Gross Domestic Product (GDP) has been the standard measure of economic growth since World War II. It is widely believed that accelerating economic growth as measured by the GDP will translate into improved living standards. However, this view is being challenged with the argument that it is better to focus on measures of wellbeing than GDP because, despite robust economic growth over the past several decades, there are still millions of citizens living in poverty.

Besides, GDP measures perpetual growth, which is unattainable. Because GDP is an outdated proxy measure of economic growth, wellbeing, which is a multidimensional approach of measuring the most important aspects of people’s life, is gaining popularity.

Perpetual Growth

Stagflation is simultaneous economic stagnation combined with high inflation. In the long run, economic growth is dependent on two drivers; productivity and labor (Dolar). Productivity is affected by multiple factors. Improvements in many facets of productivity growth have decreased or reversed since the global financial crisis. The foremost factor is the demographic crisis of western countries that threatens the growth of GDP. Developed countries have experienced deceleration of working-age population, stabilization of educational attainment, and expansion into various forms of production. Furthermore, labor reallocation from less productive to more productive sectors has decelerated since the global financial crisis. Besides, radical disruptions to education and income losses are likely to affect human capital negatively. The waning demographics of western countries imply that acceleration of productivity growth is needed. The McKinsey Global Institute projected that 80% productivity growth is required to mitigate the effects of changing demographics (49). This projection is unlikely to be achieved given the dwindling working-age population in western countries. On the contrary, productivity growth is likely to continue decreasing because of the significant changes in the demographics unless the working-age population begins to grow again.

Perpetual Growth

GDP as a measurement is very outdated because it does not measure wellbeing. It is a statistical tool used to measure how well the economy is performing. However, it neglects important factors that determine the wellbeing, such as inequality and environmental services (Gallup). GDP as a proxy measure of economic growth ignores certain aspects that do not involve monetary transactions, does not assess changes in human capital, does not discriminate activities that enhance welfare from activities that reduce welfare, does not account for cultural difference, and omits the environmental costs and rates of depletion of resources (Giannetti et al. 14). The Measure of Economic Welfare is one of the alternatives for a gross domestic product as it measures consumption in the economy as a proxy for economic welfare. It adds up the benefits of goods and services consumption and subtracts the costs associated with the consumption, such as environmental pollution, providing a picture of economic welfare. Other economic welfare measures were developed after the Measure of Economic Welfare, such as the Index of the Economic Aspects of Welfare which incorporates environmental costs in estimating economic welfare (Giannetti et al. 15). Index of Sustainable Economic Welfare is an index developed to account for the current environmental issues while addressing the long-term ecosystem and natural resource sustainable use. More indices were developed with recent ones such as the State of Global Well-Being, the Better Life Index, and the Global Well-Being Index measuring a myriad of aspects of wellbeing. The Gallup Global Well-Being measures the behavioral economics of gross domestic product growth. It estimates the percentage “thriving,” “struggling,” and “suffering” of individuals in different countries and regions (Gallup). The indexes focus on the percent thriving in at least elements of wellbeing such as purpose (liking what they do), social (supportive relationships), physical (good health), community (liking the surrounding community), and financial (managing economic life well) aspects.

The Gallup Global Well-Being measures have opened up new opportunities to study issues that affect people in different communities around the world in ways that GDP would not. For example, life satisfaction aspects of the Gallup World Poll data have been exploited to measure inequality in the distribution of subjective wellbeing (Gluzmann & Gasparini 2). Measuring inequality in subjective wellbeing might be complementary to the various approaches aimed at computing unfairness in a society because it may in some way have benefits over the usual income inequality measurements. Some perceived income inequalities may arise due to personal choices if all constraints are observed thus cannot be considered unfair. A case in point is when two individuals facing similar opportunities make different choices. One choice might lead to a better, healthier lifestyle while the other subjects the individual to poverty. Free choices resulting in socially acceptable income inequality should not be regarded as unfair. The assessment of subjective wellbeing is less likely to be susceptible to such differences. Under evaluation of subjective wellbeing, differences in perceived happiness may better estimate social unfairness rather than income unfairness (Gluzmann & Gasparini 4). Gallup World Poll provides data that can be used to compare wellbeing in different countries. It cures one of the most significant problems associated with compering inequality across countries and regions, namely, the generation of homogenous information. The poll poses the same question across all countries in all areas, which significantly reduces spurious differences in estimating comparisons. This reduces sources of measurement error significantly. It is noteworthy that people may not interpret and answer the standardized questions the same in different countries, leading to additional errors. However, the advantages of estimating subjective wellbeing and its rising popularity imply that improvements in the measurements will yield better results.

Technological Revolution

Usually, information and communication technologies are considered a key driver of economic growth and productivity. Different reviews indicate that technological effects tend to be positive at the organizational level (United Nations Conference on Trade and Development [UNCTAD 34]). However, it has been reported that productivity tends to drop as economies entrench technologies in every sector. In other words, the rapid digitization of economies has not translated into strong productivity. On the contrary, productivity growth appears to have stunted over the past few decades, with the slowdown more pronounced in developed countries and also in developing countries (UNCTAD 34). This is a productivity paradox because as technological advancement and use have increased, productivity growth has decreased, which is contrary to popular expectations (Remes et al.). The digitization of economies into digital economies has thus far not translated into increased productivity. The paradox in the digital economy is attributed to different reasons. A more pessimistic perspective considers the technological effects on productivity as having fewer impacts on productivity growth than the revolutionary technological advances of the past (UNCTAD 34). A more optimistic view links the slow growth of productivity to the time lags between the time the technologies are introduced and the time actual effects are felt (European CEO). As a result, more visible impacts on productivity will occur when technologies are adopted widely within the economy. An additional contributing factor to the productivity paradox is the difficulties associated with measuring the digital economy. The slow growth in productivity might be explained by the lack of proper recording of technological activities in that in overall GDP estimation. Consequently, the proper measurement would be reflected in increased productivity. In developed countries, demographic factors associated with the aging population are also linked to the slow growth in productivity (UNCTAD 34). Therefore, the productivity paradox related to the technological revolution arises from multiple factors.

Quality of the GDP

Measuring economic growth in purely quantitative categories diminishes the significance of “high-quality growth.” High-quality growth encompasses increased technological self-reliance, significant production and welfare transformation, the establishment of a comprehensive safety net for the citizens, enhancement of quality healthcare, education, and employment, and reduction of inequality across regions and various demographic characteristics (Wärtsilä). It reflects a policy change that focuses on investment areas that guarantee increased productivity, such as production, consumption, healthcare, and education (Pfeffer). The concept of high-quality growth is being advanced by China to reorganize the economy in a way that focus on increased domestic consumption and investing in productive sectors to drive the overall economic growth. For example, after decades of heavy investments in infrastructural projects and the manufacturing sector, the country realizes that roads and bridges are not productive but rather facilitates productivity. Policy change to shift investment into more productive sectors of the economy might bring sustainable economic growth and wellbeing. At the sectorial level, administrative job control is one of the main factors impacting the health of the employees (Pfeffer). The return of line of sight to the work, workplace flexibility, autonomous fusion teams, fluidity in work practices, and organizational health can elevate the personal wellbeing of the employees. The functional organization provides an environment with less stress caused by micromanagement demands from the employees. Therefore, wellbeing is a product of economic policy at the national level and the contribution of the private sector in nurturing the wellbeing of employees.

Conclusion

The failure of GDP as a measurement proxy of economic growth is less effective in contemporary society. It assumes that an economy will experience perpetual growth, which is a difficult achievement. Even where economies have experienced phenomenal growth over the years, the economic expansion failed to transform the lives of millions of citizens. The technological revolution also has been unable to expand the GDP as it was initially believed despite the fact that the significant impacts technology has had on society. It led to the conclusion that GDP has limitations as a measure of economic growth because it does not account for the non-monetary aspects that matter to people. As a result, new indexes such as the Gallup Global Wellbeing have been developed and are experiencing rising popularity due to their ability to compute wellbeing. In particular, the estimation of subjective wellbeing creates opportunities for improved measurement of social inequality. Furthermore, the realization that wellbeing is important to citizens is supporting new ideas of measuring national economic growth. China’s shift to the assessment of the quality of economic growth indicates a paradigm shift where countries focus on national statistics that reflect their economic realities.

References

Dolar, Veronika. “Why stagflation is an economic nightmare – and could become a real headache for Biden and the Fed if it emerges in the US.” The Conversation (2022). https://theconversation.com/why-stagflation-is-an-economic-nightmare-and-could-become-a-real-headache-for-biden-and-the-fed-if-it-emerges-in-the-us-179036. Accessed 21 Mar. 2022.

European CEO. “Giving a voice to the digital revolution’s silent majority.” (2019). https://www.europeanceo.com/industry-outlook/giving-a-voice-to-the-digital-revolutions-silent-majority/. Accessed 21 Mar. 2022.

Gallup. “2014 Country Well-Being Rankings.”

Giannetti, Biagio F., et al. “A review of limitations of GDP and alternative indices to monitor human wellbeing and to manage ecosystem functionality.” Journal of cleaner production 87 (2015): 11-25.

Gluzmann, Pablo, and Leonardo Gasparini. “International inequality in subjective well‐being: An exploration with the Gallup World Poll.” Review of Development Economics 22.2 (2018): 610-631.

McKinsey Global Institute – “Global growth: Can productivity save the day in an aging world?” page 49

Pfeffer, Jeffrey. “The overlooked essentials of employee wellbeing.” McKinsey Global Institute (2018). https://www.mckinsey.com/business-functions/people-and-organizational-performance/our-insights/the-overlooked-essentials-of-employee-well-being. Accessed 21 Mar. 2022.

Remes, Jaana et al. “Solving the productivity puzzle.” McKinsey Global Institute (2018). https://www.mckinsey.com/featured-insights/regions-in-focus/solving-the-productivity-puzzle. Accessed 21 Mar. 2022.

Wärtsilä. “Going beyond GDP: China targets a new path to growth.” (2021). https://www.wartsila.com/insights/article/going-beyond-gdp-china-targets-a-new-path-to-growth. Accessed 21 Mar. 2022.