Why use of GDP as measure of welfare gains is foolhardy

That the global economic paradigm is dominated by the ‘G-something’ (i.e. G3, G8 and G20 economies) lexicon goes to show just how much the size of an economy is arguably the only game in town.

For some, Gross Domestic Product (GDP) is the best thing since sliced bread, for others it is a far cry from it.

Whichever your bias, this book will prick your conscience.

Until the rout in global commodity prices in the period 2014-2016, the world was caught in an era where rapid growth of GDP was the gold standard of economic excellence.

It was pursued like the holy grail, faith in it bordered on dogmatism and its nay-sayers were few and far spaced.

It is only until recently that the economic model of its poster children, like China and Ethiopia, has been questioned.

The take home from the book Gross Domestic Problem is simple: GDP as a metric was born of significant political and economic interests and to use it as an indicator of welfare gains is foolhardy.

The author argues, for instance, that during the Cold War GDP measurement served as a potent propaganda ammunition in driving a wedge between the Eastern and Western blocs.

He states that at the height of the war one of the main interests of the Central Intelligence Agency was to determine the effectiveness with which a command economy could allocate resources and thus estimate the period within which a communist regime could deliver acceptable living standards.

It was crucial to how long and how well the Soviet bloc could manage widespread unrest.

Reflecting on the pioneering work of Simon Kuznets in measuring production, the author says that while the Conference on Research on Income and Wealth began with unfettered transparency and release of findings in the 1930s, the 1940s witnessed growing opacity around the conference which was progressively deemed to be the preserve of a select few.

Reading this book left me conflicted. On the one hand it turns mainstream economic analysis on its head by raising pertinent issues such as the fact that use of GDP in economies that are predominantly informal is a problem.

A good case in point is Nigeria where official statistics as at 2015 suggested 41.4 per cent of the economy was informal and rebasing saw the size of the economy revised upwards by 89 per cent.

On the other hand, for a book with such scepticism on GDP I hold the view that it does little to offer an alternative and ends up stirring an argument to which it does more to offer heat than it does light.