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South Africa’s GDP numbers not a true reflection of its people’s wellbeing

11th September 2015

By: Riaan de Lange

  

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In his book, Alex Through the Looking-Glass: How Life Reflects Numbers, and Numbers Reflect Life, Alex Bellos observes just how much we have come to depend on numbers to make sense of the world and the extraordinary success of mathematics as the enabler of our understanding.

He cites seventeeth-century astronomer Brahmagupta, who introduced rules for the arithmetic of positive and negative numbers, called ‘fortunes’ and ‘debts’. Brahmagupta was the first to give rules to compute with zero, stating: “A debt minus zero is a debt. A fortune minus zero is a fortune. Zero minus zero is zero. A debt subtracted from zero is a fortune. A fortune subtracted from zero is a debt.”

Before moving on from ‘fortune’, I will share a joke I heard, or is it a truth, since many a truth is spoken in jest? How do you make a small fortune out of gold mining in South Africa? By starting with a big fortune! Sometimes we tend to ‘overthink’ things. Why are 1946 pennies worth more than 1939 pennies? Because there are seven more. It is not about the year, but rather the number of pennies.

Although numbers can be a useful tool of explanation, their formulation and calculation should reflect what they measure.

Let us consider the gross domestic product (GDP). South Africa’s second-quarter GDP was worse than economists had predicted. It was –1.3%, while the I-NET BFA’s consensus view had been 0.8%. How is it possible for economists to get things so wrong – a 2.1% variance – when assessing an economy that can hardly grow at 2%? That in itself tells a story and warrants a column – perhaps more.

But back to the –1.3%. Have you noticed anything interesting? Consider the trend. The GDP for the first quarter of 2015 was 1.3%. For the first quarter of 2014 it was –0.6% and for the second quarter of 2014 it was 0.6%. Just to be clear – this does not imply 0% growth for each of the two quarters, as the percentages reflect the quarter-on-quarter change – either growth or contraction.

What do you know about the origins of GDP? Surely, it must be a fairly recent invention? If you thought so, you were wrong. It was devised by Sir William Petty in 1652, the year in which, on April 6, a certain Jan van Riebeeck landed at the Cape.

Petty devised the basic concept of GDP to defend landlords against unfair taxation levied as a result of a war raging between the Dutch and the English between 1652 and 1674. (Have you spotted something interesting here? In time of need, governments tend to favour taxing society’s perceived rich. Bad habits?)

The method was developed further by Charles Davenant in 1695. The modern concept of GDP was developed by Nobel Prize-winning economist Simon Kuznets for a US Congress report in 1934. In this report, he warned against the use of GDP as a measure of welfare.

In essence, GDP is not, and was never designed to be, a measure of a nation’s wellbeing. As Kuznets said in 1934, “the welfare of a nation can scarcely be inferred from a measurement of national income”. His sentiment was shared by others. After the Bretton Woods conference, in 1944, GDP became the main tool for measuring a country’s economy. Just before his assassination in 1968, Robert Kennedy alluded to the shortcomings of GDP when he said: “It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country; it measures everything in short, except that which makes life worthwhile.”

There are many limitations to using GDP as a way to measure current income and production, such as changes in quality treatment of leisure time; changes in leisure time; the underground economy/the black market (sweat shops and child labour); illegal production (drugs, prostitution and gambling); harmful side effects; nonmarket production (self-sufficiency); housework, volunteering and higher education; crime; resource depletion; pollution; long-term environmental damage; defensive expenditure (preventing the erosion of quality of life); the life span of consumer durables and public infrastructure; and dependence on foreign assets.

Although GDP is not inherently bad, it is impeded by the limitations of what it measures, which resulted in the pursuit of alternative measures, such as the favoured Social Progress Index (SPI). The SPI was developed by the World Economic Forum (WEF) and is advocated by the Social Progress Imperative and Harvard Business School professor Michael Porter (he of competitiveness strategy fame), as the most inclusive and ambitious measure of social progress ever attempted.

Instead of focusing on economic factors alone, it asks the questions that are fundamental to the wellbeing of a population, such as: Does a country have the capacity to satisfy the basic needs of its people? Does a country have the infrastructure and the instruments to allow its citizens and communities to improve their quality of life? Does a country offer the proper environment for each citizen to have the opportunity to reach his or her full potential? It considers 54 indicators related to human needs, and foundations of wellbeing. In essence, the SPI measures the wellbeing of a society by observing social and environmental outcomes directly rather than the economic factors. The index is published by the nonprofit organisation the Social Progress Imperative and is based on the writings of Amartya Sen, Douglass North and Joseph Stieglitz.

In conclusion, let us quickly consider the numbers. According to the International Monetary Fund, in 2014, South Africa ranked 33rd out of 188 for nominal GDP, or in the top 17.55%. As for real GDP growth, South Africa, at 1.4%, ranked 167th out of 222 countries or in the bottom 24.77%. As for the 2015 SPI, South Africa ranked 63 (or 47.37%) out of 133 countries.

I leave it to you to decide, but, as far as I am concerned, South Africa’s SPI ranking is more reflective of the current wellbeing of its society.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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