The Office of National Statistics (ONS) has been working on a new alternative to Gross Domestic Product (GDP) as a measure of economic activity. There are many well-recognised problems with GDP, and so a move to offer an alternative is very welcome. There is also a growing campaign against politicians’ “obsession with growth and GDP”, which campaigners see as damaging to both humans and the planet. So, an alternative metric of economic success would seem timely, but it’s not the first time such an alternative has been developed.
A (very) brief history of GDP as an economic measure
While the idea of GDP goes back to the seventeenth century, its modern form was only refined in the mid-1930s by Simon Kuznets, when it began to be used during the global depression to measure national economies’ relative activity and the impact of the worldwide economic downturn of that decade. The use of GDP then expanded further as the relevant economic data became more widely available, and was further spurred on in the 1950s by the adoption of a standard definition and methodology sponsored by the United Nations: the System of National Accounts.
The first big expansion in the political use of GDP was during the post-second world war period of reconstruction, when it became necessary to understand and measure the aid that flowed into Europe to repair the damage wrought by the war. Since then, the measurement of GDP has become a key way by which governments assess their own policies and also their country’s relative success in the world system. However, as the millennium approached and passed, it became increasingly clear GDP was not really fit for purpose.
Diane Coyle, one of GDP’s most effective chroniclers, concluded a few years ago that GDP’s days were numbered. There has been a long-standing critique which argues that GDP fails to account for the costs of environmental degradation, and more recently its inability to see either unpaid work or social wellbeing has been seen as a problem. Both of these issues are now deemed more politically important than 70 years ago when GDP was first widely used.
The new ONS metric
The criticism of GDP has prompted the ONS to develop a new measure of economic activity which they are calling Gross Inclusive Income (GII), alongside a parallel measure, Net Inclusive Income (NII). Starting from a base of the normal GDP measurement, these new metrics make four key additions:
- A measure of the quality of public service provision.
- Data on the value of unpaid household work or “services”.
- A value for the contribution of “cultural ecosystem services”; the social benefit of various environmental regulations (in economic terms).
- A wider measure of intellectual property to capture its enduring capital value(s).
These measures respond to various criticisms that have been made of the GDP metric by groups seeking a different way of understanding a country’s economic activities. It is also intended to move the measurement of economic activity away from a sole focus on aspects related to market exchange.
The NII metric then takes this new measure and subtracts a range of depreciations and other accounting measures of (formalised) loss of value. This measure is intended to capture the use of capital in economic activity in addition to the normal accounting depreciation. So NII also includes the degradation of natural assets, the deprecation of household assets used in unpaid domestic work, and a figure for the loss of value over time of intangible assets (including but not limited to intellectual property of various forms).
Although these are still experimental measures, the ONS has used them to draw some interesting conclusions about the UK economy:
- Gross inclusive income (GII) per person grew by 2.8% in 2022, following a similar rise of 2.8% in 2021.
- Net inclusive income (NII) per person increased by 5.0% in 2022, following a rise of 9.0% in 2021.
- Unlike gross domestic product (GDP) per person, GII per person and NII per person have not yet returned to their pre-coronavirus (COVID-19) pandemic peaks, in volume terms.
This suggests that there is much missing from GDP that we might want to include in our evaluation of the UK’s economic activity, but also that while the recovery from the pandemic period in basic economic terms has been slow but positive, in these new terms the losses were much greater. This is why even with a steep recovery in the last couple of years, the earlier posited levels of economic activity recorded in GII/NII have not been reached.
Given the often noted gap between formal economic measures (such as GDP) and the lived experience of the population, the new ONS approach may start to bridge this gap. The inclusion of activities that while not being purely economic are nonetheless in proximity to the usually recognised market interactions should, the ONS hopes, give people more faith that official data matches their own lived experience.
How does this relate to the Human Development Index?
However, this is by no means the first attempt to make better sense in statistical terms of everyday views of the value and benefit of economic activities. Perhaps the most famous of these alternate measures is the United Nations sponsored Human Development Index (HDI). In one sense the HDI is simpler than the posited ONS model, as it adds less to the basic GDP model than the ONS’s new measure.
The HDI starts with Gross National Income (GNI) per capita measure, which is related to GDP measures while taking into account non-domestic earnings by a country’s own corporations. To this it adds a measure of life expectancy at birth (as a proxy for health care and wellbeing measures), and measurement of the mean (average) number of years spent in school (as a proxy for educational attainment). While the technical measurement changed in 2010, to reflect data gathering issues, the components of the index remain unchanged. However, while often used in UN programmes, the HDI has not been deployed more widely in global political economic relations. Interestingly, one of the key criticisms of the HDI has been its lack of any measure of environmental sustainability, which the ONS included in their own new metric.
However, the HDI offers a clear measurement of life expectancy (and thereby health), and education, which the ONS only does via the question of efficacy and value of public service provision, which is an even more indirect way of measuring the economic role of social health, wellbeing, and longevity. In this, the HDI moves further away from the primary economic focus of GDP than does the ONS’s proposed method of assessment.
Concluding Remarks
While the ONS may hope that these new metrics will be more widely taken up, the lack of widespread political deployment of the UN’s HDI suggests this may be a vain hope. We should recall that Bhutan, albeit a smaller and poorer country, also developed a different metric – the Gross National Happiness index – which has never really gained global political traction, other than as a curiosity. While GDP has many problems, its position as a global standard will be difficult to dislodge. Given the current malaise in the UK’s global reputation, any hope that other countries may take up the ONS’s innovation for now looks sadly misplaced.
This likely leaves the ONS innovation as a metric that will primarily only be used in British politics. While (as has already been shown) this may allow a different view of the historical development of national economic activity, it will do nothing to shift the international comparative dependence on GDP. We can continue to expect to see politicians deploy GDP data (or preferably GDP per capita) when making claims about the UK’s comparative economic standing, even if this continues to miss important aspects of everyday perceptions of economic wellbeing.
