Counting the pitfalls of the traditional Gross Domestic Product (GDP), WEF said that excessive reliance by economists and policy-makers on GDP as the primary metric of national economic performance is part of the problem.
The limitation of GDP is that it measures current production of goods and services rather than the extent to which it contributes to broad socio-economic progress as manifested in median household income, employment opportunity, economic security, and quality of life, WEF stated.
It further said that decades of prioritizing economic growth over social equity has led to historically high levels of wealth and income inequality.
Consequently, it has caused governments to miss out on a virtuous circle in which growth is strengthened by being shared more widely and generated without unduly straining the environment or burdening future generations.
These are among the findings from the World Economic Forum’s Inclusive Development Index 2018 released today.
The Inclusive Development Index (IDI) is an annual assessment that measures how 103 countries perform on 11 dimensions of economic progress in addition to GDP. It has three pillars: growth and development; inclusion; and intergenerational equity – sustainable stewardship of natural and financial resources.
According to this year’s index, over the past five years, the 29 advanced economies included in the study have on average flatlined in terms of inclusion, which is measured by median household income, poverty, and wealth and income inequality, despite boosting their Growth and Development score by over 3%.
The four indicators that make up the index’s Growth and Development pillar are: GDP per capita; labour productivity; employment; and healthy life expectancy.
Over the same period, only 12 of the 29 advanced economies were successful in reducing poverty and only eight saw a decrease in income inequality.
More worrying still: rich and poor countries alike are struggling to protect future generations. The index’s Intergenerational Equity and Sustainability pillar – which takes into account public debt; carbon intensity of GDP; dependency ratio and adjusted net savings (which measures savings in an economy after investments in human capital, depletion of natural resources and the cost of pollution) – actually deteriorated in upper-, middle-, and low-income economies since 2012 and improved only marginally (0.6%) in advanced economies.
Top performing countries
According to the index, the most inclusive advanced economy in the world in 2018 is Norway. The Nordic nation ranks second overall for intergenerational equity and third for the two other pillars of the index: Growth and Development, and Inclusion. Small European economies dominate the top of the index, with Australia (9) the only non-European economy in the top 10.
Of the G7 economies, Germany (12) ranks the highest. It is followed by Canada (17), France (18), the United Kingdom (21), the United States (23), Japan (24) and Italy (27).
In many countries, according to WEF, there is a stark difference between individual pillars. For example, the US ranks 10 out of 29 for Growth and Development; however, it ranks 28 on Inclusion and 26 on Intergenerational Equity.
France, on the other hand, fares less well on Growth and Development (21 out of 29); however, it ranks 12 for Inclusion. Its low ranking on Intergenerational Equity (24) suggests it may be storing up problems for the future.
Six emerging European economies are located in the top 10 spots in the emerging economies’ ranking: Lithuania (1), Hungary (2), Latvia (4), Poland (5), Croatia (7), and Romania (10).
These countries perform well on Growth and Development, benefiting from EU membership, as well as on inclusion indicators, as median living standards rose and wealth inequality declined significantly. Latin America also performs well, with three countries featured in the top 10: Panama (6), Uruguay (8) and Chile (9).
Performance is mixed among BRICS economies, with the Russian Federation ranking 19th, followed by China (26), Brazil (37), India (62) and South Africa (69).
Although China ranks first among emerging economies in GDP per capita growth (6.8%) and labour productivity growth (6.7%) since 2012, its overall score is brought down by lacklustre performance on Inclusion.
Other emerging countries such as Mexico (24), Indonesia (36), Turkey (16) and the Philippines (38) show more potential on Intergenerational Equity and Sustainability but lack progress on Inclusion indicators such as income and wealth inequality.
Key findings and policy implications
IDI data suggest that relatively strong GDP growth cannot be relied upon by itself to generate inclusive socio-economic progress and rising median living standards.
All but three advanced countries have experienced GDP growth over the last five years, but only 10 of 29 have registered clear progress in the IDI’s Inclusion pillar. A majority, 16 of 29, have seen Inclusion deteriorate, and the remaining three have remained stable.
A majority of those countries with the best GDP growth performance failed to improve on Inclusion. This pattern is repeated in the relationship between GDP growth and performance on Intergenerational Equity and Sustainability with 11 of 29 showing clear progress and 18 of 29 deteriorating.
Emerging -country data show a similar disconnect between GDP growth and Inclusion. Of the 30 emerging economies with the highest GDP per capita growth over the past five years, only six have scored similarly well on a majority of the Inclusion indicators, while 13 have been no better than mediocre and 11 have registered outright poor performance.
With respect to Intergenerational Equity, only eight have scored similarly well on a majority of the Intergenerational Equity and Sustainability indicators, while 12 have been no better than mediocre and 10 have registered outright poor performance.
This evidence suggests that GDP growth is necessary but not sufficient condition for achievement of the broad-based progress in living standards by which most people judge countries’ economic success.
This message is particularly relevant at a time when global economic growth is returning to a more robust level and policy-makers could do more to future-proof their economies and make them more equitable.
Political and business leaders should not expect higher growth to be a panacea for the social frustrations, including those of younger generations who have shaken the politics of many countries in recent years.
“Economic growth as measured by GDP is best understood as a top-line measure of national economic performance. Broad, sustainable progress in living standards is the bottom-line result societies expect. Policy-makers need a new dashboard focused more specifically on this purpose,” said Richard Samans, Managing Director and Head of Global Agenda at the World Economic Forum.
“It could help them to pay greater attention to structural and institutional aspects of economic policy that are important for diffusing prosperity and opportunity and making sure these are preserved for younger and future generations.”
The IDI is a project of the World Economic Forum’s System Initiative on Shaping the Future of Economic Progress, which aims to inform and enable sustained and inclusive economic progress through deepened public-private cooperation, thought leadership and analysis, strategic dialogue and concrete cooperation, including by accelerating social impact through corporate action.