Why GDP is no longer the most effective measure of economic success

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By: Momodou Camara
(ACCA)

As a macroeconomic indicator, GDP fails to capture much of the value created in the modern world. New metrics promise to track everything from happiness to natural capital. At the World Economic Forum’s 49th annual meeting in Davos, New Zealand Prime Minister Jacinda Ardern revealed that she would create the world’s first ‘wellbeing budget’ in order to prioritise the health and welfare of her country’s citizens.

She said: “We need to address the societal wellbeing of our nation, not just the economic wellbeing.” Economic growth and, by proxy, wellbeing is currently measured by gross domestic product (GDP). As the framework upon which governments build countless policies, GDP aims to track the production of all goods and services bought and sold in an economy each year. The measure has become a critical tool used by economists, politicians and academics to understand society. It has been labelled “the most powerful statistical figure in human history” by author and lecturer Philipp Lepenies, and named “one of the great inventions of the 20th century” by the Federal Reserve Bank of St Louis. Today, however, GDP’s purpose is being called into question. GDP is not the precise and flawless figure that many believe it to be it is merely an estimate.

Coming up short
Having become such a familiar macroeconomic metric, it is easy to forget that GDP is a relatively modern invention. The framework for monitoring economic growth was created for the US Government by Russian-born economist Simon Kuznets in the aftermath of the Great Depression, before modifications made by British economist John Maynard Keynes turned it into the indicator we know today. In an independent review of the UK’s economic statistics published in 2016, Sir Charles Bean wrote that GDP is often viewed as a “summary statistic” for the health of the economy. This means it is frequently conflated with wealth or welfare, though it only measures income. “Importantly, GDP… does not reflect economic inequality or sustainability (environmental, financial or [otherwise]),” Bean wrote. What’s more, GDP is not the precise and flawless figure that many believe it to be it is merely an estimate. “This uncertainty surrounding official measures of GDP is inadequately recognised in public discourse, with commentators frequently attributing spurious precision to the estimates,” Bean continued.

Sarah Arnold, Senior Economist at the New Economics Foundation (NEF), told World Finance that GDP as a measure of economic activity is simply a means to an end: “It has become so synonymous with national success that the rationale for pursuing economic growth in the first place seems to have been long forgotten.” Putting the flaws highlighted by Bean and Arnold aside, GDP is still an inaccurate measure of prosperity, as it fails to convey much of the value created in the modern world. GDP was developed during the manufacturing age and, as David Pilling, Africa Editor of the Financial Times, wrote in his book The Growth Delusion: Wealth, Poverty and the Wellbeing of Nations: “[GDP] is not bad at accounting for production of bricks, steel bars and bicycles.”

Where it struggles, though, is with the service economy, a segment that accounts for a growing proportion of high-income countries’. GDP on haircuts, psychoanalysis sessions or music downloads and it becomes distinctly fuzzy,” Pilling wrote. GDP’s preference for tangible goods also means it is insufficient at capturing the value of technology. Where disruptive innovations have made life easier for consumers allowing them to book their own flights rather than paying a travel agent, for instance – GDP only sees a shrinking economy. “Lots of what tech is doing is destroying what wasn’t needed,” Will Page, Director of Economics at Spotify, told Pilling. “The end result is you’re going to have less of an economy, but higher welfare.”

Countless free online services have moved outside the realm of economic activity measured by GDP, including Google, YouTube and Wikipedia. In the eyes of GDP, innovation even if it means a better quality of service is often a detractor of economic growth. Elsewhere, valuable areas of work have always existed outside of the GDP framework, including housework, caring for sick family members or friends, and volunteering. The impact of this work is unaccounted for simply because no money changes hands. In a 2014 speech, Andrew Haldane, Chief Economist of the Bank of England, said the economic value of volunteering could exceed £50bn ($63.7bn) per year and that is before tallying up the impact on the volunteers’ wellbeing, which includes reducing stress, improving physical health and learning new skills.

The bigger picture
In 1968, Robert Kennedy, the brother of US President John F Kennedy, criticised gross national product a similar measure to GDP by saying it “measures everything, in short, except that which makes life worthwhile”. Arnold believes this observation is still true today: “GDP is not a particularly useful measure in and of itself because it doesn’t tell us much about the direction of our economic activity or help us to determine how to govern it.” The NEF believes there are five indicators that GDP doesn’t take into account that could help measure national success more accurately: job quality, wellbeing, carbon emissions, inequality, and physical health. “We know what a good economy that allows people to flourish should be,” Arnold said. “A good economy meets everyone’s basic needs; it means people are healthy and happy, and it does not stoke potential long-term trouble, such as extreme inequality.”

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ENTREPRENEURSHIP CORNER
Top 5 ways to boost employee engagement
Employee engagement is a priority for many businesses, although it’s increasingly difficult to implement it. Measures that can help include listening to your staff and taking a different approach to measuring success. One way of improving employee engagement is to act on any feedback provided by staff members: words and promises must always be followed by actions. In 2014, research from PwC revealed that engaged employees are 87 percent less likely to resign. Unsurprisingly, C-suite executives at corporations worldwide have since pushed employee engagement up their list of priorities.

But delivering sustainable, long-term engagement in the modern workplace is more challenging than ever. The first step towards creating a shared vision is to have clarity of intention. What do you hope to achieve and why? How will you go about to attaining it? Only once you know the ‘why’ can you establish the ‘how’. Getting employees involved goes a long way to securing their commitment and engagement. At Brandpie, we’ve worked with organisations across many different sectors, industries and geographies, and have identified five common areas that help drive employee engagement. Despite feedback, employees find that nothing seems to change. If you’re listening to your people, you must then follow it up with actions

1 – Start with a powerful story
Successful employee engagement initiatives require senior leadership alignment, a desire to embrace new technology without being led by it and, most importantly, a willingness to really listen to and democratise the views and opinions of employees, regardless of their seniority. Whatever business you’re in, people need to understand why you exist, what you want to achieve, how you aim to achieve it and, crucially, the role they can play. Defining your story and expressing it in an authentic way that people can relate to is key. Everything you do should ‘ladder up’ to your story, from learning and development to sustainability and client services.

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We’re in the age of the overwhelmed employee. We often hear that people can’t filter or prioritise messages because there’s too much noise around them. Reducing it is hard, but armed with the right data, it’s possible to work with internal stakeholders to prioritise what’s important and what’s simply ‘nice to have’. Think about how you consume content outside the office: employees have been shown to be three times more likely to interact with mobile content over web-based content. Video content, meanwhile, helps keep 53 percent more employees active, while two thirds of workers found their company app to be easier and faster to use than other sources, such as emails or printed materials.

3 –Listen to your people
Over the past few years, we’ve run online focus groups with more than 5,000 employees. We know that people value and appreciate the opportunity to make their voices heard. Whether using a digital employee feedback platform or a market research tool, technology enables collective intelligence. Businesses have access to a range of tools that can bring people together and get them to respond in the moment, allowing them to share their insights and ideas. It’s important to remember that great ideas can come from anyone, regardless of how junior or senior they are; technology offers everyone a voice and is a brilliant driver of engagement.
to be continued!