It would be easy to get the impression by listening to the Government, the Reserve Bank, the Treasury, financial journalists and many economists that it is undeniably good if Australia’s Gross Domestic Product (GDP) expands, but is that entirely correct? Is there such as thing as bad GDP growth?
GDP is simply (and I emphasise the word simply) the market value of all final goods and services produced within national borders. In other words GDP is just a measure of economic activity in Australia, it is not a measure of what we as Australian’s produced or how our companies are doing because even foreign owned companies operating in Australia contribute to GDP.
We could have for example a foreign owned mine in Australia using only workers from overseas and the output from that mine would still contribute to our GDP. The national economy would benefit from the mine via royalties, taxes, capital investment and the money spent in Australia by the miners etc., but GDP does not indicate if we we are getting a fair return in exchange for allowing a foreign company to tap into our resources.
GDP is basically calculated using the following formula:
GDP = C + I + G + (EX – IM)
C = private consumption. (e.g. food, rent, medical expenses etc.)
I = private investment. (e.g. new mines, factories or private housing etc.)
G = government expenditure. (e.g. salaries of public servants, new school halls, military spending etc.)
EX = exports of goods and services.
IM = imports of goods and services.
What is fairly clear from looking at how GDP is calculated is how easily it is for a Government to give it a nudge. For example; if I were the King of Australia and I wanted to give GDP a boost (without caring what I spent the money on) I could simply hire more public servants, build some rather large military bases, commission the construction of a large monument to myself and give everyone in the land $900 to spend.
If exports and imports remained the same then my actions would drive GDP growth upwards. The question is: would my actions significantly assist long term GDP growth or improve the overall economic health of the nation? Not really and in fact they may actually damage the economy over the longer term. (especially if I had to borrow money to fund my GDP boosting frenzy)
I could however justify the actions I took by ranting on about how many jobs would be created or how the nation’s defences would be enhanced. If I got the timing right, people may even praise me for what I did and I would look even better if other kings were doing the same thing. We could even hold a meeting of all major 20 kingdoms and tell the world what a wonderful job were were doing at a K-20 gathering.
This highlights the problem with using GDP as some sort of magic key performance indicator (KPI) by which we can quickly asses if the economy is doing well or not. GDP actually tells us very little about how well the economy is really doing and conveys nothing about the quality of what we produce or consume.
In fact GDP does not even tell us if our economy is heading in the right or wrong long term direction. For example the GDP of Nauru looked great until the phosphate ran out. This highlights another problem with GDP in that it receives a boost if a nation uses it’s natural resources to produce goods or simply export them, but it does not take into account the fact that these resources are possibly being depleted over time.
I am not an economist and therefore I do not pretend to be an expert on the subject of GDP, however what I do wish to highlight is that as a measure of the health of an economy GDP alone is not what we should be focused on. Perhaps we should also be looking at other economic indicators such as Gross National Product (GNP) and factoring into our assessment of the economy the depletion of our reserves of coal, iron ore and natural gas etc.?
If you have time let me suggest you watch this video clip of Nobel Prize-winning economist Joseph Stiglitz explaining in 2008 why be believes we should look beyond GDP. It is only about 8 minutes long and well worth watching in my opinion.
In this clip Stiglitz is obviously focused on the U.S. economy but all of what he says is applicable to the Australian economy as well. Of particular interest to me was the point he made about U.S spending on healthcare and actual outcomes. In other words it isn’t how much a nation spends that is important, but but rather what the nation actually receives for the money it has spent in reaching outcomes.
For me this is the single biggest problem with focusing on GDP growth alone. As a nation if we simply focus on growth we are likely to focus less on outcomes and this is already happening.
The Federal Government for example has detailed few specific outcomes in terms of how it would fix the public hospital system and instead simply outlined where it will spend more money. GDP will get a boost and it will look like something is happening, but will the extra money deliver quality outcomes?
The focus on GDP leads us into an economic trap because once most people are convinced that GDP growth is good, that is what governments will strive to give us. Quality of life issues, diversifying the economy and a whole host of other factors we should be taking into account in terms of managing the economy don’t get much attention.
But for now it seems we are hooked on GDP and this is why the Government (and other G-2o governments) has been dressing up the GDP figures by pumping billions into the economy. But was the money well spent, what will be the outcomes and is our economy healthy?
My view is that Australia has wasted a golden opportunity to position our economy for the decades ahead. I believe the majority of the stimulus money that has been pumped into the economy has not been well spent, I see few clearly defined outcomes and reckon the Australian economy has a cold which could easily become something a lot more nasty.
But maybe I have it all wrong. Perhaps all we need to do is a focus on GDP? Perhaps the spending by the Rudd Government was good policy and an effective use of taxpayers money? Maybe Australia’s natural resources will push the economy to new heights and so it is pointless worrying too much about outcomes?
In the years ahead the answers to my questions will be revealed. Until then I will just have to live with GDP love parade.