Deep dive

Why GDP growth does not necessarily raise wellbeing

Why GDP growth does not necessarily raise wellbeing. Click on the various sections to explore why this is the case.

  • GDP is a useful indicator to measure the extent of economic activities in a country, but it is not a good measure of human wellbeing or societal progress. This is a fact that was already understood by Simon Kuznets, one of the intellectual fathers of the metric [1]. 

    GDP fails to accurately capture wellbeing, as it disregards important aspects of wellbeing such as social inequalities, environmental sustainability, as well as non-monetary exchanges and unpaid work, such as care work [2] [3] [4] [5]. 

    GDP measures the quantity, not the quality, of economic activity. Expenditures that increase GDP, such as the cost of cleaning up environmental damage or increased health expenditures due to accidents and disease, do not necessarily reflect positive economic development [6]. 

    The disconnect between wellbeing and economic growth is further supported by research on alternative metrics of societal wellbeing and progress. While global GDP per capita has been rising since the 1980s, the Genuine Progress Indicator has decreased in the same time period [7].

  • The socioeconomic benefits related to a growing economy are often very unequally distributed in society as well as between societies. In 2021, the richest 10% of the global population received 52% of total income and owned 76% of all wealth, respectively. At the same time, the poorer half of the global population only earned 8,5% of total income and owned 2% of global wealth [8].

    Since the 1980s, the share of GDP going to labour in the form of wages has been declining in comparison with the share of GDP that goes to owners of capital [9] [10].

    These trends point towards the fact that workers benefit less from economic growth when compared to owners of capital, an issue that raises concerns of social justice and fairness.

    High levels of inequalities are problematic for wellbeing, even in a growing economy. Evidence suggests that countries with higher inequalities perform worse in a wide range of domains crucial for wellbeing, including physical and mental health, education, trust, as well as violence and crime [11]. Similarly, global inequalities exacerbate environmental challenges and hamper collective efforts to address these [12].

  • Empirically, economic growth and associated increases in income are not linked to happiness in the long-term, especially in high-income countries [13] [14]. This has become known as the Easterlin paradox [15].  

    Consumerism as a central pillar of current economic growth has negative effects on wellbeing due to its close association with materialist values. Psychological research shows that people whose values centre around materialism experience lower wellbeing, reflected in lower life satisfaction, worse physical health, poorer quality social relations, as well as higher susceptibility to depression and anxiety [16] [17].

    Instead, findings from the world’s longest scientific study of happiness, the Harvard Study of Adult Development, show that rather than money or material things, it is the quality of our relationships with others that is the most important in influencing people’s happiness [18].

“The gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  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.”

— Robert F. Kennedy, 1968

References:

[1] Kuznets, S. (1934).  National Income, 1929-1932. New York: National Bureau of Economic Research.

[2] Giannetti, B.F., Agostinho, F., Almeida, C.M.V.B., Huisingh, D. (2015). A review of limitations of GDP and alternative indices to monitor human wellbeing and to manage eco-system functionality, Journal of Cleaner Production, 87: 11-25. 

[3] Hoekstra, R. (2019). Replacing GDP by 2030: Towards a Common Language for the Well-being and Sustainability Community. Cambridge: Cambridge University Press.

[4] Saunders, C. & Dalziel, P. (2017). Twenty-Five Years of Counting for Nothing: Waring's Critique of National Accounts. Feminist Economics, 23 (2): 200-218.

[5] Butt, A.P., Berkhout, E., Zaghbour, C.M., Bush, A., Verma, R., & Pheko, L.L. (2023). Radical Pathways Beyond GDP: Why and How We Need to Pursue Feminist and Decolonial Alternatives Urgently, London: Oxfam

[6] Giannetti, B.F., Agostinho, F., Almeida, C.M.V.B., Huisingh, D. (2015). A review of limitations of GDP and alternative indices to monitor human wellbeing and to manage eco-system functionality, Journal of Cleaner Production, 87: 11-25.

[7] Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T., Aylmer, C. (2013). Beyond GDP: Measuring and achieving global genuine progress. Ecological Economics, 93: 57-68.  

[8] Chancel, L., Piketty, T., Saez, E., Zucman, G. et al. (2022). World Inequality Report 2022, World Inequality Lab, wir2022.wid.world.

[9] Guerriero, M. (2022). The Labor Share of Income Around the World: Evidence from a Panel Dataset. In: Fields, G. & Saumik, P., Labor Income Share in Asia: Conceptual Issues and the Drivers, ADB Institute Series on Development Economics. Singapore: Springer. 

[10] Guschanski, A. & Onaran, Ö. (2022). The decline in the wage share: falling bargaining power of labour or technological progress? Industry-level evidence from the OECD. Socio-Economic Review, 20 (3): 1091-1124.

[11] Wilkinson, R., & Pickett, K. (2010). The Spirit Level: Why Greater Equality Makes Societies Stronger. Bloomsbury Press.

[12] United Nations Development Programme (2020). Human Development Report 2020: The Next Frontier – Human Development and the Anthropocene. UNDP.

[13] Easterlin, R. A. (2015). "Happiness and Economic Growth – The Evidence". In W. Glatzer, L. Camfield, V. Møller, & M. Rojas (Eds.), Global Handbook of Quality of Life: Exploration of Well-Being of Nations and Continents (pp. 283-299). Springer. https://doi.org/10.1007/978-94-017-9178-6_13

[14] Fanning, A. L., & O’Neill, D. W. (2019). "The Wellbeing–Consumption Paradox: Happiness, Health, Income, and Carbon Emissions in Growing versus Non-growing Economies". Journal of Cleaner Production, 212, 810-821. https://doi.org/10.1016/j.jclepro.2018.11.223

[15] Easterlin, R. A. (1974). "Does Economic Growth Improve the Human Lot? Some Empirical Evidence". In P. A. David & M. W. Reder (Eds.), Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz (pp. 89-125). Academic Press.

[16] Dittmar, H., Bond, R., Hurst, M., & Kasser, T. (2014). The relationship between materialism and personal well-being: A meta-analysis. Journal of Personality and Social Psychology, 107(5), 879–924.

[17] Dittmar, H. & Isham, A. (2022). Materialistic value orientation and wellbeing. Current Opinion in Psychology, 46: 101337

[18] Waldinger, R. & Schulz, M. (2023). The Good Life. Lessons from the World's Longest Scientific Study of Happiness. Simon & Schuster