There is a problem with our economic world, and we need to change it fast.
In a world where competition spurs innovation and efficiency, measurement of performance becomes most important. Companies need to measure their costs, energy, efficiency and even patronage among consumers while national economies measure imports, exports, production and consumption patterns. Measurement of performance serves two purposes — comparison with performance in the past and the present, comparison with other enterprises or economies. This comparison is essential to determine possible improvements over the existing processes and also for the idea of economic ‘growth’.
There is also the question of why we do all that at all. The ‘pursuit of wealth’ for enterprises and economies is the underlying goal, which is further expected to bring about ‘human development’.
Gross Domestic Product and ‘Growth’
Looking at national economies, the key measurement is in the form of Gross Domestic Product (GDP). GDP is defined as the ‘total value of all final goods and services produced in an economy in a given period’. The period is usually one financial year. One way to calculate GDP would be ‘the sum of, products of value and quantity of each and every good and service of the economy that is produced within that year’. There is a caveat here — the product must have been ‘final’ only in that year and cannot be included in other years. For a product whose design started in one year and delivery happened in some other year, its value will be added for the year of delivery alone. For perspective, the GDP of India is around (it is always only approximate) 2.8 trillion U.S. dollars. The GDP of the U.S. is 20 trillion USD and that of China is 12.2 trillion USD.
‘Growth’ means an increase in the GDP of an economy over the years, usually expressed in percentage. India is growing at about 6% per year, and is therefore the fastest growing large economy. Developed economies like the U.S. are very content with a 1% growth rate, while developing economies typically have higher growth rates.
The measure of ‘Human Development’
All growth is for the purpose of ending inequalities, creating wealth, removing poverty and increasing standard of living for all people in the world. In that sense, there has been a tremendous growth in civilization for the past 200 years in all corners of the world!
There are more than 200 methods to measure ‘human development’, depending on which organization is measuring it. One method followed by the United Nations Development Program is called the Human Development Index (HDI). There are three dimensions of the HDI index — long and healthy life, knowledge and a decent standard of living. These dimensions are quantified by measurable indicators and a final index between 0 and 1 is given.
The HDI is of course, not the ‘best’ way to measure human progress, but it is widely used to measure general progress. The HDI index of India is 0.64 with a rank of 130 out of 188. India is categorized as a ‘medium human development index’ country.
Why so much interest in GDP?
Economists, business leaders, investors and the market may be interested in the gross value of GDP. But for a person interested in human development, GDP per capita (total GDP of a country divided by its total population) is the interesting feature. India’s per capita GDP is close to 1940 USD per person per year.
Historically, it has been observed that the rise in per capita GDP translates to a rise in the HDI. This favours the argument that an increase in wealth will increase quality of life.
Why do people want you to worry about GDP growth? And why is consumption considered good?
The recent news in Indian economy is regarding the ‘slowdown’. It simply means that our rate of growth of GDP is reducing. To answer why consumers are urged to spend more and worry about the GDP, the following diagram helps —
Say, the people in an economy are bored of spending and put their money in savings accounts. If done by all of them, the demand for goods and services reduces drastically. To balance the falling demand, the supply must also reduce (lest excess products will flood the market for no good reason). If supply through production is reduced, the employment must surely take a hit. Many workers will go jobless or their salary is reduced. This automatically means the overall income levels of the people falls and therefore there is less money to spend on buying stuff now. The cycle feeds on itself.
This is happening in our country at the moment, and the industries are worried. The potential investors are hesitant too. There is a ‘threat’ to the growth of GDP, and therefore (people assume) there is a stalling in human development.
Modern day economies want you to buy stuff. It doesn’t matter whether you need them or not, you are all expected to be good and responsible consumers to save the economy and keep it competing. This expectation is at its worst when the economy relies on manufacturing industry for its growth process. Services alone are not very problematic.
GDP doesn’t account for Depreciation
In spite of its excellent correlation with HDI, GDP per capita or GDP itself is an obsession which we may no longer be able to afford. From the perspective of accounting, GDP is not even the most exhaustive form of measuring national productive levels. There is a measure called ‘Net Domestic Product at factor cost’ which is most accurate in measuring the productivity of a country. Forgetting about the ‘factor cost’, lets focus on what ‘net’ means.
The Net Domestic Product is GDP minus ‘depreciation’. Example: lets say you have purchased a machine which runs well for a period of 2 years and then can’t be used. The value of it will be added to the GDP value of the year you purchased it. But after two years, it stops functioning and you will have to buy a new one to carry on the same activity. So, the value of your machine (part of ‘capital’) clearly depreciates. To account for this depreciation, the value of the machine is divided by the number of years. Do this to all products, and you get a large value of depreciation which is to be subtracted from GDP to get NDP.
What can depreciation mean?
Depreciation is at the heart of the problem of sustainability. Depreciation of capital by itself plays a small part in sustainability issues. The problem of depreciation pricks the modern world most from the source.
There is one hard fact that faces us all about the means of ‘human development’ achieved today: all of it has come at the cost of the depreciation of our planet. The creation of homes, the advancements in science, food security, healthcare, technologies, comforts, entertainment and everything you can ever think of in the modern world has directly had an impact on the planet. Good economics always accounts for all factors of production — starting from the very source on the planet to the very end experience of the consumer. We have been so obsessed with the pursuit of wealth for human welfare that we have completely forgotten the source of it all.
There is good and bad news about this aspect. Good news is that economies all over the world have realized the need for ‘sustainable development’ as the highest (and urgent) goal. Bad news is that very little is being done to address the issue.
GDP specific problems and solutions
The arms race is a great example of a vicious cycle — one country makes advanced weapons, the rival follows suit. Both keep making deadly weapons again and again in a race to become stronger than the other. The U.S. and Russia manufactured enough nuclear weapons in this mad race to potentially kill the planet many times over.
Our problem is that growth based on GDP alone doesn’t work very differently. Here, the victim is anything and everything except human beings (it affects us too in the end). If placed at the highest altar, GDP based growth will suck out all life from the planet in a not so far future!
Luckily, it is possible for humans to regain sense. Just like how the arms race went into disarmament mode, it is possible for humans to go into sustainable mode. To address this issue, people came up with a practical way of calculating GDP called the ‘Green GDP’.
Green GDP accounts for environmental degradation and subtracts depreciation value from the GDP figure. The method of calculation is fairly complicated (refer to reports from IPBES to see how ecosystems and biodiversity are valued). If it is taken up for national accounting, the competition between countries will have at least a part of ‘sustainability’ in-built! Green GDP may have its practical constraints or theoretical faults, but it is a good suggestion to account for a fundamental problem of economics.
But Green GDP failed as an experiment. China tried it out between 2003 to 2007, but hushed it up soon. Its measurements show that the environmental damage done for development work has reduced GDP values to ‘politically unacceptable’ levels. They said growth was close to zero in many provinces (which environmentalists would have definitely disputed).
Starting 2018, the Environmental ministry of India announced that it will measure the environmental wealth at district level and compile data. Land acquisition, ecological diversity, climate change mitigation funds are expected to be in the agenda. There has been no further official announcement.
Rapidly losing time
To put the environmental situation in a nutshell: everybody needs to ACT NOW. The science has clearly established that tipping points for food systems, ecology, climate change, and other earth systems are approaching within the next 10 to 20 years. We must be able to make massive changes in all our human systems within 10 years.
(see the following short video to see what you can do: https://www.facebook.com/worldeconomicforum/videos/568619780346778/)
The political leadership of the world has found climate action ‘politically unacceptable’. China pollutes recklessly, India uses its developing country status to pollute, and now the U.S. is set to pull out from the (already inadequate) Paris agreement under a conservative leader. The challenge is to politically oust this irresponsible leadership with massive climate protests, which you can always participate in.
What should we as individuals do? There can be a blanket solution to this: think before you consume anything the next time. The time you spend on you devices, the transport you choose, the food you eat, the things you shop for — everything has a profound impact on the planet if everyone does things like you. Stop for a moment and find out how many things you buy that you really do want. You can always find out about the impact of your activity on the planet. Ask yourself the following questions -
- Do the products and services we normally consume really make us happy and feel fulfilled?
- How much does nature matter in the quest for happiness?
- Are you aware of the consequences of your everyday life and choices?
The economies want us all to be mindless consumers. But we are intelligent and capable of breaking our strong habits of comfort for the good of not just the planet, but our very future.
There is one last fact, but it is up to you to decide if it is good or bad: the world runs because of us consumers. In a democratic world, we have the highest power to change, and the key to saving the planet from disaster is with us.
