Life beyond GDP

13 February 2012

By John Hawksworth, Chief Economist

As usual there was a lot of fuss in the media about the latest GDP data on 25 January showing a 0.2% fall in the output of the economy in the fourth quarter of 2011. The R-word was predictably wheeled out across the newspapers of the land, a bit prematurely given that a 0.2% decline is well within the statistical margin of error for such a preliminary estimate and that a second successive quarter of decline is far from certain.

More fundamentally though there has been an increasing recognition (notably by the Stiglitz Commission set up by President Sarkozy as well as by the OECD and our own Office for National Statistics) that, useful though it is as a summary measure of economic output, GDP is lacking in several respects as a guide to economic and social wellbeing. First, GDP excludes non-market activities such as housework and unpaid childcare. Second, it excludes the value of leisure. Third, it ignores the potential detrimental effect of some economic activities on the environment. Fourth, it is indifferent to income inequalities. Fifth, it focuses on current production without allowing for whether a society is saving enough for its future – an increasingly pressing issue for the UK and other advanced economies with ageing populations.

Our own contribution to this debate was a report that that PwC published with the Demos think tank last November on ‘Good Growth’. In this report we used a variety of techniques from intensive focus groups to large scale statistical surveys and conjoint analysis to establish what the UK public thought were the most important factors in a country’s economic performance. Five particular messages came out:

  1. Health is an economic issue: people were very concerned about their health not just in itself but as an essential requirement for being able to work to their full potential (and to a higher retirement age in future) and to put bread on the table for themselves and their families. This consistently came in the top three issues in all our survey work.
  2. Financial survival trumps aspiration for the moment: people were most concerned about getting and keeping a job and having enough income to pay the mortgage and other regular bills. More aspirational goals relating to career progression, earnings growth and home ownership came much lower down the list of priorities, in contrast perhaps to the situation five years or so ago before the recession started.
  3. Time out of work matters: people put a high value, equivalent to around £20 per hour, on having more time with their families rather than at work.
  4. Environmental concerns are some way down the priority list: although people did value things like protecting our forests and reducing carbon emissions, these factors very rarely came into the top five measures of economic success when people were forced to choose their highest priorities. This suggests that, in difficult economic times, the government will find it challenging to make the case for environmental measures that costs people more in terms of, say, energy and petrol bills.
  5. Fairness is a concern: although not one of the very top priorities, levels of income inequality in the UK, which are well above the EU average and not so far below US levels, were of concern to many people.

Combining all the results of our research into a ‘good growth index’, we found that the UK ranked second lowest from 14 high income economies on the basis of the ten factors that the public considered most important. That compares to a middling ranking for the UK in terms of the more traditional measure of GDP per person.

Addressing some of these issues will be a long term process requiring significant reforms in areas like health, transport and energy policy, as well as changes in behaviours (e.g. making optimal use of new technologies to work smarter rather than longer and reduce time spent commuting). If the focus of government policy does shift gradually from GDP to some broader measure of economic and social wellbeing, however, this could have important implications for businesses as they seek to grapple with issues such as maintaining the health of their workforce and engaging employees by addressing the balance between work and family time, environmental impacts and the fairness of rewards. Our index needs further testing over time but it does provide some useful food for thought.

Contact: John Hawksworth | Tel: +44 (0)20 7213 1650



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