Christopher Dembik
Head of Macroeconomic Research
Summary: New times, new norms and new ways of measuring just how well we're all doing. It might just work.
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The long reign of gross domestic product as the chief measure of economic progress
comes to an end in 2019. In a surprising move at the International Monetary Fund
and World Bank spring meetings, chief economists Pinelopi Goldberg and Gita
Gopinath announce their intent to stop measuring GDP. They argue that GDP has
failed to capture the real impact of low-cost, technology-based services and has been
unable to account for environmental issues, as attested by the gruesome effects from
pollution on human health and the environment in India and elsewhere around the
world.
Indeed, GDP fetishism has generally promoted economic policies that don’t consider
the full-cycle consequences of damage to environmental and human capital
resources. Instead, the IMF and World Bank propose a focus on productivity which
provides a better gauge to assess change in an economy’s productive capacity over
time. As Nobel Prize winner Paul Krugman wrote in 1994: “productivity isn’t everything,
but in the long run, it is almost everything”.
Productivity is certainly one of the most popular, and yet least understood, terms
in economics. Simply defined, it refers to output per hour worked. In the real world,
however, productivity is a much more complex notion. In fact, it can be considered as
the greatest determinant of the standard of living over time.
If a country is looking to improve people’s happiness and health, it needs to produce
more per worker than it did in the past. Since the Industrial Revolution that began in
the 18th century, higher productivity has been the main driver of higher per capita
GDP, ultimately improving our standards of living. This unprecedented decision by the
IMF and the World Bank also symbolises the transition away from the central bank dominated
era that has been associated with the collapse in global productivity since the global financial crisis.
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