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Does GDP mean anything?

Salman Rasheed

The writer is a Karachi-based research analyst and political consultant.

According to the field of economics, gross domestic product or GDP is one of the ultimate performance measures to gauge a country’s prosperity.  Gross domestic product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. Essentially, GDP is an economic photograph of a country that provides an estimate of the size of an economy and growth rate. However, in the Pakistani context, does GDP and GDP growth have any meaning regarding the welfare and economic equality of our society?

The debate over the meaning and usefulness of GDP as a measure of the wellbeing of a country is an old one. US Senator Robert F. Kennedy questioned the value of GDP as the sole measure of prosperity in a speech at the University of Kansas on March 18, 1968. Senator Kennedy said about GDP, “It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.”

Kennedy’s statement is likely true for all countries including Pakistan. The renowned American economist Joseph E. Stiglitz wrote in an article last year for Scientific American that GDP “does not measure health, education, equality of opportunity, the state of the environment, or any other indicators of the quality of life.  It does not even measure critical aspects of the economy such as its sustainability: whether or not it is headed for a crash.”

The recent covid-19 pandemic has exposed the fallacy that wealthy nations because of higher GDP per capita would be more effective in tackling the pandemic than less wealthy countries. But what the world witnessed is the opposite, the wealthiest country on earth the United States of America (US) with a GDP of almost US$ 23 trillion recorded over 750 thousand deaths while a country like Malaysia with a total GDP size of 1.5% of the US and one-sixth on GDP per capita basis experienced about 28 thousand deaths. The US generates so much wealth but had a difficult time limiting covid-19 deaths.  Why isn’t US GDP and GDP growth not providing better living standards to its people?

Regarding the large GDP and number of covid-19 deaths experienced by the US, Professor Stiglitz described the US economy in the same article as the following, “the American economy is more like an ordinary car whose owner saved on gas by removing the spare tire, which was fine until he got a flat. And what I call “GDP thinking”— seeking to boost GDP in the misplaced expectation that alone would enhance well-being – led us to this predicament.” Stiglitz goes on to mention, “In sum, the relentless drive to maximize short-term GDP worsened health care, caused financial and physical insecurity, and reduced economic sustainability and resilience, leaving Americans more vulnerable to shocks than the citizens of other countries.”

Looking at income inequality in Pakistan, it is not surprising that there is a large gap between the rich and poor. Elite capture of the economy is nothing new here and according to United Nations Development Program’s (UNDP) Pakistan National Human Development Report 2020 (NHDR) estimates that the total privileges enjoyed by Pakistan’s most powerful groups amounted to PKR 2.66 trillion in 2017-2018, equal to 7% of the country’s GDP.  The report defines these privileges as favorable pricing, lower taxation, and preferential access. The corresponding cost of social protection programs estimated by Dr. Hafiz A Pasha in 2019 was around PKR 624 billion.

Furthermore, the modified Palma ratio measures the ratio between the richest 20 percent of the population, also called quintile 5 (Q5), and the poorest 20 percent, called quintile 1 (Q1). Pakistan has a modified Palma ratio of 4.7, meaning that the richest quintile has 4.7 times the income of the poorest quintile.  The NHDR 2020 also states that the middle class in Pakistan is shrinking from 42% in 2008-09 to 36% in 2018-19.  Sadly, all these equality metrics prove that Pakistan’s political and economic elite have rigged the system to their benefit whereas, the remainder of our society is picking up the crumbs.

In the Pakistani context, does GDP growth add to the wealth of the bottom 80% of society?  It appears that increasing GDP doesn’t trickle down as much to the bottom 80% since the top 20% of society skims off most of the cream. 

We can throw around GDP growth numbers but they seem to have no relative impact to improve the economic and social well-being of the bottom 80%. This also shows that all governments past and present have failed in redistributing income and wealth. 

Our economic policymakers must develop an economic model suitable to the Pakistani situation that caters to the uplift and welfare of the bottom 80% which requires out-of-the-box thinking rather than textbook solutions.  We need an economy that creates prosperity for all without hardship for anyone.  One of the reasons for the creation of Pakistan as envisaged by the Father of the Nation Quaid-e-Azam Muhammad Ali Jinnah was ensuring that the poor would live a decent life, “It is not our purpose to make the rich richer and the accelerate the process of accumulation of wealth in the hands of a few individuals. We should aim at leveling up the general standard of living amongst the masses”  

The current worldwide supply-chain and logistical crisis are fueling inflation everywhere. The time has come to re-think economic globalization and increase localization.  We need to implement supply-side policies that enhance our economy’s productive potential to lessen reliance on imports through boosting domestic manufacturing that will increase the supply of products and jobs.

When evaluating the economic performance of Pakistan, we must look beyond just GDP and GDP growth and have a dashboard of indicators.  The dashboard would contain a set of numbers that would convey vital diagnostics of our society and economy and help direct them. Along with GDP, other indicators should include life expectancy, environmental sustainability as measured by greenhouse gas emissions and/or air and water quality, unemployment rate, income and wealth inequality metrics, and economic sustainability measured by levels of indebtedness. 

Senator Robert F. Kennedy’s speech at the University of Kansas also mentioned the poverty of satisfaction, that is the lack of purpose and dignity, “Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things.”  As Pakistanis, we need to ask ourselves if this is not what we are experiencing today? We are sadly willing to skew our moral compass to gain material wealth and look the other way in how we achieve it.