By Raj Gonsalkorale

GDP Is the wrong tool for measuring what matters – It’s time to replace gross domestic product with real metrics of well-being and sustainability– Joseph E. Stiglitz

A country’s Gross Domestic Product (GDP) is the standard measure of the total value of all goods and services produced within its borders during a specific period, typically a year. The “services” component of GDP includes the value of all final services produced, such as transportation, communication, finance, healthcare, education, and many others. Sri Lankan GDP was estimated to be USD 84.36 Billion, and it is reported that the country achieved a GDP growth of 5% in 2024.  In dollar terms, the growth amounts to USD 4.21 Billion. This is a pure arithmetic calculation and no doubt economists, and the Sri Lanka Central Bank will have their own calculations and interpretations. If the country has grown by USD 4.21 Billion dollars and it has an economy worth USD 84.36 Billion, it is worth examining and discussing what it means and whether it measures, as Stiglitz says, the well-being and sustainability of the economy.

The following statistics presents a range of underlying disparities, inequalities and inequities amongst its people despite developments” visible to the naked eye.

Poverty in Sri Lanka is reported as 24.8% of the population as of July 1, 2024, impacting access to nutritious food. Nearly one-third of children under 5 are malnourished. UNICEF says that 2.3 million children in Sri Lanka don’t have enough to eat. Families wake up every day to increased food prices, struggling to provide for their children in a country where vital services, like healthcare and education, are being pushed to their limits.

As per statistics from the department of census and statistics, the top 10% of Sri Lankans hold 42% of all income and 64% of all personal wealth, the top 1% holds 15% of all income and 31% of all wealth. The bottom 50% of Sri Lankans have only 17% of all income and 4% of all personal wealth. Income Distribution –The highest 10 percent of the population shared 32.9 percent of total income in 2016, while the lowest 10 percent shared 2.9 percent.  More than half the total household income is enjoyed by the richest 20%, while the bottom decile (poorest 20%) gets only 5%. 

Status of women – The UNDP (https://www.undp.org/srilanka/gender-equality) states that out of the 8.5 million economically active population, 72% are males and only 35% are females, women constitute 52% of Sri Lanka’s population, but female representation in parliament is only 5.3%, the labour force participation of women as of 2021 is 33.6% of the total population, 90% of Sri Lankan women and girls have faced sexual harassment in public buses and trains at least once in their lifetime. Unpaid Care Work. The most recent time-use survey conducted in 2017 showed that 87.3 per cent of women above the age of 10 years were responsible for most of the care work, a percentage that is bound to have increased during the COVID pandemic and the current economic crisis. Women who engage in care work are classified as economically inactive, but mostly unpaid.

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University,  former chief economist of the World Bank (1997-2000), former chair of the US President’s Council of Economic Advisers, former co-chair of the High-Level Commission on Carbon Prices, and lead author of the 1995 IPCC Climate Assessment and Co-Chair of the Independent Commission for the Reform of International Corporate Taxation and the author, most recently, of The Road to Freedom: Economics and the Good Society (W. W. Norton & Company, Allen Lane, 2024) says in an article published in the Scientific American “GDP measures everything,” as Senator Robert Kennedy once said, “except that which makes life worthwhile.” The number does not measure health, education, equality of opportunity, the state of the environment or many other indicators of the quality of life. It does not even measure crucial aspects of the economy such as its sustainability: whether or not it is headed for a crash”. (https://www.scientificamerican.com/article/gdp-is-the-wrong-tool-for-measuring-what-matters/). This article is well worth reading, especially by policy makers, and more generally by the public.

Interestingly Stiglitz refers to causal connection relating to what is measured, simply put, a cause-and-effect relationship. He refers to an inkling of this causal connection during the Vietnam War, with the military’s emphasis on “body counts”: the weekly tabulation of the number of enemy soldiers killed. Reliance on this morbid metric led U.S. forces to undertake operations that had no purpose except to raise the body count.

Like a drunk looking for his keys under the lamppost (because that is where the light is), the emphasis on body counts kept us from understanding the bigger picture: the slaughter was inducing more Vietnamese people to join the Viet Cong than U.S. forces were killing”

The point Stiglitz is making is perhaps the reliance on what is measured as yardsticks for planning for the future and that if metrics are not accurate and have no direct relationships and do not depict the wellbeing and quality of life of people, the planning process itself would be on unstable grounds.

In 2019, Sri Lanka’s GDP was estimated at 89.02 billion US dollars and economic growth at 4.5% compared to the growth of 7.8% in 2018. Yet, in 2022, the country declared itself bankrupt announcing it was defaulting on its debts. While the COVID pandemic and the global economic downturn had a debilitating effect on the country’s economy. by a GDP measure, years preceding the bankruptcy were healthier than in 2022 and even than what it is now. As stated in the Wikipedia according to commentators, the money was used to fund vanity projects rather than projects of national utility. Sri Lanka’s foreign debt increased substantially, going from US$11.3 billion in 2005 to $56.3 billion in 2020. While foreign debt was about 42% of the GDP in 2019, it rose to 119% of its GDP in 2021”. This is an illustration that economic planning and management using the GDP as a key measure, and not managing its debt had not served the country well and led to its bankruptcy.

The objective of this article is not to go back in history and analyse what happened and where the country got it wrong. Rather, as a matter for the future, consider Stiglitz’s statement that GDP Is the wrong tool for measuring what matters – It’s time to replace gross domestic product with real metrics of well-being and sustainability”.

In terms of the well-being of the people, it is interesting to note some statistics relating to the USA, the richest country in the world which according to the World bank, had a GDP of 27.72 trillion in 2023 and a GDP per capita of 82, 769.

As per the US Census Bureau, the US had an official poverty rate of 11.1%, with 36.8 million living in poverty. Malnutrition is another key factor that has a relevance to the health and well-being of people, but it is a complex issue with both undernutrition and overnutrition concerns, affecting a significant portion of the population, including children and older adults, with disparities in food insecurity rates across different demographics. Child Malnutrition: 2022 Facts and Statistics contained in World Hunger Education Service -Hunger Notes (https://www.worldhunger.org/about-whes-hunger-notes/) reports that about one in seven households (13.5%) experienced food insecurity in 2023, with 47.4 million Americans living in these households, 13.8 million children lived in food-insecure households, 1.6% of U.S. adults aged 20 and over are underweight. Obesity or a non-communicable disease coupled with malnutrition, is prevalent in more than half of all malnourished households that reside in the US. Income disparity according to the Wikipedia, in 2021, the top 10% of Americans held nearly 70% of U.S. wealth, up from about 61% at the end of 1989 and the top 1% earned 13.2% of total income in 2019, nearly doubling from 7.3% in 1979. Besides these statistics, disparities relating to health services where, as mentioned by Stiglitz The U.S. being the richest country in the world, suggesting a highly efficient economy, recorded more than a million deaths from COVID, whereas Vietnam, with a GDP of 409 billion had about 43,000”.  All above indicators and a host of other indicators, too many to cite here, questions the well-being situation in the US and how such disparities and inequities occur in a country which has a GDP of 27.72 trillion or 26.1 % of the worlds GDP in 2023 (US 106.2 trillion) –https://www.worldometers.info › gdp › gdp-by-country

Stiglitz argues that seeking to boost GDP in the misplaced expectation that that alone would enhance well-being—led us to this predicament. An economy that uses its resources more efficiently in the short term has higher GDP in that quarter or year. Seeking to maximize that macroeconomic measure translates, at a microeconomic level, to each business cutting costs to achieve the highest possible short-term profits. But such a myopic focus necessarily compromises the performance of the economy and society in the long term”.

This indeed is a good lesson for Sri Lanka. In the past, numerous projects undertaken increased the GDP of the country and raised its GDP growth. However, while the goods and services valuation would have gone up, many such projects were financed with debt, without a proper assessment of returns on the investments, and at the cost of not providing adequate funding for health and education, food security, energy security, environment security and many other social issues.

This would have compromised on the well-being of the people and the long-term sustainability of the economy with the state of bankruptcy, the country experienced in 2022 demonstrating the unsustainability of economic management based purely on GDP and GDP growth measures, without for example, considering the country’s indebtedness.

As mentioned by Stiglitz, in 2007, France’s President Nicolas Sarkozy had realized the futility of a single-minded approach of pushing up GDP to the neglect of other indicators of the quality of life. In January 2008, Stiglitz was asked by President Sarkozy to chair an international commission on the Measurement of Economic Performance and Social Progress. The initial report issued in 2009, entitled Mismeasuring Our Lives: Why GDP Doesn’t Add Up, was published right after the global financial crisis had demonstrated the necessity of revisiting the core tenets of economic orthodoxy. Stiglitz says that it met with such positive resonance that the Organization for Economic Co-operation and Development (OECD), after six years of consultation and deliberation, concluded that in place of GDP, each nation should select a dashboard”—a limited set of metrics that would help steer it toward the future its citizens desired.

The OECD has adopted the approach in its Better Life Initiative, which recommends 11 indicators that measures performance on the things they care about (https://www.oecdbetterlifeindex.org/). The World Bank and the International Monetary Fund (IMF), traditionally strong advocates of GDP thinking, are now also paying attention to environment, inequality and sustainability of the economy. Based on this experience, these 11 topics reflect what the OECD has identified as essential to well-being and sustainability

Sri Lanka could adopt, with necessary local imperatives, the OECD Better Life Initiative, with its core tool, the Better Life Index, to move beyond GDP as the sole measure of progress by focusing on broader aspects of well-being, and economic management that plays a crucial role in supporting policies that enhance these aspects. It could recognize that economic growth alone doesn’t guarantee a better life, and it should measure well-being across various domains, including material living conditions (housing, income, jobs) and quality of life (community, education, environment, health, life satisfaction, safety, and work-life balance). Policy makers could develop a framework for more effective economic policies such as responsible fiscal and monetary policies, employment programs, and social safety nets, all of which directly impact various dimensions of well-being, including income, employment, and access to essential services. Policies that address climate change, pollution, and resource depletion are essential for ensuring a sustainable environment and protecting the well-being of future generations.

While Sri Lanka maybe collecting data and reporting on some of these indicators, it is unlikely there is a dashboard that provides performance statistics and whether and how these are used in determining economic policy determination and management. A dashboard is essential for the selected indicators, and it should be available via the internet for public access. Such a tool would increase visibility on how the country is performing and it will increase accountability on the part of entities responsible for implementation and management of policies. Sri Lanka is not a member of the OECD, and while using its indicators as guidelines, it could develop its own indicators that should be the cornerstones for economic management. Disparities that exist, whether they are related to health, education, demographics, income, gender equality, living area related disparities, particularly related to housing and neighbourhood amenities, that lead to significant inequalities in access to opportunities, quality of life, and health outcomes, and impacting individuals and communities, should be the areas that economic policy and management should address, when looking at infrastructure and services expenditure. Addressing disability and mental condition related care, infrastructure needs to support affected persons, should also be a key area that should be included, if it really cares for its people.

For worthwhile and sustainable outcomes to occur, planning will have to be decentralised and taken to the grassroots as practically as possible. The top-down planning needs to become bottom-up planning, where resource availability and sharing being understood and appreciated by all based on realistic measures that impacts on the lives of people. Leaving decision making to a set of officials in the Finance ministry or a Minister or members of the Parliament is the ultimate top-down model that Sri Lanka has followed since independence and the country’s bankruptcy in 2022, 74 years after independence, shows the weaknesses in the economic model in operation over 74 years. Compared to some regional economies, Sri Lanka lags, perhaps except in healthcare where its universal healthcare system is the envy of many such regional countries.  However, the challenges before it are immense as even now, serious cracks have begun to appear on the system and its sustainability.