% of its territory as forest. All these initiatives to be truly successful require collective leadership at all levels, which can integrate developments in affordable technologies and adaptive governance.

Fioramonti questions the suitability of ranking countries by their GDPs in a world that he thinks is moving towards an economy that satisfies human needs; a civil society that has become a network society with persons and collectivities being linked through quick communication networks; a technological system that privileges distributed use of renewable technologies rather than centralised production and distribution of non-renewable energy; and a political system that manages conflicts and common property resources through cooperation rather than competition and by using layers of horizontal management rather than top–down bureaucratic control.

In Table 5.1, he produces several top Group of Seven (G7) rankings by using different criteria. For example, theG7 of sustainable development would in decreasing order be Costa Rica, Colombia, Panama, Ireland, South Korea, Chile, and New Zealand. TheG7 of happiness would rank in decreasing order: Denmark, Switzerland, Iceland, Norway, Finland, Canada and Netherlands. There are also rankings in terms of social progress, environmental and economic performance. What is remarkable about these rankings is the absence of the actualG7 countries in any of these lists and the presence of more than one Scandinavian country, except in the first one. This is not surprising given the fact that practically all of these countries had been governed by social democratic parties for a long time. Although Africa does not figure in any of these indicators’ top rankings, there are regional overachievers in this continent too. For instance, Mauritius performs better than emerging powers like Brazil, Russia and India, as well as Indonesia and Turkey, in social progress.

Fioramonti’s indicators can be taken as alternatives to the HDI. But, there are severe problems in his choice of countries (due to the choice of sources as also the want of more careful scrutiny). For example, Panama, a country with a tiny population, figures in his list. Instead, he might have chosen a small city with a record of green development in Germany. There are other problems with his list. How can Colombia, a country plagued by drug wars and a 40-year-old civil war, figure in his list? If South Korea figures in his list because it weathered the recession starting in 2008 well, then why not China, which has weathered the recession of 2008 far better? China has other achievements as well: while there has been severe environmental degradation in many cities of the country, according to the World Watch Institute, China leads the world in the use of renewable energy. Thus, there seems to be a bias against communist or radical countries in the author’s work, with the exception of Cuba and its healthcare system. However, the author’s contention that Cuba’s economy is penalised by the GDP approach is contentious: is Cuba penalised by the GDP or by the relentless illegal international embargo and other kinds of aggression?

Conclusions

This kind of evasion pervades the whole book. Never does the author mention capitalism and its inexorable logic of profit-seeking, often at the cost of human welfare. The only multinational corporation mentioned in the book is IBM. Firms like Walmart or Tesco or McDonalds, which have destroyed retail trading and vending in wide swathes of the world, do not figure in his analysis. Nor do other multinationals like Cargill and Monsanto, which have been indirectly responsible for the deaths of thousands of farmers in developing countries.

The words—deregulation, neo-liberalism or financialisation—are foreign to his lexicon. While he pleads for equitable decentralised economies, he refuses to engage with the politics that continually enrich the super-rich, while the poor often become even poorer. It was not expected that the author should have addressed all these issues, but he should have at least indicated the difficulties of and pointed some paths to realising the dreams. For instance, under what kind of revolution did Ecuador succeed in encoding the rights of nature in its constitution? Fioramonti’s book is best seen as a catalogue of what can be done in the area of decentralised planning. Readers will have to look elsewhere for ways of realising them.

References

Coase, R H (1960): “The Problem of Social Cost,” Journal of Law & Economics, Vol 3, pp 1–44.

Hardin, Garrett (1968): “The Tragedy of the Commons,” Science, Vol 162, No 3859, pp 1243–48.

Hayami, Yujiro (1980): “Economic Approach to Village Community and Institutions,” Journal of Rural Development, Vol 3, pp 47–49.

Klosko, Gregory (1984): “The Refutation of Callicles in Plato’s ‘Gorgias,’” Greece & Rome, second series, Vol 31, No 2, pp 126–39.

Ostrom, Elinor (1990): Governing the Commons, Cambridge: Cambridge University Press.

Popkin, Samuel (1979): The Rational Peasant: The Political Economy of Rural Society in  Vietnam, Berkeley, CA: University of California Press.

Schor, Juliet (2005): Born to Buy: The Commercialised Child and the Consumer Culture, New York: Scribner.

Sen, Amartya K (1977): “Rational Fools: A Critique of the Behavioural Foundations of Economic Theory,” Philosophy and Public Affairs, Vol 6, No 4, pp 317–44.

Wade, Robert (1994): Village Republics: Economic Conditions for Collective Action in South Asia, San Francisco, CA: ICS Press.

Updated On : 31st Aug, 2018

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