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Book review

The growth delusion

by Hans Dembowski

In brief

Masai herder in Kenya: GDP statistics do not accurately reflect standards of living in the rural areas of developing countries.

Masai herder in Kenya: GDP statistics do not accurately reflect standards of living in the rural areas of developing countries.

If you want to know what is going wrong with economic policymaking it makes sense to turn to business journalist. David Pilling, the Africa editor of the Financial Times, offers relevant insights in his short book with the title «The growth delusion». He does an excellent job of spelling out the absurdities of focusing on ever higher GDP figures. The book is easy - and even fun - to read.

Put simply, gross domestic product (GDP) measures everything that money is spent on within a country's border. The general assumption is that the more money is spent, the better people will be off. For several reasons, this assumption is wrong. Repairing environmental damages, for example, costs money, but it does not enhance welfare. At best, it re-establishes the status quo ante. On the other hand, anything that does not cost money is considered unimportant, so if a family takes care of an elderly member, that does not figure in GDP statistics. If they hire a nurse to do the job, it does.

Pilling elaborates these things well. Advertising doesn't satisfy people, but keeps them aware of more things they might want. As it is paid, however, more advertising means more growth. If people consume a lot of unhealthy food, their personal welfare is likely to decline, but all that counts is the expenditure. If, at some point, they need medication to treat a non-communicable disease, that again contributes to growth.

Pilling finds it bewildering that Britain's national statistics include assumptions for the revenues of illegal prostitution and drug trafficking. Any voluntary exchange of money is considered to contribute to GDP, and therefore activities that legislators have outlawed in the belief that they harm society are included in the very statistics that are supposed to indicate welfare. The author does not discuss whether these activities should be legalised or not, he simply points out the contradiction.

«The bigger our banks, the more persuasive our advertisers, the worse our crime and the more expensive our healthcare, the better our economies are seen to be performing», Pilling writes. In his eyes, there is another reason why it is wrong to gear economic policies to growth. GDP data do not tell us anything about how incomes are distributed and whether inequality is increasing or declining.

To some extent, Pilling's book shows that we have lost a decade. Before the global financial crisis erupted on Wall Street in 2008, some western policymakers had begun to question the merits of economic growth as measured in GDP statistics. On behalf of then French president Nicholas Sarkozy, a commission scholars published a report on the matter in 2009 (see Nina V. Michaelis in D+C/E+Z 2009/12).  Some economists began to consider happiness as a policy goal (see Petra Pinzler,  D+C/E+Z 2012/04).

During the great recession, however, public attention once again became focused on growth. Unsurprisingly, the results have been perverse. The global environment is in deeper crisis that bevore and inequality has become worse. As Pilling argues convincingly, the growth paradigm is part of the problem.

Unlike many western journalists, Pilling has a deep understanding of developing countries, having covered Africa and previously Asia for many years. He correctly observes that growth is essential in very poor economies. When a society simply does not have the means to fulfill basic needs, it it must increase the resources available. That does not apply to rich nations, however, where more GDP measured in monetary terms is not making people happier anymore.

At the same time, Pilling warns that GDP figures for developing countries are often misleading. For example, subsistence farmers hardly earn money, so they are not counted. Their welfare depends on good harvests, but the statistics only assess harvest revenues. They do not tell policymakers much about how a large section of the rural people is coping.  

Pilling does not offer a simple metric that might replace GDP growth. He insists that policymakers have to take many things into account, including the distribution of incomes and the desirability of what money is spent on. In a complex world, there is no simple guideline policymakers could stick to.

 

Pilling, D., 2019: The growth delusion. London: Bloomsbury

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