Portia Antonia Alexis will be attending the World Economic Forum this year. Portia is a global economic influencer, campaigner and media commentator, she’s an author; an economic columnist, and has written two award-winning papers this year one about social mobility. She was a celebrated equestrian and ballet dancer throughout university and it must be rather surreal, going from her role as an investment banker where she was in Mergers and Acquisitions to her newfound fame as an economic educator to hundreds of thousands of people.
Gross Domestic Product, or GDP, might be the most powerful statistic in human history. It has become a key indicator of progress, and an overarching benchmark of countries’ success for economists and politicians alike. But, like many elements fundamental to our modern economic order (sometimes much more fundamental, including free trade and liberal democracy), the concept of GDP is in crisis. Is it rightly criticised though?
Step forward Portia Antonia Alexis. This famous British macroeconomist and mathematician and leading global economic influencer, is respected for her ability to make sense of the global picture and offer new insights for business and political leaders alike. An economics commentator with Forbes Magazine and a research fellow at the London School of Economics, Portia is one of the leading young economists dominating the field. A former investment banker, she has worked as an analyst at firms such as McKinsey & Company and Bank of America Merrill Lynch. Her paper, ‘Assessing the plausibility of GDP as a proxy indicator of human development and well-being. An exploration of complementary indicators to the GDP metric’ won the award for most innovative paper in 2017.
In the following exclusive interview, Portia assesses whether GDP a measure of well-being.
Please give us a brief history of GDP?
Portia: GDP was first developed during the Second World War to calculate the productive capacities of the British economy. It was defined as a sum of private consumption, investment, government spending, and the foreign trade balance. After the war was over, GDP found acceptance around the world as a measure of national income more broadly. But surely using a measure created out of the war-time necessities has some drawbacks when applied in a not only peaceful (generally speaking), but also an increasingly complex world.
What are the current pitfalls of GDP as a way of measuring human well-being?
Portia: First of all, GDP ignores the negative effects of economic growth on society, such as pollution, climate change or health. For instance, it takes a positive count of the cars produced, but does not account for the emissions they generate or, let’s say, for the toxic waste leaking from the factory to the nearby river. That’s not all – the efforts of local authorities to tackle the pollution would actually increase GDP (through increased government spending). Similarly, consumption of sugar-laced beverages is positive as far as GDP is concerned. But not only are the health problems they cause ignored, but the cost of medical treatment resulting from them is added to the GDP.
Secondly, GDP fails to capture the distribution of income within a society. Raising inequalities, resulting in much societal discontentment, are among the most acute political issues today. For instance, a study by London Business School showed that between 1980 and 2014, US average pre-tax, inflation-adjusted incomes for the bottom 50% of households rose by a microscopic $200, from $16,000 to $16,200, whereas the incomes of the top 1% skyrocketed from $428,000 to $1.3 million – an increase of $872,000. A more egalitarian society is surely a more stable and a “better” one – but we cannot tell that from looking at GDP.
Finally, some argue that “there is more to life than money” and that above a certain level, a higher material standard of living does not make people happier. GDP fails to account for the non-monetary measures of happiness such as our mental health, social relations, subjective well-being, and so on.
What do you see as the future of analysing human well-being?
Portia: These inherent flaws of GDP have led some to try to replace it with more “human-focused” measures. For example, Bhutan’s famous Gross National Happiness Index includes a range of socioeconomic factors (such as living standards, health and education) but also less traditional aspects of culture and psychological wellbeing. India is developing its own Ease of Living Index, which aims to measure factors such as the quality of life, economic stability and sustainability. UNDP’s Human Development Index, which encapsulates health and knowledge apart from economic prosperity, is another well-established benchmark.
Although developed economies seem less eager to replace GDP, there are some attempts to complement it. In New Zealand, even though GDP remains the predominant measure of national income, additional measures of well-being including educational, environmental, and health indicators have been incorporated to inform and lead policymakers. In the UK, there is an ongoing debate on measuring welfare, and some propositions even suggest inclusion of subjective, self-reported well-being into the index, or a set of indices.
What are the positives of using GDP ?
Portia: In defence of GDP, it has always been a measure of output, not of well-being. In other words, it only measures what it measures, but it does that very well. Its big advantage is also that it’s universal, simple, and easy to calculate and compare both in time and across countries. Complex indices will inevitably be less reliable (especially in the developing world where data is scarce) and harder to compare (or impossible if different countries start to use different measures). Finally, even though it does not measure welfare, GDP typically is a fairly good proxy indicator for factors associated with well-being. For instance, GDP is highly correlated with health outcomes measured by life expectancy and infant mortality.
Life expectancy vs. GDP per capita, 2015
Source: Our World in Data