When the Hong Kong government released its first-quarter gross domestic product (GDP) figures in May, most media thought it was significant data. Newswires such as Reuters and Bloomberg flashed the information immediately, while The Wall Street Journal and the Financial Times considered the GDP data newsworthy enough to put on their home pages.
Why do we put so much effort into understanding GDP? It’s basically a raw measure of output of goods and services and, as David Pilling describes in his new book, The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations, an increasingly irrelevant figure in a world built on software, services and the so-called “sharing” economy.
The concept of GDP was developed in the 17th century and became more commonly used in the 1930s when it was used to measure the effects of the Great Depression in the United States. Simon Kuznets, the “father” of modern GDP reporting and a United States government economist, intended it as a very broad measure of physical materials, whether it be steel, timber, potatoes or tyres.
“Kuznets was striving for a measure that would reflect welfare rather than what he considered a crude summation of all activity,” writes Pilling, a Financial Times correspondent. “He wanted to exclude illegal activities, socially harmful industries and most government spending.”
Kuznets also had challenging ideas from an accounting point of view, such as ignoring the roads and rails that took people from their suburbs to work so they could produce things, because he thought for this is an input into production and not a final output.
He lost most of those battles, and GDP became the go-to figure to measure economic growth and a convenient yardstick to assess competition with rival nations.
GDP persists as a primary economic measure, even though its coverage of services – and even many goods – is spotty. Today, the U.S. counts gun sales but not the drug trade. Colombia’s data include drugs but not guns, while the European Union adds the illegal activities of organized crime and other illicit activities.
In China, the concept of GDP as a positive data series is so pervasive that it has become an Internet meme, thanks to the obsession with economic growth of Communist Party chief Li Dakang, a character in the hit CCTV series In the Name of the People. Yet, China recorded erratic economic growth – some years above 10 percent; others of catastrophic recession – until the 1990s. Pilling notes that delivering year after year of rapid economic growth has become the party’s principal source of legitimacy.
Pilling’s economic discourse is punctuated by puzzled entrepreneurs of the new economy. Will Page, Director of Economics at Spotify, the Swedish music- streaming service, tells the author: “GDP faces a square peg, round hole dilemma” because it was “originally designed to measure tangible manufactured goods, which are losing relevance.” But as Pilling discovers, the modern world presents its own problems. Is looking at Facebook an economic activity? “Should we really put more of a value on watching a cat video,” he asks, “than, say…. watching a real cat?”
In Hong Kong, Pilling notes, “Australian opals are shipped, via Chungking Mansions, to southern China, where they are polished, sent back to Australia, and sold as souvenirs to Chinese tourists visiting Australia (who presumably take them back to China). In such a world, the idea of domestic production… becomes almost meaningless.”
On a broader scale, Pilling tracks the growth of the U.S. economy. But then he surveys the despair pervading the American Rust Belt, with cities like Detroit and Milwaukee denuded of decent jobs, and white middle-aged men succumbing to suicide, drug and alcohol abuse, and other “deaths of despair.”
“It might be stating the obvious to say that raw growth statistics cannot capture intangible feelings, such as the loss of community, job security, well-being, or even identity,” Pilling writes, “but if that is the case, why have we made economic growth – measured by GDP – a proxy for what we are supposed to value in life?”
Author interview: David Pilling
David Pilling spends an awful lot of time explaining a concept he neither likes nor trusts. “When you think about the economy, you think about growth, and we have kind of put growth on a pedestal,” says the long-time Financial Times correspondent on a recent visit to Hong Kong.
A simple loaf of bread has become an economic conundrum. “You don’t just say that the loaf of bread is worth £3 and that’s the contribution to gross domestic product,” says Pilling.
“You have to know what went into the bread, so flour went into the bread and wheat went into the flour and each time you have to subtract that as an input so that you get a final figure for the value added.”
Currently the newspaper’s Africa editor, based in London, Pilling has seen the inadequacies of economic measurement. “GDP is terrible at measuring the informal economy, which is interesting when you get to countries that I cover in Africa.”
He also spent several years covering the Asia-Pacific region, based in Hong Kong. His previous book was Bending Adversity: Japan and the Art of Survival, published in 2014, which has become something of a primer for expatriates.
That book provided some of the impetus for his current volume. Post-World War II Japan was the ultimate lesson in economic growth. By the 1980s, Japanese diners would sprinkle gold leaf on their food like salt and pepper. Then came years of stagnation. First South Korea, then China overtook Japan economically.
As Japan’s fading international image became increasingly at odds with its very obvious prosperity, Pilling began to question the reality of economic growth and the way it was measured. “Part of what I’m trying to do is to look at the process,” he says. “How we come up with this number, what it means and what it doesn’t mean.”
Another goal is to vindicate Simon Kuznets, who saw his original concept of “national income” distorted and politicized. “It’s now used as the denominator of choice,” says Pilling. “We compare things to GDP – tax to GDP, debt to GDP, but GDP itself is fairly arbitrary.”
Pilling says Kuznets wanted to exclude military spending – “because he thought this didn’t really serve a purpose” – and financial speculation, “because he thought it was useless and possibly dangerous. Something which I would argue makes him ahead of his time.”
