Politicians, business leaders and journalists have placed enormous trust in the concept of Gross Domestic Product, or GDP, while governments in Asia often obsess over maximising it. But as a statistical concept, GDP has many flaws, argues David Pilling of The Financial Times in his new book The Growth Delusion. In an interview with Asian Affairs’ Duncan Bartlett, Pilling claims that few people other than specialist statisticians properly understand the measure. And he raises the question many people in Asia and elsewhere ask: ‘Why, if my country’s economy is growing at a world-beating rate, does life not feel better?’
David Pilling: The concept of GDP was invented in the 1930s as a barometer of the US economy after the Wall Street Crash. President Roosevelt used it to decide how much he should spend to revive the economy. At that time, there was really no single tool to measure the economy. You had things like freight car loadings, the stock market, the rate of unemployment, but you had no single number. So the concept of GDP was clever. It managed to compress everything that we do as humans – and something that we defined as ‘the economy’ – into one number. Clever things tend to last. People associated the number with the escape from the Great Depression and America’s victory in the Pacific War, so you can see why people came to think of it as a truly important number.
Duncan Bartlett: But it’s not just the Americans who use it – it’s used all around the world.
DP: There was a sort of evangelical movement to spread it around the world. That was not conceived by the economist who developed the concept of GDP, Simon Kuznets. It’s become the one single number to rule them all. And it’s also risen – quite subtly, I think, in a sense – into a measure of well-being. Now, economists will tell you that’s rubbish. No economist worth his salt, or her salt, would ever say that this is a measure of well-being. Yet in the public debate and in political discourse, it’s very easy to slip into talking about the economy and growth as wholly good things, things that we couldn’t possibly object to, somehow equating to our well-being.
DB: So you developed cynicism and doubt about the GDP figures over a period of time. What led you to believe that they had become a delusion?
DP: Delusion is a strong word and there are caveats to that. But I was a reporter in Japan for the Financial Times for seven years, from about the end of 2001 to 2008, the Koizumi years. From the point of view of the FT, Japan was a total disaster because there was little or no GDP growth. When I was talking to London from Tokyo, the tone of the conversation would be: ‘What’s gone wrong? There must be terrible social deprivation. Are there lots of people outside on the streets sleeping rough?’ And, of course, there are some homeless people in Japan but it was a distorted perspective. All of that was born of the fact that nominal GDP in Japan hadn’t budged for 20 years.
But this didn’t really reflect reality. For example, a politician came to Tokyo and he was just amazed at the activity, the sophistication, the level of service, the money that was there and said, ‘Well, David, if this is a recession, I want one.’ The numbers are telling you one thing; your eyes, ears, common sense are telling you another.
DB: People were talking about the ailing, disappointing, moribund economy in Japan. Moral judgment came to be associated with these low or flat GDP numbers.
DP: Well, because of its rise in the ’70s and ’80s, Japan had amazed the world. And people thought that the Japanese had discovered some new kind of paradigm and that they might overtake the Americans, so there was a touch of schadenfreudewhen it didn’t work out like that.
DB: Let’s move on to India. The Indian government takes pride in presiding over the fastest growing major economy, probably faster growing than China. Some economists, in fact, advise it to aim for an even higher GDP growth rate of eight, nine, or even ten percent, because India has the so-called demographic dividend in its favour. What’s your view?
DP: In a relatively low income country such as India, GDP, however crudely measured – and it is a crude measure – can be roughly correlated with other things we care about: health, education, provision of water, sanitation, etc. Because you need the money as the tax base to pay for those things. So all else being equal, it is a very good way of getting people out of poverty and bringing a kind of a minimum standard of living to everybody.
DB: But, of course, there is an interesting point here, which is that you can have rapid GDP growth, but if you also have a rapid population growth, it’s of less value to the citizens of a big and populous country.
DP: Well, absolutely. The demographic dividend is not just adding lots and lots and lots more people. It comes when a high fertility rate falls rapidly, so your dependency ratio begins to fall too because you have the bulk of the population in the workforce.
DB: There’s no other country in Asia where GDP is so tied up with ideas of patriotism and pride than China. People in China are encouraged to see GDP as a measure of social success but the GDP figures which are officially published out of China are often disputed by international economists.
DP: Well, in terms of PPP (purchasing power parity), which takes account of local prices, China is now a bigger economy than the US. But in dollar terms, it isn’t. And that is important in terms of projecting power because it determines how much tax you can raise. It determines how much you can spend on defence. So if China’s growth outpaces American growth for decades, then eventually, if it chose to, China could have a much more powerful military and its projection of power would be stronger.
As you suggest, some of the official numbers may not be credible, even within the narrow definition of GDP. So again, I come back to this idea. I’m not saying GDP is meaningless. I’m just saying that we need to know what it tells us, and what it doesn’t, and take a more sophisticated approach to these numbers.