Is the DNA of GDP evolving?
We can perhaps forgive Craig Bennett his moment of mirth. Writing on Twitter on Monday morning, the boss of Friends of the Earth in the U.K. noted that ahead of the opening of this week's Davos Summit, the latest press release from the World Economic Forum (WEF) had "made me chuckle a little."
The source of his amusement was to be found in the publication of the latest edition of World Economic Forum's (WEF) Inclusive Development Index (IDI), and the press release highlighting how a "focus on GDP [is] fuelling inequality and short-termism."
As Bennett observed, how times change. "When we @friends_earth were saying this sort of stuff (around Davos) in early 2000s, we were branded 'anti-capitalists', not least by @wef," he wrote.
He has a point. Critiques of GDP as an analog for economic success are almost as old as the metric itself. As any GCSE economics student will be aware, the manner in which an oil spill actively increases GDP by boosting economic activity through the clean-up operation has been well documented for decades. And yet it is only in recent years, as efforts to measure natural capital and gross national happiness or well-being have piqued the interest of policymakers, that there has been more serious mainstream discussion about alternative approaches.
On first impressions, WEF's index is an important milestone in this trend, and one all businesses should be aware of. Here is one of the most influential economic think tanks in the world, the incubator of "Davos Man" itself, declaring unequivocally that "decades of prioritizing economic growth over social equity has led to historically high levels of wealth and income inequality and caused governments to miss out on a virtuous circle in which growth is strengthened by being shared more widely and generated without unduly straining the environment or burdening future generations".
The IDI attempts to tackle this flaw in the current economic system by proposing an alternative to GDP that focuses more broadly on living standards and future-proofing of economies, as well as raw economic activity.
Specifically, it proposes the use of 11 metrics across three "pillars": growth and development; inclusion; and intergenerational equity, which inevitably covers sustainable stewardship both of natural and financial resources.
The growth and development pillar includes the conventional metrics of GDP per capita, labor productivity, employment and healthy life expectancy. But the inclusivity pillar incorporates median household income, poverty and wealth and income inequality, while the intergenerational equity pillar includes environmental and financial metrics, such as public debt, the carbon intensity of GDP and the dependency ratio and adjusted net savings, which measures savings in an economy after investments in human capital, depletion of natural resources and the cost of pollution are incorporated.
When applied to 103 countries, the IDI goes a long way to explaining how the last decade has seen levels of public anxiety and dissatisfaction with the economic system increase, even as GDP growth has continued.
It shows how all but three advanced economies have seen their GDP grow over the last five years, but only a third have made any progress against the index's Inclusion Pillar and similarly, only 11 out of 29 have made progress in terms of their Intergenerational Equity and Sustainability. In contrast, 16 out of 29 have seen their Inclusion score deteriorate and 18 out of 29 have seen their sustainability performance get worst. That nagging feeling that the global economy has stopped working for many people in recent years has a firm basis, if you only measure the right thing.
The report's analysis of the Intergenerational Equity and Sustainability pillar is particularly concerning, especially when set against the goals of the Paris Agreement and U.N. Sustainable Development Goals, which will be achieved only if economies deliver rapid progress in reducing their carbon intensity and improving their adjusted net savings. It warns that performance across the pillar actually has deteriorated in upper-, middle- and low-income economies since 2012, and improved only 0.6 percent in advanced economies.
WEF's press release ends with a stark warning. "This evidence suggests that GDP growth is a necessary but not sufficient condition for achievement of the broad-based progress in living standards by which most people judge countries' economic success," it concluded. "This message is particularly relevant at a time when global economic growth is returning to a more robust level and policy-makers could do more to future-proof their economies and make them more equitable. Political and business leaders should not expect higher growth to be a panacea for the social frustrations, including those of younger generations who have shaken the politics of many countries in recent years."
Or as Richard Samans, managing director and head of global agenda at the WEF puts it: "Economic growth as measured by GDP is best understood as a top-line measure of national economic performance. Broad, sustainable progress in living standards is the bottom-line result societies expect. Policy-makers need a new dashboard focused more specifically on this purpose. It could help them to pay greater attention to structural and institutional aspects of economic policy that are important for diffusing prosperity and opportunity and making sure these are preserved for younger and future generations."
Bennett again would be forgiven for pointing out that it sounds exactly like what he and his peers have been saying since the turn of the century.
The question for corporate leaders is whether the IDI and the growing wider interest in alternatives to GDP will have any tangible impact on policymakers and business norms.
The latest edition of the IDI came just days after the WEF's annual global risk report once again warned how environmental risks are escalating. It also came a week after the boss of the world's largest asset manager wrote to the bosses of listed firms to warn them that they needed to set out a strategy that defines their wider purpose and addresses environmental and social risks.
And yet, Monday's report confirms these trends are largely yet to filter through and have a meaningful impact on the sustainability and social metrics we should be using to gauge the long-term future prospects for the global economy.
There are multiple potential reasons for this disconnect. Perhaps "Davos Man" is not as influential as he — and it almost always is a he — once was, or perhaps he was never as influential as we all thought. Perhaps he is not as united in support of WEF's new clean, green, caring and sharing priorities as we would like to think — a hypothesis underlined by the attendance at this year's summit of one Donald Trump, the walking, talking antithesis of everything contained in the new Inclusive Development Index. Or perhaps the forces of economic orthodoxy built up over centuries will take a long time to redefine, no matter how self-evident the benefits associated with a new approach to economic development.
Perhaps the only way to deliver meaningful improvements in environmental and social metrics is to keep demanding that businesses and governments take them seriously, or else risk the current age of insecurity and anxiety stretching long into the future.
Whatever the truth of the matter, all businesses need to recognize that engagement with long-term environmental risks and opportunities is at long last part of the corporate and economic mainstream. And nothing is "anti-capitalist" about that.