UN takes a step towards ending GDP era

When Treasurer Jim Chalmers gave his budget speech back in May, he told the Australian people that one of his goals was to not let the war in Iran hurt Australia’s gross domestic product (GDP) growth.

“Before the war”, he said, “GDP growth was strengthening and broadening”, but Treasury now estimated “global growth to slow from 3.5 per cent last year to just 3 per cent this year”.

Chalmers hoped the budget would keep Australia’s GDP growth on track by cutting taxes and red tape to make the economy competitive.

“Our efforts in National Competition Policy alone could boost GDP by $13 billion”, he told parliament.

Chalmers interpreted GDP growth as a symbol of the Australian economy’s health. The higher the GDP growth, the healthier the Australian economy.

But just a week before his speech, the United Nations was cautioning member states from doing exactly that.

In a report titled “Counting What Counts”, a group of economists selected by the UN Secretary-General noted that while “GDP is an indispensable measure of economic activity … it was never designed to capture the full range of outcomes that shape people’s lives”.

As an alternative to GDP, the UN recommended member states construct a “dashboard” of 31 indicators that measure various socio-economic features, including peace, health, education, poverty, and natural capital.

The recommendations followed similar moves by the French Government in 2008 and the Organisation for Economic Co-operation and Development (OECD) in 2018.

The UN’s recommendation is significant because, for the last 80 years, it has been the effective gatekeeper of GDP, strongly encouraging its use across the world.

The history of GDP goes back to the 1930s Great Depression, when economist Simon Kuznets, at the National Bureau of Economic Research in the USA, began to develop a system of “national income accounts” to understand the devastation wrecked by the crisis.

During WWII, national governments began to design “gross national product” (GNP, a precursor to GDP) to help them manage their wartime economies.

GNP became even more useful for postwar reconstruction, especially when it came to the Marshall Plan (1948-51): an economic recovery program led by the USA that involved injecting large amounts of funds into war-torn Europe to help rebuild the continent itself (and prevent the spread of communism).

Such a large-scale reconstruction project required an immense amount of statistical data in order to send money to where it would be most useful.

This is where the newly created UN played a key role. In 1947, the UN published Measurement of National Income and the Construction of Social Accounts, which outlined a system of measuring GNP similar to the one developed by Kuznets in the 1930s. The 1947 system was designed for a liberal capitalist economy, in which goods and services added value in an economy with private and public sectors.

On the other side of the Iron Curtain, the Soviet Union was developing its own form of national income accounts – the Material Product System (MPS) – that was designed for communist countries with centrally planned economies. In this system, only the production of goods (not services) contributed to the national income.

The GNP and MPS were contesting Cold War-era political ideas. This was explicit when it came to the Marshall Plan: as a condition of receiving aid from the USA, nations had to adopt the recommendations of the 1947 UN report and begin recording and reporting their GNP data.

The UN changed its measurement of GNP/GDP as its understanding of a ‘good’ economy evolved.

In 1968, the UN made financial transactions by banks a form of production (previously they had been considered an intermediate input). As a result, banks collecting interest from mortgages now contributed to a country’s GDP. And in 1993, it reclassified military expenditure from investment to output, rewarding nations that spent heavily in their respective military sectors.

Throughout the decades, national governments across the capitalist world regularly used their GDP growth estimates to symbolise the well-being of their respective citizenry and their own party’s political successes. US President Donald Trump will often mention his country’s GDP figures to demonstrate his country is “winning”.

But the statisticians who developed GNP and GDP were always concerned about its politicisation. They knew these figures only told governments the size of an economy, and that they revealed little to nothing about prosperity, equality, or well-being. In 1945, Kuznets questioned whether a statistical measure designed for war would be suitable for a peacetime economy. National income accounting during peace, in his opinion, needed to consider immaterial values, like the “idea of a good life”.

81 years later, the UN is finally following Kuznets’ advice, but it will take more than a report to end the GDP era.