An alternative measure to GDP is proof that the global economy isn’t what it seems

Smog as far as the eye can see.
Smog as far as the eye can see.
Image: Reuters/George Frey
We may earn a commission from links on this page.

By traditional standards, the global economy is experiencing something of a renaissance. For the first time since the 2008 financial crisis, every major region in the world is growing at the same time. But there remains a growing unease that measuring the health of an economy by GDP alone disguises the truly burning issues—namely, inequality.

Gross domestic product­—the sum of the goods and services produced by a nation—is an insufficient measure of national economic performance, according to a new report from the World Economic Forum (WEF), which is hosting its annual gathering of the global elite in Davos this week.

Dozens of political leaders will be at the conference, in high spirits given the strength of the global economy but not necessarily comfortable in their positions. Since last year’s gathering, for example, British prime minister Theresa May lost her parliamentary majority and German chancellor Angela Merkel is a last-minute addition to the schedule after cobbling together a governing coalition (probably), months after her country’s most recent election.

“Decades of prioritizing economic growth over social equity has led to historically high levels of wealth and income inequality,” the WEF report says. With these disparities comes unhappiness and distrust of politicians.

Criticism of GDP has been mounting for years, with economists recommending that we demote it as a measure of progress or replace it with a dashboard of indicators that better represent living standards. Several ideas for better measures have been proposed, inspired by the work of a commission set up in 2008 by former French president Nicolas Sarkozy, which asked economists including Nobel laureates Joseph Stiglitz and Amartya Sen to come up with alternatives to GDP.

The WEF proposes a measure of its own, dubbed the “inclusive development index.” While it takes into account growth, as measured using GDP per capita, employment, and productivity, it also incorporates several other metrics, including gauges of poverty, life expectancy, public debt, median income, wealth inequality and carbon intensity. The index also considers investments in human capital, the depletion of natural resources, and damage caused by pollution.

This broader index of economic progress and wellbeing shows how the traditional measure of growth often falls short. In the past five years, almost a third of the 103 countries covered by the WEF index experienced a decrease in their inclusive development scores even as GDP increased. Among the 29 advanced economies in the sample, all but three have experienced economic growth over that period, but most—16 out of 29—saw their measures of social inclusion deteriorate, according to the WEF. Income inequality has risen or remained stable in 20 of these advanced economies, and poverty has increased in 17.

Ultimately, the report argues that a fixation GDP growth won’t ensure an improvement in living standards. “Policymakers should not expect higher growth to be a panacea for the social frustrations that have roiled the politics of many countries in recent years,” the WEF says.

This is the second year WEF has published the Inclusive Development Index, and the second time Norway has topped the list for advanced economies, scoring highly on all indicators except wealth inequality. Norway’s high rankings on everything from median income and public debt to pollution, suggest that it will be difficult to fulfill Donald Trump’s desire to entice more Norwegians away from their homeland to the US, which ranked 23rd.

Inclusive Development Index, top 10 countries