During the Lugano Fund Forum in Switzerland for 23rd November 2015 I came across a man known for his unconventional views in economics, Joseph Stiglitz, a Nobel Prize winner, who looked quite out of place, surrounded on all sides by fund managers. The irony of an event filled with fund managers huddled around an economist who is known to criticise the idea of a free market was something to behold.
Joseph Stiglitz was there to give a global economic outlook, where many of the manager’s present expected him to say something positive about the future. Despite their expectations he then drops the news about the slowdown in China, falling commodity prices, and the continuing crisis in Greece using these stories to pre-empt the point that perhaps a no growth economy is something we should pursue.
He pointed out that there are other variables in the economy which are more important than GDP, meaning that no growth in GDP does not mean no development and that this GDP led growth target derailed entire economies.
I immediately connected with his statements about how many emerging economies have GDP targets to fulfil without questioning themselves as to whether the target accurately indicates the actual objective. Objectives in businesses and economies have become more and more focus on short-term problems, resulting in long-term problems festering and Investment becoming short-term focused instead of long term. Stiglitz understands that investments in infrastructure, housing, buildings, and power plants are long term, and only affect daily lives indirectly of course a government requires enough tax revenue to sustain itself. But, long-term is still the key to a sustainable growth and life of an economy and country.
Take for example education, it is not something that we can directly measure beneficially when we inject more money into it. But no one can argue that it is one of the most fundamental feature of a successful economy. It increases the competency of the economy which benefits both private and public sector. It can also be a short term investment where short training of workers can be classified as education itself. By having better quality of education, in return human progression in technologies and other fields in society would improve.
A growing economy that doesn’t draw lessons from the past is only committed to make the same mistake. The most excellent example of this is basically China. From a planned economy that shifted into a capitalistic economy, its consequences to its high levels of growth is its environmental impact. While it is a negative aspect of the rapid growth in China, it is still a phase that China may have to go through in order to achieve economic development. It is something that the British empire has also had to go through during the Industrial Revolution in the 1800s dealing with the high pollution, where the use of coal was widespread. However, knowing that other economies have managed to have survived the heavy environmental cost of an industrial phase, China could have done this better learning from other countries.
It is here where the word “sustainable” was the highlight of the day, knowing that economy that is growing rapidly does not mean it could sustain itself in the long run. The resources we use benefit us today, but it may hurt the future generation to come. This is something that GDP does not fully portray, as it is not the only important factor in the economy.
"Growth and development must not be measured solely by consumption and output, and from here we must seek an alternative measure of growth instead of relying on GDP"
Questioning whether economics as a subject serves purpose to output and numbers, or human lives. As gross domestic product is a result of an economic activity, not something we must achieve.
It can be seen from the four charts below that while unemployment for the US and UK hiked in 2008 with the falling GDP, Japan and Germany’s unemployment stayed resilient even with the economic and financial crisis. This then shows in simple terms that the changes in GDP may have a weak impact towards unemployment, and that other factors are equally or more significant than GDP. Furthermore, with an average growth of 1.1% over the period of 1990 to 2014, Japan’s living standard is still one of the highest within the category of developed economies.
Japan can be seen as a success story when it comes to developing its economy after being crippled by its defeat in the second World War. As I read the news about Shinzo Abe’s plan to revitalise Japan’s low aggregate demand with his Abenomics. When a country experiences a decade of low to zero growth, one would expect that a sense of instability will ensue. A crisis can cause a drop in unemployment may result in numerous protests and political instability. Yet, its unemployment rate after the 1990 housing market bubble remain low and stable, even withstanding the devastating financial crisis in 2008 shown in the graph.
While this article is trying to state that GDP is not a good measurement and a good KPI of an economy. An alternative of such indicator and quantitative measure is still being discussed by many economists, that would well suit the goal of economic welfare for society.
Inflation in my opinion is a better indicator that shows how a well a government can run its economy by stabilising its price. Of course it only looks at one aspect of the economy, but it does capture a different picture of the economy that maybe can be a better indicator of how well an economy is doing. For example, in the previous article I wrote I showed the instability of Indonesia’s inflation compared to China’s low inflation. Indonesia’s inflation kept going higher than its real GDP growth. While we know real GDP growth ignores price changes, but if it is growing less than the price increase it then shows that the economy is not growing enough to supply the aggregate demand increase. For Japan’s case, inflation is quite in line with the lacklustre GDP, having deflation to compensate the lack of growth.
It’s quality of life and living standards are still higher than most developed countries. In a book called Bending Adversity, David Pilling praises Japan’s stagflation with the words: “If this is a recession, I want one.” He then continued to explain Japan’s ability to organise its society well during the stresses and hardship of the lost decade. Where they persevere much better than other societies.
However, it is arguable that the idea of a “no growth” economy may then turn into a deep deflation and will then result in a ‘degrowth’ which will hamper progress if there is no demand. While I do agree that this may seem problematic, it is still questionable whether a no growth model is a negative thing to have in the future. Of course emerging countries will need growth, especially Indonesia. But in the situation with low growth and inflation occurring in places such as Europe and Japan. Life is still much better than the USA which are still struggling with health care and welfare given the size of its economy. One argument that is ‘pro-growth’ is the necessity to offset the effects of inflation, where if a population grows, capacity and more output is needed to survive. But this will be covered in the next article, particularly about Indonesia.