How the GDP magic failed

Book review of GDP: The World's Most Powerful Formula and Why it Must Change

The book starts with a reference to an interesting coincidence that saw three bright young scholars from the Indian subcontinent meet at Cambridge University as economics undergraduates in 1953. They became close friends, and each went on to achieve great eminence. One even won the Nobel Prize in economics. 

The trio included the Nobel laureate-to-be Amartya Sen; Mahbub-ul -Haq who rose to become Pakistan's chief economist and presided over its short-lived 1960s economic boom; and Meghnad Desai whose name became synonymous with development as the head of London School of Economics' Development Studies Institute. 

They figure in this book not because of their friendship but because of their role in shaping the idea of development economics leading to the birth of human development index (later adopted by United Nations) to reflect a more accurate picture of a country’s progress as against the gross domestic product (GDP) favoured by international financial institutions and national governments.

Yet all three, the author points out, started out as “Old School” economists believing in the magic of GDP growth rate. Dr Haq especially pushed it to extremes as an architect of his country’s economic philosophy — until he concluded that he couldn’t continue to support a policy that effectively promoted concentration of wealth in a few hands at the expense of millions of ordinary people. 

Using GDP as the sole measure of a country’s economic health has long been a contentious issue with critics arguing that it ignores other key development indices such as living standards, life expectancy, literacy, health, per capita income, and environment.  Its narrow focus on production and consumption gives a misleading picture of  a country’s socio-economic landscape. A high GDP growth is not a proxy for overall economic success. 

Readers might remember the BJP’s disastrous “India Shining” campaign built on the back of a rapidly rising GDP growth rate ahead of the 2004 general elections.  The slogan backfired and the party suffered a crushing defeat in the elections. The reason was simple: The campaign’s lopsided focus on urban growth ignored the distress of vast swathes of Indians who lived outside the metropolitan bubble. 

GDP: The World’s Most Powerful Formula and Why it Must Change

Author: Ehsan Masood

Publisher: Icon Books

Pages: 257; Price: Rs 499

India’s famed growth story was divorced from the reality on the ground where millions of Indians remained mired in a cycle of poverty, illiteracy, malnutrition. A mouth-watering 7.6 per cent GDP growth made no difference to their daily lives even as a tiny metropolitan elite became richer, causing the socio-economic divide to widen. No wonder, the left-behinds found the “India Shining” narrative insulting and voted against it with their feet.

History is littered with corpses of supposedly high-flying economies that crashed and burned because ultimately their true state caught up with the myth of GDP-driven progress. This book reminds us how, in the 1960s, Pakistan was “seen around the world as a model economy” meriting “a visit from no less than President Dwight D. Eisenhower”. 

The so-called “Karachi economic miracle” saw its GDP leap from 2.5 per cent in the late 1950s to nearly 6 per cent between 1960 and 1965. As in India and other “tiger” economies of the 1980s-1990s, it was achieved by putting all eggs in the “growth” basket — focusing  wholly on industrial output by propping up a small, privileged business class with fiscal concessions  and shielding it from competition. It was assumed that once these brave entrepreneurs were able to produce enough wealth, its benefits would automatically trickle down to everyone. 

“This meant that a handful of chosen families were effectively given a licence to print money... . It also made a relatively small number of people into the new super- rich,” writes Ehsan Masood pointing out that at the height of the boom just 20 or 22 families controlled much of Pakistan’s economy. 

The “trickle down” theory didn’t work, plunging the Pakistani economy and larger society into a spiral of crises from which it has still not recovered. But here’s the thing: Despite the historically proven fragility of GDP-driven growth it continues to mesmerise everyone from IMF and World Bank to central banks, national governments, businesses and the media. 

As the author points out, the quarterly announcement of the latest GDP data “ranks as one of the great rituals of modern economic and political life”, and the fates of governments hang by how bad or good the figures are. This book is not a plea for binning GDP, which remains a powerful economic measurement tool, but for broadening its scope to include other development indices so that it is able to offer us a more complete picture of a nation’s progress.

Mr Masood is a well-known British-Pakistani science writer with an interest in developmental issues. His views on GDP were formed by its damaging effect on developing societies, including, of course, his own ancestral land, Pakistan. Which makes him a persuasive witness for the prosecution in the case against GDP mania.