By Amir Bagwanje
Great economic Depression of the 1930s and later the outbreak World War II in the early 1940s propelled the international economic players to a compelling need for a precise and comprehensive technique to assessment of the wealth of nations. The idea was essentially to devise a way of evaluating wartime expenditure and the value of general goods and services in the aftermath of these crises. Consequently, an American economist, Simon Kuznets (1934) and others developed a System of National Accounting that metamorphosed into Gross National Product (GNP) or better known Gross Domestic Product (GDP) today.
By definition, GDP represents the sum total monetary value of following quantities: general goods and services produced within an Economy, aggregate consumption, investment, government expenditure and total value of exported goods minus goods imported over a period of time. The centrality of GDP to macroeconomic analysis cannot be overstated.
It’s simply the conventional wisdom in major Economies in terms of measuring growth, forecast and development. Although, some economists argue that, Net National Product (NNP) fare more accurately than GDP in determining growth because, the former incorporates the effects of depreciation and households’ disposable income.
GDP has provided a generally accepted yardstick of assessing economic growth across the globe. It’s unarguably, one of the incredible achievements of the 20th century. A quick look at Nigeria’s GDP at 2015 shows decline to ten years low to 2.84% ($568.51 billion) due to fall in oil price.
Decomposing this figure will show the comparative strengths and weakness of various sectors of the economy. For instance, oil sector contribution to GDP contracted to 8.28%, industrial production component fell to 3.04% from 3.17% in 2014 but agriculture rose to 3.48% as against 3.46 in the previous year (Trading Economics, 2016).
This sector-specific analysis helps to steer economic policies. It should be mentioned however, the purpose of this note is to attempt to decipher the myth around GDP to wit; that GDP alone can represent economic prosperity of a country, especially a developing one like Nigeria. No. The Great Kuznets himself cautiously spelt out the inherent limitation to GDP in measuring the individual wellbeing within an economy. He said, “the welfare of a nation can scarcely be inferred from a measure of national income”.
I shall discuss why GDP must be complemented with Human Development Index (HDI) vis-a-vis the inadequacies of GDP in a moment.
In recognising the unfitness of GDP to measure prosperity especially in developing countries, the United Nations developed an alternative system – HDI in the1990s mainly to take into account those critical variables, such as inequality, life expectancy, education etc. that are critical to human development but inexplicably excluded in GDP computation.
HDI dimensions of wellbeing, according Stiglitz-Sen-Fitoussi’s Report (2008), named, The Commission on the Measurement of Economic Performance and Social Progress (CMEPSP), outlined material living standards (income, consumption and wealth), health, education, personal activities, political voice, governance, social connections and relationships, environmental sustainability and economic/physical security as the missing link in growth assessment. This is especially true in Nigerian context. All of the above socio-economic variables ought to be adequately accounted for under HDI metric if we want an accurate picture of the state of economy.
Now, let’s examine what I think is the rank superiority of HDI over GDP. Issues like environmental degradation is a huge burden in Nigeria, if we were to shift to HDI paradigm, we would have to calculate the exact impact of oil spillage in Ogoni land for example and throughout the Niger Delta region with a view to addressing them properly. Also, HDI would account for effects of carbon emissions as a negative externality to the environment and general health of citizens within the Nigerian Economy. GDP was not design to do this. But HDI does.
There is a marked gap between standard measurement of macroeconomic variables such as GDP growth, unemployment, inflation and the situation on the ground. This does not render the GDP statistics useless as such, but calls for a radical paradigm shift to a more welfare-tailored metric – HDI.
Again, income is not evenly distributed in Nigeria, HDI metric gives attention to inequality and lack of access to education and decent healthcare. For instance, HDI would assess the impact of Boko Haram insurgency in the north east of Nigeria in relation to specific effects it has on children out of school, disutility associated with lack of security, crippled social connections and other setbacks peculiar to the region that are not captured by GDP.
Although empirical finding asserts there is correlation between GDP and HDI, GDP only does what it was intended for, that is measure output and growth without recourse to vital aspects of human welfare.
It ignores distribution of income amongst the society. There is no gainsaying that probably only 5% of the Nigerian population enjoys the lion share of 80% of the resources. Inequality is widespread in the country but unfortunately not included in the national income accounting hence the need for HDI which does just that.
Inflated oil price created a bubble that analysts have long predicted would burst in the event of a crash in the oil market if we did not save for a rainy day. They have been vindicated because today, Friday 20th May, 2016, as I write this article, the National Bureau of Statistics announced the Q1 GDP has crumbled to negative (-0.36%), the lowest since late 1990s, a marked departure from Q1 2015 (3.96%). So, I reckon we were living way beyond our means because of the false steady growth that our ballooned GDP figures suggested in the past.
Unfortunately, the purpose of this write up is not on policy advise but to identify a flawed process of economic measurement and suggest appropriate methodology that is tailored and sensitive to our economic situation. Perhaps, the recent GDP figure should nail the final indictment on the reliance on GDP alone as a means of judging our economy and probably ignite a serious discussion about the inevitability of alternative measures, such as HDI.
Bagwanje is an author based in the United Kingdom. Email: [email protected]No tags for this post.