Why GDP is not a good measure of socio-economic progress

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The correlation between a country’s GDP growth and the improvement of the life of citizens is not definite if not downright non-existent.
The correlation between a country’s GDP growth and the improvement of the life of citizens is not definite if not downright non-existent.

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According to the World Bank, Botswana remains one of the most economically unequal countries in the world, only behind her neighbours South Africa and Namibia.

Botswana’s Gini coefficient, which represents a country’s economic inequality, stands at 0.53, with a Gini coefficient of 0 representing perfect economic equality and 1 representing complete inequality.

On the other hand, Botswana’s gross domestic product (GDP) per capita, which represents a country’s economic output relative to its population, stands at $8 258 (R126 000), making Botswana an upper-middle-income economy.

The GDP metric was devised by the American economist Simon Kuznets in the 1930s and was originally used in the 1940s during World War II by countries involved in the war to determine what their economies were capable of producing so the said countries could decide how much financial effort they could put in the war.

The problem with misrepresenting economic growth as a representation of a country’s prosperity and wellbeing of citizens is that, when policies are enacted, they fail to address the actual problems faced by the populace.

However, over the years, the metric has been used to identify economic progress, going against what the originators intended it to be used for.

The problem with using GDP as a means of economic progress is that, as economist Moses Abramovitz puts it, long term changes in the rate of growth of welfare and wellbeing of citizens cannot be determined, even roughly, from the changes in the rate of growth of output, which is GDP.

In other words, the correlation between a country’s GDP growth and the improvement of the life of citizens is not definite if not downright non-existent. Botswana is a very good example of this. Take the country’s poverty rate for example.

Read: Are lockdowns to blame for falling GDP?

As per the latest figures, the country’s poverty rate stands at 16% – which is ten times the average poverty rate for countries classified as “upper-middle-income” economies.

This big disparity shows that because of its huge rate of economic inequality, Botswana’s economic classification does not truly represent the actual welfare and well-being of its citizens, and hence the problem with using GDP as a determinant of a country’s socio-economic standing.

If you have a bulk of a country’s economic output concentrated in only a few hands, you are bound to get a wrong representation of its socio-economic status.

These numbers paint a picture in which despite achieving impressive economic growth over the years, that growth has failed to significantly improve employment rates which would, in turn, lead to a reduction of poverty rates and an increase in prosperity.

The problem with misrepresenting economic growth as a representation of a country’s prosperity and wellbeing of citizens is that, when policies are enacted, they fail to address the actual problems faced by the populace.

Botswana, for example, under President Masisi’s administration is embarked on a mission to promote export-led development in order for the country to achieve high-income status by the year 2036.

On the surface, it seems like a logical mission for an upper-middle-income economy to aspire for a $12 000 (R184 000) GDP per capita standing which would translate to classification as a high-income economy.

If a government is truly concerned with the wellbeing of all its people and not only attaining good PR in the eyes of the international community, it would not be hard to not let GDP, in this case, GDP per capita, be the sole determinant of economic policies.

However, in reality, considering the amount of poverty present in the country, it would make more sense for most attention to be given to policies that would fight poverty which would, in turn, translate to economic prosperity for all.

It is pointless for a country to implement policies that would supposedly drive economic growth if that economic growth will only prove beneficial to a small and elite section of the populace.

What you would get as a result of those policies is an increasing amount of economic inequality which will consequently drive the already vulnerable section of the population into even more poverty and make them susceptible to exploitation.

If a government is truly concerned with the wellbeing of all its people and not only attaining good PR in the eyes of the international community, it would not be hard to not let GDP, in this case, GDP per capita, be the sole determinant of economic policies because they would understand and appreciate that it is not a true reflection of the lives of the people.

It would look at its poverty and inequality levels and work on reducing them.

If, however, the government has economists who are either too politically affiliated to correctly advise leadership or their advice is well-intended but disregarded by the same leadership, the country’s populace, minus the elites, will continue to suffer.

Modise is a writing fellow at African Liberty, a blogger, and a podcaster. He tweets via @EphraimModise1


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