The limits of using GDP

Keya Acharya in The Wire.In


Most countries swear by it. It is cited by newspapers, banks and business. Almost all prominent world political leaders have used the GDP (gross domestic product) to show their countries’ well-being. Prime Minister Narendra Modi and finance minister Arun Jaitley repeatedly use India’s apparently rising GDP to point to the country’s progress and as a defence tool against criticism.

GDP measures the monetary value of goods and services produced by a country, mostly for sale in markets. Though the concept had earlier beginnings, national income and a nation’s products were first created by American Nobel laureate Simon Kuznets of the US Department of Commerce in 1934, born due to the information gaps that led to the Great Depression.

By the 1940s, wartime planning led John Maynard Keynes of the British Treasury and Henry Morgenthau Jr. of the US Treasury to go further and develop the metric of measurement we now know as GDP.

The question now is, is the concept still relevant in today’s situation? There have been criticisms for decades, from prominent economists and academics, that GDP is inadequate in measuring development, not least of all by Nobel laureate Joseph Stiglitz together with Amartya Sen and Jean-Paul Fitoussi in their 2010 report Mismeasuring our Lives: Why GDP Doesn’t Add Up.

Stiglitz, Sen et al say that statistical concepts in GDP may be correct, but the system is fundamentally flawed in that is does not measure a country’s income distribution or the well-being of its citizens. They take the case of traffic jams (page 3 of their book’s summary) as an example: GDP may rise because of increased sale of cars and gasoline but does not take into account the impact of the overuse of these on the quality of life.

The case of Delhi’s air pollution, and its major connection to its use of diesel could well be an example for us. Six years ago, a World Bank report put India’s costs of air pollution and environmental destruction at $80 billion per year; the costs could well have increased in the intervening years. Stiglitz, Sen themselves have said that statistical measures which ignore air pollution will be an inaccurate estimate of citizen’s well-being.

Indeed, even Simon Kuznets, the original founder, had said over fifty years ago that to assess a nation’s welfare, economists need to ask not how much the economy is growing, but what is growing and for whom, points out Canadian political scientist Ronald Colman (co-architect of Bhutan’s Gross National Happiness index).

Robert Costanza of Australian National University says GDP ignores social costs, environmental degradation, income-inequality, something even the OECD’s (Organisation for Economic Co-operation and Development) head of national accounts, Francois Lequiller concurs.

The WEF has a new term called inclusive development index, to measure a country’s progress. In January 2018, India ranked 62nd out of 74 emerging economies in its development index, beaten by Sri Lanka, Nepal and Pakistan in its region for development progress.

Colman outlines the enormous failure of the GDP to account for the accelerating trends of resource depletion, species extinctions and increasing greenhouse gas emissions. The last 12 years have been the hottest in millennia; sea-levels will rise by a metre by 2100; forests have been decimated and overhunted, disappearing by 1% per year whilst 40% of the world’s tropical forests have already disappeared, he says. The impacts of these existing threats do not reflect in the GDP.

And yet, in spite of this wide array of prominent criticism by noted scholars, an alternative index of economic and overall well-being has not become mainstream. Stiglitz and Sen’s economic critique was commissioned by French President Nicholas Sarkozy in 2009; yet the 2015 Paris Agreement, signed in France and deemed a milestone in the global agreement on climate change mitigation measures by 195 countries, has no inclusion of anything that offers an alternative GDP system.

At an international gathering of journalists in Italy, late November 2017, which saw a panel of economic experts from around the world discussing alternative GDP issues, I asked American physicist Fritjof Capra, director of the Centre for Ecoliteracy at Berkeley, US, why there was such a gaping lack of the inclusion of alternative GDP measures in the Paris Agreement. Capra believed that the lack of civil society participation in this particular field was a major reason for its absence. Costanza said that the habit was hard to kick, equating the GDP system to an ‘addiction’, difficult to erase.

Colman believes the fundamental reason for an alternative measurement system not finding its rightful place is that it ‘threatens the short-term economic base’: “This is unpalatable in the political arena; who is willing to challenge this?” he asks. He does agree that civil society needs to be far more engaged to displace GDP as fundamental to measuring a country’s progress.

Costanza has looked at the UN’s 17 Sustainable Development Goals (SDGs) as an alternative system. The SDGs however, are not compulsory policy practice, merely a persuasion for nations to follow. They are also complex in their interrelatedness, making it all the more difficult to present as a binding guideline. Integrating some of these development measures into the current GDP system is not possible, says Colman.

The complexity is indeed enormous, which is one reason for there not being any unity amongst economists in pushing what should be a crucial system for gauging development.

Obviously then, we need to make ecological and development economics a compulsory, system for nations to follow. Some have already done it (New Zealand, Bhutan, UK; China has re-started green growth research). It needs political will and push.

Governments might well find their own interests served in moving to an alternative GDP and striking out on a new path.

Is the EU taking its over-fishing habits to west African waters?

The UN says EU trawlers are out-muscling 1.5 million fishermen, who themselves warn west Africa could 'become like Somalia'

• 
• • John Vidal aboard the Arctic Sunrise
  • guardian.co.uk, Monday 2 April 2012 14.01 BST

Mauritania's waters are crowded. Twenty-five miles out to sea and in great danger from turbulent seas are small, open pirogues crewed by handfuls of local fishermen, taking pitifully few fish. Also here within 50 miles of us are at least 20 of the biggest EU fishing vessels, along with Chinese, Russian and Icelandic trawlers and unidentifiable pirate ships.

We are closest to the Margaris, a giant 9,499-tonne Lithuanian factory trawler able to catch, process and freeze 250 tonnes of fish a day, and a small Mauritanian vessel, the Bab El Ishajr 3. Here too, in the early mists, its radio identification signal switched off, is Spanish beam trawler the Rojamar. The Arctic Sunrise, Greenpeace's 40-year-old former ice-breaker, is shadowing one of Britain's biggest factory trawlers – the 4,957-tonne Cornelis Vrolijk. Operated by the North Atlantic Fishing Company (NAFC), based in Caterham, Surrey, it is one of 34 giant freezer vessels that regularly work the west African coast as part of the Pelagic Freezer Association (PFA), which represents nine European trawler owners.

The ship, which employs Mauritanian fish processing workers aboard, is five miles away, heading due south at 13 knots out of dirty weather around Cape Blanc on the western Saharan border. By following the continental ledge in search of sardines, sardinella, and mackerel, it hopes to catch 3,000 tonnes of fish in a four- to six-week voyage before it offloads them, possibly in Las Palmas in the Canary Islands.

But, says NAFC managing director Stewart Harper, while most of its fish will end up in Africa, none will go to Mauritania, despite the country facing a famine in parts. "Unfortunately Mauritania does not yet have the infrastructure to handle cargoes of frozen fish or vessels of our size," he says.

The west African coast has some of the world's most abundant fishing grounds, but they are barely monitored or policed, and wide open to legal and illegal plunder. According to the UN's Food and Agriculture Organisation, all west African fishing grounds are fully or over-exploited to the detriment of over 1.5 million local fishermen who cannot compete with them or feed their growing populations.
Heavily subsidised EU-registered fleets catch 235,000 tonnes of small pelagic species from Mauritania and Moroccan waters alone a year, and tens of thousands of tonnes of other species in waters off Sierra Leone, Ghana, Guinea Bissau and elsewhere.

A further unknown amount is caught by other countries' vessels, but the individual agreements made between west African countries and foreign companies are mostly secret.

Despite possible ecological collapse, and growing evidence of declining catches in coastal waters, west African countries are now some of the EU's most-targeted fishing grounds, with 25% of all fish caught by its fleets coming from the waters of developing countries.

Willie MacKenzie, a Greenpeace ocean campaigner, said: "Europe has over-exploited its own waters, and now is exporting the problem to Africa. It is using EU taxpayers' money to subsidise powerful vessels to expand into the fishing grounds of some of the world's poorest countries and undermine the communities who rely on them for work and food. The EU has committed some €477m for agreements with Mauritania over the past 10 years, essentially paying for vessels like the Cornelis Vrolijk to be able to access these waters," he adds.

According to the PFA, about 50 international freezer-trawlers are active in Mauritanian waters at any one time, of which 30 originate from countries such as Russia, China, Korea or Belize. "By targeting fish species that cannot be fished by local fishermen, we avoid disrupting local competition and growth and always fish outside the 12-13 mile fishing limit for our type of vessel," says a spokesman.
"Not all international operators active in Mauritanian waters meet the EU's safety and environmental standards. This threatens our efforts to foster sustainable practices in the region."

Greenpeace says the over-exploitation of African fisheries by rich countries is ecologically unsustainable and also prevents Africans from developing their own fisheries. It takes 56 traditional Mauritanian boats one year to catch the volume of fish that a PFA vessel can capture and process in a single day. Since the 1990s, the once-abundant west African waters have seen a rapid decline of fish stocks. Local fishermen say their catches are shrinking and they are forced to travel further and compete with the industrial trawlers in dangerous waters unsuitable for their boats.

"Our catch is down 75% on 10 years ago. When the foreign boats first arrived there was less competition for resources with local fishermen and fewer people relied on fishing for food and income. Governments have become dependent on the income received by selling fishing rights to foreign corporations and countries," says Samb Ibrahim, manager of Senegal's largest fishing port, Joal.

"Senegal's only resource is the sea. One in five people work in the industry but if you put those people out of work then you can imagine what will happen. Europe is not far away and Senegal could become like Somalia," said Abdou Karim Sall, president of the Fishermen's Association of Joal and the Committee of Marine Reserves in West Africa.

"People are getting desperate. For sure, in 10 years' time, we will carry guns. The society here destabilises as the fishing resource is over-exploited. As the situation become more difficult, so it will become more and more like Somalia," he said.

There is now growing concern that illegal or "pirate" fishing is out of control in some waters. According to the UN, across the whole of sub-Saharan Africa, losses to illegal fishing amount to about $1bn a year – 25% of Africa's total annual fisheries exports.

Guinea is thought to lose $105m of fish to pirate fishing a year, Sierra Leone $29m, and Liberia $12m. An investigation by Greenpeace and the Environmental Justice Foundation in 2006 found that over half of the 104 vessels observed off the coast of Guinea were either engaging in or linked to illegal fishing activities.

Surveillance and monitoring of overfishing is now urgently needed or fish stocks will collapse, leading to humanitarian disasters in many countries, says the UN. Increasingly, ships are transferring their catches to other vessels while at sea, rather than directly off-loading in ports. This conceals any connection between the fish and the vessel by the time the fish arrives on the market, meaning the true origin of the catch is unknown.

However, the PFA says banning EU vessels from African waters would not be sensible.
In a statement it said: "Less regulated, less transparent and less sustainable fishing operators would replace the European vessels. This would be a bad deal for Europe and the African countries we partner with.

"They would see less strategic infrastructure investment, reduced transfer of skills and knowhow, as well as scientific research and more depleted fish stocks. And in Europe we would damage a viable part of EU's fishing economy to the benefit of countries such as China.

"All of the fish caught by the PFA is destined for west-central African communities rather than consumers in developed countries. In fact, the fish caught and distributed by the PFA is often the only source of essential protein for the people in countries such as Nigeria."

• John Vidal's travel costs to Senegal were paid by Greenpeace. The NGO had no say over editorial content.

Why Is Economic Growth So Popular?

By Ugo Bardi

26 November, 2011
Cassandra's legacy

When the new Italian Prime Minister, Mr. Mario Monti, gave his acceptance speech to the Senate, a few days ago, he used 28 times the term "growth" and not even once terms such as "natural resources" or "energy". He is not alone in neglecting the physical basis of the world's economy: the chorus of economic pundits everywhere in the world is all revolving around this magic world, "growth". But why? What is that makes this single parameter so special and so beloved?

 

During the past few years, the financial system gave to the world a clear signal when the prices of all natural commodities spiked up to levels never seen before. If prices are high, then there is a supply problem. Since most of the commodities we use are non-renewable - crude oil, for instance - it is at least reasonable to suppose that we have a depletion problem. Yet, the reaction of leaders, decision makers, and economic pundits of all kinds was - and still is - to ignore the physical basis of the economic system and promote economic growth as the solution to all our problems; the more, the better. But, if depletion is the real problem, it should be obvious that growth can only make it worse. After all, if we grow we consume more resources and that will accelerate depletion. So, why are our leaders so fixated on growth? Can't they understand that it is a colossal mistake? Are they stupid or what?

Things are not so simple, as usual. One of the most common mistakes that we can make in life is to assume that people who don't agree with our ideas are stupid. No, there holds the rule that for everything that exists, there is a reason. So, there has to be a reason why growth is touted as the universal cure for all problems. And, if we go in depth into the matter, we may find the reason in the fact that people (leaders as well as everybody else) tend to privilege short term gains to long term ones. Let me try to explain.

Let's start with observing that the world's economy is an immense, multiple-path reaction driven by the thermodynamic potentials of the natural resources it uses. Mainly, these resources are non-renewable fossil fuels that we burn in order to power the whole system. We have good models that describe the process; the earliest ones go back to the 1970s with the first version of "The Limits to Growth" study. These models are based on the method known as "system dynamics" and consider highly aggregated stocks of resources (that is, averaged over many different kinds). Already in 1972, the models showed that the gradual depletion of high grade ores and the increase of persistent pollution would cause the economy to stop growing and then decline; most likely during the first decades of the 21st century. Later studies of the same kind generated similar results. The present crisis seems to vindicate these predictions.

So, these models tell us that depletion and pollution are at the root of the problems we have, but they tell us little about the financial turmoil that we are seeing. They don't contain a stock called "money" and they make no attempt to describe how the crisis will affect different regions of the world and different social categories. Given the nature of the problem, that is the only possible choice to make modelling manageable, but it is also a limitation. The models can't tell us, for instance, how policy makers should act in order to avoid the bankruptcy of entire states. However, the models can be understood in the context of the forces that move the system. The fact that the world's economic system is complex doesn't mean that it doesn't follow the laws of physics. On the contrary, it is by looking at these laws that we can gain insight on what's happening and how we could act on the system.

There are good reasons based in thermodynamics that cause economies to consume resources at the fastest possible rate and at the highest possible efficiency (see this paper by Arto Annila and Stanley Salthe). So, the industrial system will try to exploit first the resources which provide the largest return. For energy producing resources (such as crude oil) the return can be measured in terms of energy return for energy invested (EROEI). Actually, decisions within the system are taken not in terms of energy but in terms of monetary profit, but the two concepts can be considered to coincide as a first approximation. Now, what happens as non-renewable resources are consumed is that the EROEI of what is left dwindles and the system becomes less efficient; that is, profits go down. The economy tends to shrink while the system tries to concentrate the flow of resources where they can be processed at the highest degree of efficiency and provide the highest profits; something that usually is related to economies of scale. In practice, the contraction of the economy is not the same everywhere: peripheral sections of the system, both in geographical and social terms, cannot process resources with sufficient efficiency; they tend to be cut off from the resource flow, shrink, and eventually disappear. An economic system facing a reduction in the inflow of natural resources is like a man dying of cold: extremities are the first to freeze and die off.

Then, what's the role of the financial system - aka, simply "money"? Money is not a physical entity, it is not a natural resource. It has, however, a fundamental role in the system as a catalyst. In a chemical reaction, a catalyst doesn't change the chemical potentials that drive the reaction, but it can speed it up and change the preferred pathway of the reactants. For the economic system, money doesn't change the availability of resources or their energy yield but it can direct the flow of natural resources to the areas where they are exploited faster and most efficiently. This allocation of the flow usually generates more money and, therefore, we have a typical positive (or "enhancing") feedback. As a result, all the effects described before go faster. Depletion can be can be temporarily masked although, usually, at the expense of more pollution. Then, we may see the abrupt collapse of entire regions as it may be the case of Spain, Italy, Greece and others. This effect can spread to other regions as the depletion of non renewable resources continues and the cost of pollution increases.

We can't go against thermodynamics, but we could at least avoid some of the most unpleasant effects that come from attempting to overcome the limits to the natural resources. This point was examined already in 1972 by the authors of the first "Limits to Growth" study on the basis of their models but, eventually, it is just a question of common sense. To avoid, or at least mitigate collapse, we must stop growth; in this way non renewable resources will last longer and we can use them to develop and use renewable resources. The problem is that curbing growth does not provide profits and that, at present, renewables don't yet provide profits as large as those of the remaining fossil fuels. So, the system doesn't like to go in that direction - it tends, rather, to go towards the highest short term yields, with the financial system easing the way. That is, the system tends to keep using non renewable resources, even at the cost of destroying itself. Forcing the system to change direction could be obtained only by means of some centralized control but that, obviously, is complex, expensive, and unpopular. No wonder that our leaders don't seem to be enthusiastic about this strategy.

Let's see, instead, another possible option for leaders: that of "stimulating growth". What does that mean, exactly? In general, it seems to mean to use the taxation system to transfer financial resources to the industrial system. With more money, industries can afford higher prices for natural resources. As a consequence, the extractive industry can maintain its profits, actually increase them, and keep extracting even from expensive resources. But money, as we said, is not a physical entity; in this case it only catalyzes the transfer human and material resources to the extractive system at the expense of subsystems as social security, health care, instruction, etc. That's not painless, of course, but it may give to the public the impression that the problems are being solved. It may improve economic indicators and it may keep resource flows large enough to prevent the complete collapse of peripheral regions, at least for a while. But the real attraction of stimulating growth is that it is the easy way: it pushes the system in the direction where it wants to go. The system is geared to exploit natural resources at the fastest possible rate, this strategy gives it fresh resources to do exactly that. Our leaders may not understand exactly what they are doing, but surely they are not stupid - they are not going against the grain.

The problem is that the growth stimulating strategy only buys time (and buys it at a high price). Nothing that governments or financial traders do can change the thermodynamics of the world system - all what they can do is to shuffle resources from here to there and that doesn't change the hard reality of depletion and pollution. So, pushing economic growth is only a short term solution that worsens the problem in the long run. It can postpone collapse but at the price of making it more abrupt in the form known as the Seneca Cliff. Unfortunately, it seems that we are headed exactly that way.

[This post was inspired by an excellent post on the financial situation written by Antonio Turiel with the title "Before the Wave" (in Spanish). ]

Ugo Bardi is a professor of Chemistry at the Department of Chemistry of the University of Firenze, Italy. He also has a more general interest in energy question and is the founder and president of ASPO Italia.