Measuring progress. Gross Domestic Product (GDP) and alternative indicators in the context of sustainable development


Bachelor Thesis, 2021

56 Pages, Grade: 1,3


Excerpt

Table of Contents

List of Figures

List of Abbreviations

1. Introduction
1.1 Problem description
1.2 Objective and methods

2. Sustainable development and GDP
2.1 Defining sustainable development
2.2 Defining GDP - Definition and calculation
2.3 Creating GDP - The development of GDP
2.4 Drawbacks and limitations of GDP
2.4.1 Economic drawbacks
2.4.2 Ecological and social drawbacks
2.5 Benefits of the GDP

3. Implications for policy making
3.1 Importance of indicators for political decisions
3.2 GDP affecting economic decisions and policy making
3.3 Barriers to change GDP
3.4 Political efforts towards sustainable development
3.4.1 Stiglitz-Sen-Fitoussi Commission
3.4.2 Enquete Commission "Growth, Prosperity, Quality of Life"

4. Alternatives to GDP in support of sustainable development
4.1 Indicators adjusting GDP
4.1.1 Index of Sustainable Economic Welfare (ISEW) and Genuine Progress Indicator (GPI)..
4.1.2 Green GDP
4.2 Indicator sets supplementing GDP
4.2.1 Green satellite accounts
4.2.2 Sustainable Development Goals (SDG)
4.3 Indicators replacing GDP
4.3.1 Human Development Index (HDI)
4.3.2 Ecological Footprint (EF)
4.3.3 Case Study: Bhutan's Gross National Happiness (GNH)
4.4 Correlations between GDP and sustainability elements

5 Discussion

6 Conclusion

Bibliography

List of Tables

Table 1: ISEW calculation

Table 2: Set values for calculating HDI

Table 3: Human development categories of HDI

Table 4: Components of GNH

Table 5: Improvements and deteriorations of alternatives over GDP

List of Figures

Figure 1: GDP per capita 2019 (current US$)

Figure 2: Comparison of ISEW and GDP of Tuscany, 1971-2006

Figure 3: 17 goals of SDG

Figure 4: The world's Ecological Footprint and biocapacity in gha/capita, 1961-2016

Figure 5: EF in relation to HDI for every country, clustered in regions, 2014

Figure 6: GDP/capita and life expectancy (years at birth), 2015

Figure 7: GDP/capita and HDI, 2017

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

1.1 Problem description

At the present time, the world population faces many challenges, such as the climate crisis, environmental degradation, depletion of natural resources and a growing population. In such times, fundamental questions about the way our economy works gain in relevance (Kumar, 2018). The Gross Domestic Product (GDP) is currently regarded as the most important indicator for economic performance and, thus, for a country's prosperity and living standards as well (Costanza, et al., 2014). The indicator was developed to measure the output value of an economy (Kapoor & Bibek, 2019). It is undisputed that economic growth, measured by GDP growth, increased people's well-being after the Great Depression and World War 2, however, economic, social and ecological circumstances have changed a lot since that time. There are many problems associated with GDP which mainly deal with the variables it includes or excludes from its calculation. Despite its various limitations, GDP remains a guiding figure for political decisions (Costanza, et al., 2014, p. 91). The question arises whether an economic model based on steady economic growth can be sustainable. The dispute about GDP is not recent, it was already discussed in the report of the Club of Rome's report “The Limits to Growth” in 1972 (Meadows, et al., 1972). Meanwhile, many alternatives to GDP have been developed which intent to display sustainable development in a better way. However, those alternative approaches pose drawbacks regarding their applicability and methodology and, thus, consensus has yet not been reached.

1.2 Objective and methods

Generally, this thesis is designed as a compilation work with the aim to present an overview of the current level of knowledge based on literature and with regard to the object of the thesis. The object of this thesis is to point on the drawbacks of GDP and, based on this, to present a selection of alternatives to GDP in support of sustainable development. These alternatives are examined critically and compared to GDP with the purpose to propose an indicator approach which displays genuine progress in a more comprehensive way. There are three overarching research questions which are addressed in this paper.

The first question is whether GDP is an appropriate indicator in support of sustainable development. The answer to the first research question is provided in chapter 2. It forms the basis for the further course of this paper since it examines the adequacy of using GDP in the context of sustainable development. For answering the question, sustainable development and GDP are defined. Furthermore, information about the calculation and development of GDP is useful to get a clear picture of the indicator. Eventually, pointing out its limitations and benefits clarify which elements of sustainable development are adequately and not adequately presented in GDP.

The second research question is what role GDP plays in policy making, and it is answered in chapter 3. To answerthis research question in depth, GDP's relevance and persistence in politics over such a long period of time is worked out. Concrete areas of application of GDP in policies and possible reasons for the reluctance to change GDP are expounded. The processing of this question is crucial since the need to find alternatives to GDP would not be so important if GDP was irrelevant in the real world. In the further course, a selection of political starting points of going beyond GDP are pointed out and their effectiveness is examined.

What are alternatives to GDP which display sustainable development in a better way? - This is the ultimate research question. Chapter 4 presents a selection of alternative approaches to GDP in the context of sustainability based on three approaches: adjusting, supplementing and replacing GDP. The intention, definition and calculation of each indicator is presented, and advantages and drawbacks are worked out. Furthermore, practical application examples from countries and regions are demonstrated. Chapter 4 also encompasses a case study which addresses a country where an alternative indicator to GDP has been introduced. The core of the case study consists of the examination of the conception and its policy implementation. In addition, the results of the indicator's measurement are analyzed. In chapter 5, the alternative indicators are examined in terms of their improvement and deterioration over GDP regarding the dimensions of sustainable development. Thus, the indicator with the best coverage of the dimensions of sustainable development can be ascertained.

It is important to mention that whenever it is talked about GDP as an indicator of welfare, prosperity or well-being, it is referring to GDP per capita. Furthermore, (genuine) progress and sustainable development are used as synonyms to ensure better readability.

2. Sustainable development and GDP

2.1 Defining sustainable development

In 1987, The World Commission on Environment and Development defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” (WCED, 1987, p. 43). The purpose of this idea is to maintain economic growth while protecting the environment in the long run (Schepelmann, et al., 2009, p. 9). However, this definition is insufficient since only the environmental aspect of sustainable development is taken into account. According to Soubbotina (2004, p. 8), sustainable development is characterized by the fact that it balances the economic, the social and the ecological dimension. The author mentions that “equality of opportunities for well-being” (ibid, p. 8) is central to the term as well. This means that the interests of different groups of people and among generations have to be balanced. Ciegis et al. (2009) have a similar definition. They state that “efficiency, equity, and intergenerational equity” (ibid, p. 31) have to be combined with regard to the dimensions above mentioned. As sustainable development is multidimensional, it is essential to strive for indicators which are not limited to single dimensions but include ecological, social and economic aspects (Schepelmann, et al., 2009, p. 9).

The ecological dimension of sustainable development deals with the general health of ecosystems. Ciegis et al. (2009, p. 33) explain that the health of ecosystems means its ability to regenerate itself. Following this definition, sustainable systems have to avoid over-exploitation of natural resources and maintain functions provided by the ecosystem as well as biodiversity. Only if society stays within the ecosystem's limits, basic human needs can be met on a sustainable basis (Ciegis, et al., 2009, p. 33; Holden, et al., 2014, p. 131; Harris, 2000, p. 6). In social terms, sustainable systems comprise elements, such as equality regarding distribution and sufficient health and education systems. In addition, gender equality and the ability to participate in political matters are further aspects of sustainable development. The economic dimension of sustainable development addresses the maintenance of the current level of production. Furthermore, sustainable systems avoid exceeding uncontrollable levels of governmental debt (Harris, 2000, pp. 5-6). Ciegis et al. (2009, p. 33) add that the ability of future generations to generate at least the same level of prosperity as the current generation is of central importance for economically sustainable development as well.

2.2 Defining GDP - Definition and calculation

As one of the most important macroeconomic indicators, GDP serves as a proxy for the economic performance of a country. Callen (2020) explains that GDP represents the “monetary value of final goods and services [...] produced in a country in a given period of time [...].”. In other words, the value of GDP is the sum of all entities produced within a country's borders in a certain period of time. The three words of which GDPis composed are Gross - the depreciation of the value of capital stock is not deducted, Domestic - only activities within a domestic economy are considered without regard of national ownership, and Product -the output of the economy (Schepelmann, et al., 2009, p. 14).

There are three methods to present and calculate GDP which focus on production, expenditure and income. The production method calculates the total of the value added which is contributed by each sector to the final output. The value added consists of total sales minus the value of intermediate inputs. In the expenditure method, GDP is presented as the total of final consumption expenditures, gross capital formation, and net exports. This method is often displayed in the formular GDP = C+ I + G + (X-M), where C is consumption, I is investment, G is government expenditures, X is exports and M is imports. The income method sums the value of remuneration, gross operating surplus and production taxes. This method presents the GDP shares of each participant in the production process. The result of the three approaches should be equal, even though they base their calculations on different sources of data. However, practice shows that there are insignificant differences due to statistical errors which can be disregarded. The respective national statistical agency is usually responsible for calculating a country's GDP. The calculation methodology is based on international standards which can be found in the System of National Accounts, 1993 (Callen, 2020; Schepelmann, et al., 2009, p. 14; Viet, 2009, p.4).

In order to determine whether an economy's total output has increased or decreased over periods of time, calculating real GDP is useful since it considers inflation. This is important to ascertain whether the change of output value is due to output or price changes. In the scope of this thesis, the difference between nominal and real GDP is only mentioned for the sake of completeness and will not be addressed further. When comparing GDP among countries, the value of GDP is usually converted in US dollar. The conversion can be done with either market exchange rates or purchasing power parity (PPP) exchange rates. With PPP exchange rates the purchasing power of various countries are equalized. This is especially important for the comparison between developed and developing countries (Callen, 2020).

Further important terms in the context of GDP are GDP per capita, Gross National Product (GNP), Gross National Income (GNI) and System of National Accounts (SNA). GDP per capita is especially relevant in terms of welfare and prosperity as the metric takes into account a country's population (Schepelmann, et al., 2009, p. 14). Like GDP, GNP displays the value of an economy's output. While GDP calculates the value of output within a country's borders, GNP includes the goods and services produced by a country's residents regardless of their location. GNI and GDP are closely related as well since GDP is a large component of GNI's calculation. Net income from abroad, property income as well as net taxes are added to GDP and subsidies on production are subtracted from it (OECD, 2020). National accounts are systems which aim at presenting the economic situation of a country based on certain frameworks. Besides showing flows and stocks, national accounts serve as source for various macroeconomic indicators. GDP represents a central element of national accounts (Deutsche Bundesbank, n.d.; Eurostat, 2018). The System of National Accounts (SNA) is the international standardization of establishing national accounts and provides guidance for measuring economic activity (United Nations, 2021).

Figure 1 presents per capita GDP for twenty selected countries clarifying that there are large discrepancies among nations regarding their per capita GDP.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: GDP per capita 2019 (current US$)

Source: Own presentation based on The World Bank, 2021

2.3 Creating GDP - The development of GDP

Already in 1665, first attempts to measure national accounts and the taxation capacity were developed in England. A similar approach was used in France which, however, only centered around agricultural output (Cobb, et al., 1995, p. 4). Carrying on the primary attempts of measuring national income, there were many economists trying to refine the calculation for national accounts over the course of time. In the 18. century, Adam Smith, a British economist, established popularity with the theory that a country's whole output, including manufacturing, contributed to its prosperity. Nevertheless, Smith excluded the economic activity of services from his definition of wealth since it did not produce a physical product and did therefore not have a value (Coyle, 2014, pp. 9-10). His material belief of a nation's wealth was dominant until the late 19. century, when the British economy faced a great shift from manufacturing to trading and finance (Cobb, et al., 1995, p. 5). The neoclassical economist, Alfred Marshall, overrode Smith's theory and drafted a new definition of wealth. He mentioned that prosperity was not only of material matter but also includes personal and intangible qualities (Marshall, 1890, pp. 54-62). The focus switched from tangibility to utility of products and services as the core element of wealth. With this approach, Marshall introduced that everything commercially traded has a market value, determined by supply and demand, and contributes to prosperity (Cobb, et al., 1995, p. 5).

Another turning point in the development of GDP was in the 1930s and 1940s in the wake of the Great Depression and World War 2 in the United States. The Great Depression, a worldwide economic depression starting in 1929, was accompanied by production decline, redundancies and mass unemployment. For this reason, the US government needed a measure with the ability to make a clear statement about the direction in which the American economy was moving as a base for political decisions. Consequently, a group of economists led by Simon Kuznets, developed a uniform set of national accounts which can be regarded as the prototype of GDP today (Costanza, et al., 2014, p. 91).

World War 2 brought up new concerns about the production output of the economy. The production of defense and war material had to increase tremendously. At the same time, a sufficient amount of consumer goods and services for the US citizens had to be provided in order to sustain the standard of living. Thus, national accounts estimates were needed for making full use of the production capacity as well as for measuring the consequences of the rapid rise of production on the US economy (Kane, 2012, pp. 11-12). In order to ensure economic stability in the long run, the Bretton Woods Conference was held in 1944 to establish a concept of international cooperation and trading. The main purpose of the concept was the generation of jobs, the provision of satisfactory income and the development of economic welfare. As a product of the conference, the International Monetary Fund (IMF) and the World Bank were established. The purpose of the institutions was to promote international monetary collaborations, ensure financial stability of countries' exchange rates and currencies and provide financial resources for infrastructure development after the war. The IFM and the World Bank used GDP as the major figure of general progress ever since (Costanza, et al., 2014, p. 91).

Since people were mainly concerned about their economic living conditions during the post-war period, focusing on GDP as an indicator for progress was reasonable (Delhey & Kroll, 2012, p. 8). However, the usage of GDP for measuring prosperity and sustainable development was already criticized by many renowned politicians and economists shortly after its introduction. Even Simon Kuznets warned of GDP's limitations since the indicator was intended to only reflect a small segment of market activity. In a report to the Senate of the United States, he openly stated his concerns about the misuse of GDP as it has the ability to "simplify a complex situation" (Kuznets, 1934, p. 5) which, however, cannot be quantified and measured exactly (ibid, pp. 5-6). Furthermore, Robert Kennedy, a former US politician, stated his opinion about GDP in a speech in 1968 as well (Kennedy, 1968):

Yet the Gross National Product [GDP] does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. [...] It measures everything, in short, except what makes life worthwhile (Kennedy, 1968).

2.4 Drawbacks and limitations of GDP

In the following, major drawbacks and limitations of GDP regarding sustainable development are listed. It is important to note that there is a number of limitations beyond the factors listed below. Since listing all objections would be beyond the scope, the main points prevailing in literature are identified.

2.4.1 Economic drawbacks

Formal and informal economy

The informal economy is perceived as unreported market activities, legal or illegal, which are not reflected in GDP and happen outside the formal market. However, the informal sector indirectly influences GDP because the value added may increase the revenue and output in the formal sector. In this context, examples for legal market activities would be barter of legal services and goods or fringe benefits. Illegal activities include trade with stolen goods, drug dealing and theft (Schneider, 2002, pp. 3-4). The informal sector represents a crucial problem since it has an impact on a nation's progress, economic growth as well as the political situation. There are many problems for the employees in this sector, such as bad working conditions and a lack of social protection and insurance (Islam & Alam, 2019, p. 1). Informal economy is a larger issue in developing countries than in developed countries. A study of the World Bank (2016) came to the conclusion that the informal market activities take up more than 50% of GDP in developing countries whereas the share is only around 5% in developed countries. Therefore, for many developing countries GDP is very low and gives a mistaken idea of the actual economic situation of a country (Van den Bergh, 2007, p. 7).

Devaluation of activities outside the monetized realm

The calculation of GDP fails to consider nearly all activities, which do not contain monetary transactions. Important work in the household and the voluntary sector do not find their presence in GDP although those services have a great contribution to individual welfare and economy. Furthermore, leisure can increase the general quality of life to a great extent. However, leisure does not have a value for GDP measurement. From GDP's point of view, time off even has opportunity costs. In other words, it is perceived as a lost possibility to further increase economic output (Orlowski & Wicker, 2015, p. 2673).

Input orientation of governmental services

Another shortcoming of GDP is found in its assessment of governmental services. Those services do not have an underlying market price which displays the marginal utility to the user because they are usually free of charge or offered at a reduced price. Therefore, the evaluation of output of governmental services is treated as equivalent as its input. However, considering the amount of monetary spending as the value of goods or services poses the problem that the actual benefit is disregarded. Growth of GDP is not automatically the consequence of increasing productive investment but can also occur due to inefficient government spending. The other way around, GDP decrease must not be accompanied by a deteriorated state of market but can be due to efficient government spending and innovation (Ivkovic, 2016, p. 265).

Defensive expenditures

GDP involves economic activities which, however, do not necessarily promote welfare. Cobb et al. (1995, p. 2) put it in such a way that GDP does not distinguish between the "desirable and the undesirable” (ibid) as regrettables are simply added to the GDP and boost it. Regrettables are viewed as costs which are, for instance, related to crime, accidents, military or environmental disasters. As a more precise example, restoration after a hurricane does not enhance initial well-being as it only yields at restoring people's living conditions and well-being before the catastrophe. Still, restoration expenses lead to GDP increase. Similarly, maintenance of a crime free district might require higher police expenditures. While the crime rate and the accompanied welfare within the district remain the same, the additional expenses boost GDP (Osberg & Sharpe, 2001, p. 12). Since those activities only help to prevent and restore social and environmental damage, they are neither the source of a nation's progress nor the enhancement of prosperity (Giannetti, et al., 2015, p. 12).

2.4.2 Ecological and social drawbacks

Income distribution

Another shortcoming of GDP as a measure of sustainable development is the neglection of income distribution among a nation's citizens. While only the average income is relevant for GDP, the median income would be more of use for capturing how the income among specific population groups of a nation develops (Van den Bergh, 2007, p. 6). Stiglitz (see Van den Bergh, 2007, p. 6) notes that while the GDP has increased in the US, the median income has decreased during the last decades. In general, this means that a rise in GDP does not automatically lead to an increase of income equality. This is an essential fact since a high degree of inequality is accompanied by unequal opportunities and decreased well-being. In addition, GDP does not capture the proportion of expenditures among population groups. Since wealthy people have a bigger share of consumption and buy more luxury goods, their expenditures are heavier weighted by GDP than those by the poor (van den Bergh, 2007, p. 6).

Depletion of natural resources and environmental externalities

A largely neglected and unpriced field in GDP deals with environmental externalities and depletion of natural resources. Those negative effects on the ecosystems are motivated bythe measurement of GDP as plundering the natural habitat for its resources sets off GDP growth (Cobb, et al., 1995, p. 9). He adds that GDP calculations disregard a main accounting rule since it perceives depletion of natural resources as actual income. Changes in environment, which include deforestation and decreasing fish stocks, and the excessive reduction of fossil resources are completely unnoticed by GDP as well. Negative environmental externalities, such as pollution of air or water, do not negatively affect GDP, however, cleaning up those toxic substances increases the measure. Moreover, services provided by the ecosystem are decreasing accordingly (Costanza, et al., 2009, p. 9). The factors mentioned lead to GDP giving a wrong picture of prosperity as the population believes it is richer than it actually is (Costanza, et al., 2009, p. 9; Van den Bergh, 2007, pp. 8-9).

Threshold effect

Since it is generally assumed that better financial circumstances result in higher well-being, policy makers often focus on GDP growth in their policy recommendations without considering further sources of welfare. Within limits, increasing GDP is often accompanied by increasing well-being and progress. Nevertheless, the effect of threshold of GDP embodies that GDP growth is offset with several costs at a certain point. Those costs include, for example, loss of leisure (Costanza, et al., 2009, p. 9). According to Costanza et al. (ibid), increasing material wealth beyond a certain threshold goes along with several social and personal drawbacks for individuals. It negatively affects community bonds, personal relationships and self-development, only to name a few, resulting in an overall decrease of happiness and quality of life (ibid).

Income and subjective well-being (SWB)

Considering empirical evidence, wealthy people are satisfied with their lives to a higher degree than poor people. Diener et al. (1995) already concluded in their comprehensive study of 55 countries that, on average, subjective well-being (SWB) increases with income and when a certain level of material basis and basic supply is ensured. Moreover, a high level of income is accompanied by more opportunities, security and recognition in society (Frey & Stutzer, 2001, p. 408). However, there is a large number of literatures questioning the positive correlation between income and SWB. This body of research is mainly based on the study conducted by the US economist Richard Easterlin (Li & Shi, 2019, p. 1). Easterlin discovers that although income per capita in 2004 in the US is twice as large as in 1974, the average SWB had not increased significantly during that time. He emphasizes that the difference of average SWB is insignificant among countries, regardless of whether rich or poor countries are looked at. Easterlin reasons this by stating that there are crucial cognitive factors, such as social comparison and hedonic adaptation, which influence SWB within countries. Therefore, differences in income per capita among countries do not automatically lead to differences in average SBW. Additionally, Alexander (2012, p. 6) explains that the positive impact on SWB of increasing income appears to be weaker in high levels of income than in lower levels. While SWB increases with income in low income levels, the correlation attenuates remarkably at a certain point of income. This consideration is related to the theory of diminishing marginal utility. In this case, marginal utility represents SWB. The theory states that the marginal utility of additional income decreases above a certain threshold. When the marginal utility of additional income is zero, further income increase will not affect SWB because saturation of SWB is reached (Li & Shi, 2019, p. 5). Nevertheless, numerous studies critically review the statements regarding this diminishing correlation between income and SWB. A major objection is the insufficient involvement of other factors affecting SWB, such as decreasing sociability, switching individual priorities and increasing social inequality (Bartolini & Bilancini, 2010, p. 211; Li & Shi, 2019, p. 16; Stevenson & Wolfers, 2008, pp. 28-30).

2.5 Benefits of the GDP

Despite its critique and limitations, GDP has a number of crucial benefits which explain its persistence and importance over such a long period of time. Firstly, this may be due to its uniqueness as an accurate, simple and universal measure. As such, GDP is a significant indicator for economic policy and decision making at international, national and regional levels. With the ability to accurately assess tax yield, productivity, production gaps and inflation, it plays a vital role for economic management. The simplicity of GDP is based on the clear separation between market activities and non-market activities. More precisely, GDP considers everything which is traded with an underlying market price without any selection or limitation. This fact is closely related to GDP's objectivity. The measure does not discriminate or neglect any monetary transaction but simply counts them. Additionally, Ivkovic (2016, p. 263) emphasizes the per capita GDP's comparability between countries since the population of the nations is taken into account. Therefore, it serves as an important economic measure for global comparison (Schepelmann, et al., 2009, p. 19; Ivkovic, 2016, p. 263).

3. Implications for policy making

3.1 Importance of indicators for political decisions

Independent of specific subject areas and purposes, various indicators are essential for economic policy. As indicators have the ability to describe a certain topic of interest, reduce information overload and provide specific necessary information, they are very useful for decision making. Especially in terms of genuine progress, the usage of different indicators is valuable in order to match the dimensions of sustainable development and to assess the direction in which a country is moving (Canoy & Lerais, 2007, p. 5). Cornescu and Adam (2014, pp. 13-14) explain that sustainability indicators mainly contribute to setting goals or standards and serve as early warning about unsustainable directions.

3.2 GDP affecting economic decisions and policy making

Since it is claimed that GDP does not affect the real economy, its drawbacks and suggestions to find more suitable measures of progress meet resistance from many economists and politicians. Nevertheless, there is a multitude of aspects which indicate that GDP information is indeed used in the real economy and has an impact on reality (Van den Bergh, 2009, p. 120).

As economic growth is usually a central goal of nations, politicians often align their decisions according to GDP (Van den Bergh, 2009, p. 120). The media reinforces this fact as news tend to go for simple and concise headlines and GDP delivers those short captures (Canoy & Lerais, 2007, p. 4). Furthermore, GDP predictions substantially affect dealings of the financial sector and banks as interest rates are bound to GDP changes and enterprises regard GDP as an important factor for investment decisions. Moreover, GDP has the ability to reinforce itself because of its monopolistic status and its global use. A multitude of actors - including government, enterprises, financial sector, non-profit organizations, research institutions, media and private households - have an interest in GDP and focus on it. Therefore, it influences the investment climate and consumption leading to structural impacts on the economy, society and politics (Van den Bergh, 2007, p. 10). Van den Bergh (ibid) argues that the broad belief that GDP largely influences economic reality leads to a "self-fulfilling prophecy” (ibid, p. 10). This theory is transferred into reality as it provokes reactions to GDP changes by enterprises, investors, governments and private households and produces a procyclical effect. Furthermore, GDP is present in all education levels and the media as well as in economic and finance research to a large extent.

In the following, concrete examples for GDP affecting policies are mentioned:

1. Kyoto Protocol

Barker and Ekins (2004, p. 53) show how GDP information is able to direct decisions at US federal level, such as climate policies. The Bush administration rejected the ratification of the Kyoto Protocol, a global agreement of 192 nations to set binding greenhouse gas (GHG) emission targets in order to combat climate change. The refusal was mainly due to the negative effects those targets would have on GDP growth. Many economists shared this view as they stated that GHG mitigation would go with high economic costs (Sutherland, 2000, p. 90).

2. EU clim a te policy

GDP plays an important role in the EU climate policy as well. In the sectors which are not captured by the EU Emission Trading System (EU ETS), the European Union aims at reducing the GHG emissions by 30% in 2030 compared to 2005. This legislation is to be achieved by setting binding emission reduction targets for every member state (“Effort Sharing”). The height of these individual targets is based on each EU member's economic performance, measured with GDP per capita. According to this system, countries with a higher GDP have to reduce their emissions to a higher percentage than countries with a relatively low GDP. For example, Germany needs to reduce GHG emissions by 38% while Poland only needs to cut 7% (Bonn & Reichert, 2018, pp. 4-5). However, this legislation is criticized since the orientation towards GDP does not assure that emissions are actually cut where a reduction would be cheapest and most efficient (ibid, 2018, p. 9).

3. EU funding

GDP information often serves as an important base for policies at EU and international level. It is used in order to determine the allocation of financial support for regions and EU member states. The EU Regional Policy is financed from several European funds of which two of them, the European Regional Development Fund (ERDF) and the European Social Fund (ESF), are allocated to regions according to their GDP per capita. The threshold is aGDP of less than 75% of the EU average. Furthermore, the Cohesion Fund (CF) aims at EU states which have a GNI per capita below 90% of the Union standard (Lammers, 2018, pp. 593-594).

As GDP information is the core of SNA, the use of SNA as a base for economic decisions and policies is crucial as well. They are an important instrument for decision making and communication. The statistics indicate an economy's financial and economic power. Therefore, they are able to influence decisions on investment, consumption and wages, such as conditions of international loans and stock trading. Additionally, targets of public policies are often based on SNA. For instance, the contribution of national military expenditures among the EU countries is measured in terms of military expenditures as percentage of GDP (Bos, 2007, pp. 9-23).

Given the numerous areas of application in which GDP serves as a direct reference and central economic measure, it becomes evident that GDP does affect the real economy and policy making to a large extent.

3.3 Barriers to change GDP

There are still significant barriers preventing GDP change. The resistance is mainly of institutional origin. A common reason for this is the belief that growth is always good. It is widely accepted that continuous GDP growth is desirable and the cure for universal problems. The assumption that economic growth is vital for preventing crises is one of the main causes which hinder change. Likewise, decreasing GDP is believed to provoke economic instability. Thus, goals which are not compatible with GDP growth are regularly dismissed by policy makers and governments. Politicians are interested in GDP growth to a large extent as economic decline might be reflected in negative vote results. Accordingly, this paradigm is a major reason for refusing to establish and use measures which are not primarily consistent with economic growth (Schmelzer, 2015, p. 266; Costanza, et al., 2009, p. 27; Van den Bergh, 2009, p. 120).

Another barrier is the deficiency of political motivation and guidance to find alternative measures. This is mainly due to the threat that new measures may reveal inappropriate past and present political decisions. Costanza (2009, p. 28) cites the example of China where a sustainable alternative to GDP, Green GDP, was introduced in 2006. Besides economic growth, the new measure included environmental consequences of economic growth. However, the attempt to remodel GDP was already dismissed after a year. Amongst other factors, this was due to political matters since many provincial leaders did not want to restrict their market activities and still wanted to put economic growth as first priority. This may derive from their stake in local companies and the tradition of being evaluated based on their economic success (ibid; Rauch & Chi, 2010, p. 108).

Furthermore, there is a big interest in sustaining the status quo since the existing circumstances guarantee financial success for multiple organizations and institutions (ibid). Maja Gopel (2011, p. 1), a German political economist, states that systems at the meso-level rather stick to the current frame of mind. This is mainly due to established beliefs and processes as well as power relations and beneficial interest behind present decisions (ibid).

3.4 Political efforts towards sustainable development

3.4.1 Stiglitz-Sen-Fitoussi Commission

In 2008, Joseph Stiglitz, Amartya Sen and Jean Paul Fitoussi were convened by the former president of France to arrange a commission which addresses issues regarding GDP as a measure for progress. The commission's aim was the identification of limitations of GDP, the determination of additional information needed for alternative indicators and the assessment of applicability of alternative measurement tools. The report of the commission was published in 2009 and received worldwide attention from many government leaders, economists and scientists at international level. The central message of the report is that progress can no longer be measured in terms of economic output due to its inadequate portrayal of further aspects of sustainability and well-being (Stiglitz, et al., 2009, p. 7; Bijl, 2011, p. 158).

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Title
Measuring progress. Gross Domestic Product (GDP) and alternative indicators in the context of sustainable development
College
University of Applied Sciences Dortmund
Grade
1,3
Author
Year
2021
Pages
56
Catalog Number
V1032810
ISBN (eBook)
9783346440518
ISBN (Book)
9783346440525
Language
English
Keywords
measuring, gross, domestic, product, GDP
Quote paper
Theresa Klein (Author), 2021, Measuring progress. Gross Domestic Product (GDP) and alternative indicators in the context of sustainable development, Munich, GRIN Verlag, https://www.grin.com/document/1032810

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Title: Measuring progress. Gross Domestic Product (GDP) and alternative indicators in the context of sustainable development



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