Economic Growth Is Not Always Progress

Inflation and economic growth, measured by gross domestic product (GDP), have recently been headline news and have sparked serious debate among pundits, politicians and the citizenry-at-large. What do these stats mean for upcoming elections and for the average person’s daily life? Is it fair to compare China’s with the US? Is it fair to compare past GDP to today’s?
David Pilling’s 2018 book titled “Growth Delusion” explores these questions and many others and adds a healthy dose of skepticism along the way, especially when he points out that inflation effects reported GDP numbers, and vice versa.

Mr. Pilling makes a compelling case that GDP is an imperfect measure of economic growth that fails miserably to accurately indicate the welfare of a nation, with one exception: if “you’re poor, economic growth can be transformative” and effective in raising living standards out of poverty. However, he adds that GDP does not take into account, for example, income inequality, existing resource endowments and their depletion, and good and bad externalities. The author traces the history of GDP’s creation to the early twentieth century and explains that even at its inception, its creator saw flaws in the data used to compile it and in its tenuous ability to reveal the health of an economy.

The author also suggests that, even today, the GDP metric is fraught with pitfalls in comparing economic growth across nations, especially in emerging economies, and comparing those statistics over time. For example, some nations include illegal activities in the calculation, while others have huge underground economies which go unmeasured and unreported in GDP stats; others, such as China and Kenya, for example, deliberately underreport GDP growth, so as to keep subsidies coming from richer nations and certain global development institutions.

Mr. Pilling explains that technological changes that have transformed nations away from manufacturing and into service economies and the financialization of economies have further distorted and confused GDP meaning over the past half century. Through a series of specific anecdotes from developed and emerging nations the author demonstrates the many challenges inherent in devising this single metric of a nation’s economic health.

The author concludes that due to its shortcomings, and our inability to reduce all living standard factors to dollars and cents, the GDP metric needs to be supplemented with other types of stats and indexes; he highlights the many attempts to measure living standards by various researchers in recent years who have identified other factors that weigh in assessing human progress, prosperity and happiness.

Although rather comprehensive and detailed in its approach, the book’s analysis is an easy read and most accessible to readers with limited background in economic statistics and macroeconomic analysis. The book is an excellent introduction to this complicated and very detailed subject and should appeal to not only macroeconomists, but also to business executives and investors that rely on GDP statistics and forecasts in their decision-making.