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Economics

Integrate new prosperity metrics into economic planning and policymaking

Nicholas Sorrenti via Unsplash

Economic growth, measured primarily by GDP, has long been a central goal of economic planning and policymaking. While GDP growth has supported positive trends such as poverty reduction, it has been accompanied by societal costs like climate change, environmental degradation and increasing inequality.

The limitations of GDP as a measure of prosperity

For decades, a central goal of the economic system has been the pursuit of economic growth, with gross domestic product (GDP) as the reigning macroeconomic metric. Governments use GDP to guide and monitor economic planning, design and assess the effects of economic policies, prepare national budgets, and compare the health of their economy against other countries. Development financing, debt relief and even UN membership fees are often contingent upon a country’s GDP. Businesses use GDP to monitor the state of the economy and industries and to make strategic decisions.

However, experts have long warned against conflating GDP with prosperity because it does not measure the quality of economic growth as it relates to ecosystem health, sustainability or people’s subjective and objective well-being. While GDP’s growth since 1960 — an increase of more than 7,000% — has been accompanied by benefits like poverty reduction, improved access to health and education, and reduced child mortality, this growth has come at a cost.

The Sustainable Development Index shows that most of the 163 tracked countries are not achieving human development within ecological limits or planetary boundaries, and 40% of countries have gotten worse over time. Income and wealth inequalities have also been on the rise since the 1980s, resulting in increased political instability and polarization. Recent research from the Earth Commission shows the world is not operating within the safe and just limits of what the planet can afford for seven out of eight earth systems, including climate, aerosol pollutants, natural ecosystems, working landscapes, surface water, groundwater, nitrogen and phosphorus. In other words, global economic development to date has resulted in extreme risks to earth system stability and human livelihoods.

Human activities pushed most earth systems beyond safe and just limits

 

Why GDP remains the dominant economic metric

GDP continues to be the dominant goal for economic planning and policymaking for three primary reasons. First, accounting rules and recommendations for measuring GDP are well-established by the United Nation’s System of National Accounts (SNA). The high degree of international acceptance of the SNA has led to widespread adoption by national statistical agencies, policymakers, international institutions and businesses, and has resulted in frequent conflation of GDP with prosperity.

Second, there is a lack of coordination across researchers, countries and international institutions on alternative progress indicators and “beyond GDP” metrics covering well-being, equity and sustainability dimensions. Most countries track a wide variety of such indicators but vary in terms of indicator selection, data collection and analysis methods, reporting practices, and ability to integrate findings into policymaking processes. Subsequently, there is a lack of comparability across countries for indicators representing dimensions of well-being, equity and sustainability.

And third, countries lack the technical and financial capacity, and sometimes political will, to develop and embed alternative prosperity indicators in their national statistical agencies and economic plans and policies.
 

How to remove GDP lock-in

To remove GDP lock-in, governments need to systematically integrate well-being, equity and sustainability goals into central economic planning. For instance, governments can work to de-silo policymaking across agencies and consider integrating goals across various national strategies that touch on climate, nature and equity issues (e.g., national development plans, nationally determined contributions and National Biodiversity Strategies and Action Plans). International institutions that support development efforts must also ensure their missions, decision-making processes and results frameworks are tied to these wider goals.

To increase global harmonization and uptake of alternative progress indicators, governments and international institutions can support the creation of a core set or dashboard of internationally-agreed upon well-being, equity and prosperity metrics and associated accounting rules, possibly linked to the UN Sustainable Development Goals. This set of metrics could be elevated to the same international level as GDP to increase acceptance, working through the SNA and satellite accounts.

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Current investments and financial flows remain off track to protect people, nature and biodiversity. Watch this webinar recording to learn more.

Tracking progress on global outcomes

Key enablers and barriers to change

Data challenges

This shift presents several data collection challenges. First, there are challenges with identifying if a government or international institution is embedding well-being, equity and sustainability goals into economic plans and decision-making processes. Several initiatives track efforts to develop well-being frameworks by OECD countries, wealth accounts, or implementation of the UN SEEA. 

However, these efforts face limitations in terms of country coverage, ability to collect time series data, or ability to track how frameworks or indicators are actually used to inform economic planning and policymaking. A survey approach of national and subnational governments and international institutions could work to overcome these challenges. Private sector or business goals and metrics are likewise difficult to track, as there are few if any legal mandates to publicly report on them.

Similarly, it is difficult to track the number of governments and international institutions supporting a globally harmonized accounting framework because there is no available dataset. A survey approach could also work in this regard.

Another significant challenge for this shift is that the discussion on moving “beyond GDP” among governments, international institutions and other actors is still evolving. Many leading stakeholders and economic experts — including the UN Secretary-General and the 2008 Commission on the Measurement of Economic Performance and Social Progress — have argued for the development of a core set or dashboard of well-being, equity and sustainability metrics that would provide a clear sense of the health and status of the economy. 

Others point to the importance of using a composite index that covers well-being, equity and sustainability dimensions but that is easy to use, like GDP. The international community has not yet agreed on a clear path forward nor a timetable, but recent research shows there is growing convergence on what dimensions are most important to include in a dashboard approach and which composite indices are best suited to include them.

Experts would likely advocate that all governments and international institutions that work on economic development issues mainstream well-being, equity and sustainability metrics into decision-making processes, economic planning and public policies. Should a core set of such metrics be adopted and integrated into a globally harmonized accounting framework, a target of 100% of countries implementing these revisions would be ideal. Experts would also likely advocate that major media outlets do a better job of reporting on the success of policies, initiatives and investments in terms of well-being, equity and sustainability, in addition to economic metrics, but there is no agreed upon target for tracking the embrace of economic narratives.

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