05 Jun 2009  What Do YOU Think?

What Does Slower Economic Growth Really Mean?

Respondents to this month's column by HBS professor Jim Heskett came close to general agreement on the proposition that economic growth is not measured properly by GDP, calling for new indicators. Jim sums up. (Online forum now closed. Next forum begins July 6.)

 

Summing Up

If not useful growth, what are we measuring? And why? This column does not thrive on general agreement. And this past month discussants came close to general agreement on the proposition that economic growth is not measured properly by GDP, gross domestic product. Further, in an age of concern about the environment, questions are raised about whether certain forms of growth—let alone incorrect measures—serve a very good purpose.

Paul Jackson caught the tone of many responses when he said, "Of course GDP is flawed, duh!" Jim Ruen added, "Is all growth equal? Of course it isn't. That is like saying that all apples are just that, apples."

A rich discussion centered around a proposition raised by Colin Moore that more "stable" or "sustainable" forms of growth, for example food production, should carry "higher multiples … versus opportunistic…." forms of growth (such as "financial securitization"). Milton Puryear added "truck-type SUV sales" to the list of activities deserving low multiples, commenting that, "How is it growth if it is only sustainable under conditions that are mostly in the past?" Other activities included in GDP, such as health care costs, do not reflect the fact that spending more on health care is, in John Caddell's opinion, "in general not good for the country."

How should growth be measured? Deepak Alse commented, "Slower growth is not necessarily good or bad…. Quantitative metrics serve as best indicators when they are based on qualitative platforms." Along this line, Ken Ackerman reminded us that "Growth is a product of confidence … we spend too little time measuring the mood of the public." Kenan Jarboe said, "GDP has always been an imperfect proxy for growth…. Rather than focus on GDP per se, we should look at … standard of living, productivity, innovation." Noting that "GDP is a point-in-time measure," Gerald Nanninga asked. "How much of the economic activity today… will improve tomorrow's (or) … is really borrowing or taking away from the future?"

Questions were raised about the necessity of growth itself. Tom Dolembo commented that "This is a revolution, not a business cycle." Even though it may be "irrational" to think it, "What if … we don't grow out of choice? …. What if we demand less, use less, and want less forever?" Jim Geisman continued this line of thought in saying, "Overall, I think growth is overrated … unsustainable." Andrew Lianwarne suggested that "we need to reshape the way our economic system operates if we are to establish a stable economy without continued expansion." P. Maxson, assuming also that growth has limits, asked, "will we manage this change, or will we let ourselves be mauled by it?"

A more basic question may be whether a stable economy and high standard of living is even possible without growth? What do you think?

Original Article

During the past several weeks, economists have begun to predict substantially slower growth rates for the world's economy into the foreseeable future. Characteristic of this is the reduction of roughly 100 basis points annually in the expected growth rate of the United States from 2 to 3 percent per year to 1 to 2 percent. Those responsible for the projections tell us that as a result, we can expect substantial reductions in sustainable employment, incomes, and profits, not to mention the standard of living to which people can aspire. You may or may not agree with these projections. But they suggest that it's time that we ask whether we have been using the right measures for growth.

First, when we speak of growth, it usually refers to growth in gross domestic product, the value of all goods and services produced during a period of time. It makes no assumptions about the usefulness of various types of production. The presumption is that macroeconomic growth translates into greater top line opportunities for individual organizations. With no improvement in productivity, that means a similar increase in jobs and income. (More realistically, it means modest increases in both productivity and jobs.) It also means, even without a change in tax rates, a larger tax base. This is important to the extent that it is a major component of a government's plan to manage its capital accounts, which in turn has important implications for international credit markets and in the case of the U.S., the dollar, and the Treasury's ability to borrow at reasonable rates of interest.

But is all growth similarly useful? For example, is growth in the production of food, steel, or for that matter information the equivalent of growth in the production of financial services? The latter grew so rapidly in the U.S. in recent years (with every mortgage backed security and credit default swap transaction counted, resulting in substantial contributions to growth rates) that, at its peak, it may well have accounted for a substantial portion of the 100 basis point differential between past and projected growth rates. One can argue that each transaction may have produced top line growth for individual companies and tax revenues for the government, but did it create as much value for the individual citizen and the economy as a whole as the production of an equivalent amount of food, steel, or information? If much recent growth has resulted from real estate and financial bubbles, will slower growth really have as profound an impact on our way of life and the corporate business model as some are predicting?

Are our measures of growth flawed? If so, what does slower economic growth mean? As one example, might it actually produce more equitable compensation and penalize the wealthiest more than others in the United States, thus reducing what some have concluded is an unsustainable gap between rich and poor? What do you think?

Comments

    • John Caddell
    • Principal, Caddell Insight Group

    Jim, you bring up some very important points. First, not all GDP growth is good growth. There was a fantastic essay in Harper's ("Our Phony Economy," June 2008) which traced the history of the GDP statistic and discussed its distortions when it's used as a general barometer of economic health.

    One type of distortion in particular is in health care costs. We are coming to grips with the fact that spending more (i.e., increasing GDP) on health care is in general not good for the country--we are already overspending and under-healthy compared to other developed countries. (See Awul Gatande's excellent article in the New Yorker last week for a great illustration of this.)

    For such a complex topic as our economic health, I would love to see different ways of assessing our situation, rather than continuing to worship at the altar of the GDP.

    Regards, John

     
     
     
    • CJ Cullinane

    I do agree with the projections and believe the economy will be hit by the results, less money, less jobs, and higher inflation. Much of the 'growth' we saw in the last few years was financed by debt clear and simple. Is this real growth? What we are seeing now and will continue to see is the aftermath of this enormous debt at all levels of the economy, individuals, companies and the government.

    Most of the financial services growth has little effect on the individual and their standard of living, if anything it has a negative effect because the individual is paying for the services and not getting much of a 'real' return. As for manufactured goods you just have to look at our auto industry, we are non-competitors!

    The government is in debt at every level, local, state, and federal. This means more taxes to support this enormous government overhead. More taxes means less spending by the individual taxpayer and more by government. This will hit the average person right in the 'standard of living'.

    Our measures of growth, and inflation, are flawed. Most of the financial problems we have now (I think) were created by manipulating the interest rate over many years. These measures were the excuses for doing this. Products help the economy much more than financial services.

    The rich will be taxed more but it will not help the poor, if anything I believe it will make them a bit poorer. Government will grow but this also will not help the lower class or middle class. Money and labor migrate to fertile ground, that ground will not be in the United States. If you do not believe this think back to the seventies and eighties, there are similarities.

     
     
     
    • Kumar Kunal Kamal
    • Doctoral Student, IIM Indore

    "Are our measures of growth flawed?"

    They definitely are. And that is the reason why we are hearing calls from Economists like Stiglitz and Sen for their reformulation. It is good that their voices are increasingly being heard, and there is an increased call for reformulating the economic indicators.

    Similar is the case with measures like "Inflation Rate": India is seeing a very low Inflation in the last few months only to the dismay of the average consumer. Everyday the average consumer hears about the much publicized "lower inflation rates" which only adds to their pain. The Indian Media ties the word "Inflation Rate" to the WPI which is not right; the common man is interested in CPI, and CPI is either not calculated or calculated on the basis of spurious data.

    So, there are three things that need to be taken care of: First, we need to find out if our economic indicators need a reformulation; Second, we need to calculate our economic indicators by using correct data; and Third, we should project the right indicators to the right people in the right way at the right time.

     
     
     
    • Alton Brantley

    Regarding John Caddell's health care cost comment, Gatande's article shows that a population's medical services are governed by supply, demand, and payment structure. That some populations have unhealthy lifestyles is true, and has been forever true. That the physicians are providing valid services is also true. The patients qualify for the the procedures by health status and available medical technology. The federal government has created a payment methodology that provides access to interventions for a population that otherwise couldn't afford it.

    There are only two ways to control healthcare costs - economic structure and regulation. If there were no medicare-medicaid payments, there would be less demand and therefore less expenditure on intervention. If the government wants to provide everyone with health services that are "equal," then rationing by regulation is the alternative. This will, of course, reduce services to the lower and middle economic classes and increase medical tourism for the affluent.

    At some point, there needs to be an understanding that health care is like every other aspect of our culture -- not everyone can have everything and that economic disparity is a part of any system of society. Not everyone can (or should) own a luxury car. Not everyone can (or should) have a liver transplant.

    One approach to improving health status would be to provide high impact-lower cost services at a basic insurance premium, and allowing economics to regulate who gets the higher cost (and optional) extensive services. This approach is similar to providing public transportation for those who cannot afford personal vehicles. Such rationing by programmatic structure can improve the health of our society without bankrupting our economy.

     
     
     
    • Karthikeyan
    • Senior Consultant, GENPACT

    Yes, it may be the case that for the forthcoming few years there may be lower GDP growth. As we all know that, it is the result of the financial system collapse. The financial services industry was growing at a very high growth in the past. It may not grow at the same level for the near future or anymore. It is because people have lost the trust with the credit card companies. The promise they made to make our life better is been proved to be flawed. But people and governments now started realizing that the traditional savings economy is better than the credit economy. The result is that we will have a transition stage during which there will be slower GDP growth but definitely it's not going to stop there. We will be going to see the good growth rate. It all depends on the time to transition. It even could be the case our efforts and beliefs will turn to another sector, possibly agriculture. It will take time to restore growth.

    To comment on the measures of growth, I would like to disagree with the point that they are flawed. Did we not experience layoffs even before the GDP growth rate slowdown was announced? Didn't we reduce our spending irrespective of the recession announcement came from the federal or not? Didn't we see the product's price growing rapidly even before the inflation figures are published in the news paper?.

    We need to understand that the GDP, inflation figures are just postmortem statements. The growth rate is projected based on the postmortem statement. We know them only after the event. It is difficult to project accurately.

     
     
     
    • k b ackerman
    • sr. janitor, ackerman co.

    Hi Jim- growth is product of confidence. I cannot comment on traditional growth measurements, but it seems that we spend too little time measuring the mood of the public. Vistage International, a leading executive group, polls its membership each quarter to develop a confidence index. This is a small sample, but perhaps a similar poll could be undertaken by Gallup or another polling organization. When people are frightened, they stop buying. Until they gain the confidence to return to normal buying patterns, our economy will stay in trouble. Ken Ackerman

     
     
     
    • Sunil Varughese
    • Director, Brand Indigo LLC, Dubai

    The worst global economic recession that is underway has seen many "holy cows" of unregulated capitalism being questioned.

    It is now quite clear that to have a sustained and equitable growth for all segments of the society we have to adopt an 'inclusive growth' route for mature, emerging and survival economies.

    It is also quite evident that the extant model of "Laissez Faire Capitalism" and all the "operative tools" that bolster this model have to be necessarily "re-tooled" while the global economy moves forward.

    Thus, the debate on economic growth has to graduate to a "Sustainable Development Platform" where we look at developing a 'Sustainable Capitalism' model and all related tools that would foster a "Sustainable Future" for all sections of humanity.

     
     
     
    • Colin Moore
    • Chief Investment Officer, Columbia Management

    Jim

    I do not believe the value of all growth is equal in either social or financial terms. If we think of the financial issue in terms of a relatively simple corporate present value model, the short term growth rate is only one factor. More importantly is the sustainability of the growth rate and the effect on the risk premium. Food production may produce lower rates of growth, short term, than financial securitization but it may be more sustainable and (perhaps consequently) carry a lower risk premium. Therefore higher multiples are applied to "staple" or sustainable growth versus opportunistic/acquired growth.

    If we systematically differentiate between different types of growth at the individual corporate level when valuing securities - then why not apply the same criteria at the national level. The multitude of factors makes the analysis of sovereign debt more complicated but in essence it is the same growth numerator and risk premium denominator. The relative risk premium on US debt may currently be held in check through the actions of the Federal Reserve and the concerns over other countries but it will inevitably rise if we cannot demonstrate a path to sustainable growth.

    The issue is complicated by our behavioral traits. We consistently demonstrate an inability to differentiate between the different forms of growth while we are experiencing them. There is just too much fun either receiving large bonuses or buying a house that you could not really afford. June 2008 witnessed the first economic/market "fire" alarms ringing but the fire had been raging for several years. We tend to rationalize each phase as "it's different this time" and spend little time debating the sustainability or social equity of the new "new thing". The chasm which opened between the corporate shares of national income versus that of individuals has suggested that the growth of recent decades was unsustainable. We simply adjusted by increasing lending to sustain the "growth" rather than re-evaluate the sources of the "growth."

     
     
     
    • Stan Heard
    • President, Success Architecture, LLC

    I agree that real growth in an economy is something quite different from whatever the GDP is supposed to measure. Not only does GDP include things that probably shouldn't be included but it also is just a moving estimate of a statistical value. It is a substitute for real information about the economy. It is tinkered with by every administration of government to make it look the way it suits them.

    I disagree that the current economic crisis is proof of a need to "re-tool" the laissez faire model of capitalism. First, that model is and has been non-existent for more than 100 years in America and never existed at all in the rest of the world simply because governments will not tolerate an unregulated economy. What is needed is a re-tooling of the size and scope of government and government regulations.

     
     
     
    • Jim Ruen
    • Owner, Edge Communications Inc.

    Is all growth equal? Of course it isn't. That is like saying that all apples are just that, apples. Apple varieties grow at different rates, mature at different times, have different tastes, uses and intrinsic values. The same is true of our economy. I work largely in agriculture and am constantly reminded that our so-called economic issues and theories of growth are mere parodies of what can be seen in any field, forest or meadow. Whether health care or financial service, heavy industry or education the parallels are there.

    A study of the soil and how nature slowly builds an underlying web of biological organisms that feed the plants offers the perfect study of long term investment strategies.

    Create a monoculture and then leave it to itself without regulation or cultivation and you create room for opportunistic and fast growing organisms that take over and destroy the productive potential of the crop.

    Look at hills and valleys and you can truly understand the impact of efforts to "raise" the floor for those at the bottom. Valleys only fill by erosion of soil and materials from the sides of the hills. That can be done with excess organic matter from verdant growth on the hill sides, by erosive action of wind and water on denuded slopes. In any case, the reality being that once the valley is filled, no hills are left standing. The difference being the productivity of the process.

    In each of these cases, you can artificially speed the process for short term effect. For example, you can introduce fertilizers from outside sources and super inflate the biological life forms for short term growth spurts that out yield the natural process. However, that is like creating an addict that requires continually higher bursts of narcotics or a stock market requiring every higher paper profits, to maintain an artificial high.

    We need to start to look at the big picture and identify those areas where we need to make long term investments, carefully cultivate the desired outcomes and accept slow, but steady improvements in living standards. Only then will we have a healthy and stable economy.

     
     
     
    • Anonymous

    Jim, slowdown in the economy of a country depends upon following these factors- 1. its GDP 2. per capita income 3. Inflation 4. Production/Services

     
     
     
    • Paul T. Jackson
    • owner/consultant, Trescott Research

    Robert Theobald, economist and futurist, addressed this situation years ago and shortly before his death had produced the book, Healing Century. It covers most all of the above comments. He and others saw this coming and what we were doing to ourselves and others was unsustainable.

    Of course GDP is flawed, duh!; especially when services include our Waste and Waste Management and recycle services. Growth in those things are hardly of value. When just about all we need can be found at the thrift store or garage sale; discards because there is something new, different, or chick, not because something is broken, is unsustainable...and we are living with the consequences of spending and buying because we could, not because we needed.

    We need less government and the wealthy 1% to share that wealth more in philanthropy. In seeking grants, I found one philanthropic group indicate an organization had to have a paid executive and revenue of $150,000 to be eligible. If small volunteer non-profits that add value to quality of daily life had that kind of money, they wouldn't be needing the grants in the first place.

    We've made our choices as a flawed global community and now we have to live with the consequences. Get over it...but CHANGE NOW, DON'T WAIT FOR SOMEONE ELSE.

     
     
     
    • Mok Tuck Sung
    • Owner, Profit Tools

    The United States' slower economic growth really means a lot to us in Asia, as the United States is one of the top importers of Asian goods and services.

    The Asian export model does not work any more. We will need domestic demand to replace that lost export demand. However, we have a great cultural challenge because as Asians we tend to be savers rather than spenders. Especially in these challenging times, Asians tend to save more, causing a drag in domestic demand that could lead to faster growth.

    The near future growth will be domestic and regional. This will require a set of growth indicators that have a more accurate representation of growth within Asia and the world.

     
     
     
    • Kenan Jarboe
    • President, Athena Alliance

    GDP has always been an imperfect proxy for growth. It is subject to statistically interpretation -- for example treating R&D as an expense produces a different outcome than treating it as an investment. It is also a very aggregate measure. Rather than focus on GDP per se, we should look at the more relevant direct measure -- standard of living, productivity, innovation.

     
     
     
    • Ashiq Khader
    • Consultant

    Jim, This growth stuff, started sometime in '60's that hit the ceiling, is now splashing down to the floor. Calculated as 1-2% growth, it may prove to be the right projections, based on past 'assumptions'. I think the basis of calculation of this growth has not kept in pace with time, as the absolute numbers and means to achieve it were the focus. I reread "Small Is Beautiful: Economics As If People Mattered" by British economist E. F. Schumacher and feel that it is now more relevant to bridge the economics of small world and the 'economies of scale' principles. I wonder if pure science can provide some fresh thought to Economic gurus of our time. Believe it, managing 'nano' is the beautiful way nature works in providing sustenance and growth to more complex organisms!

     
     
     
    • Anonymous

    All excellent comments, but at a "high level" of abstraction. What does slower growth mean for an entrepreneur, an innovator, or a marketer of a particular product? Just as all growth is not the same, all consumption cutbacks will not be the same; and the structure of our economy will evolve with new proportions. In 2001, a book, The Next Economy, began examining these issues.

    Thanks.

     
     
     
    • Milton Puryear

    Hello Jim,

    All growth clearly is not good or even truly growth, especially when it subtracts itself from our accounts in ensuing years as much of the financial services growth has done. Or truck-type SUV sales. How is it growth if it is only sustainable under conditions that are mostly in the past.

    Clearly it is time to reevaluate how we define and measure growth. Agreeing on what is REALLY real growth and what is fluff will be the challenge. But getting better at it will smooth GNP, avoid a significant amount of pain and waste of resources.

    Some observers are better at it than others. They are mostly those who are willing and able to study the ways that the basic system does not perform optimally. Everything that turns a profit is not good. That is the point of the Health Care article in the New Yorker last week. The difference between high cost helathcare cities (100%) and low cost cities (33-50%) is not access to healthcare as Alton Brantley would seem to suggest. The author's conclusion is that the real difference is in treating healthcare as a business in which maximizing profits is of greater, or even equal, importance to providing the best care.

    All that spending and no gain in outcomes. Perhaps that is where regulation is needed. Perhaps it should be based on aligning incentives to the real value of outcomes.

     
     
     
    • Shashi Sharma
    • CEO, SSBC India

    The global economy has dug itself into a hole and whatever measure is used for benchmarking growth in the coming years, it will be a slow recovery.

    The bubbles - asset prices as also debt paper were both created by banks - central, investment and commercial. The financial system (thanks to the way central banks operate) led the consumers to believe that the multipliers (represented by the velocity of money circulation and not new asset creation) will keep growing for ever...so the lending banks threw caution to the winds and kept leveraging their capital multiple times, to create fee spreads.. they forgot that lenders needed to have direct sight to their borrowers/assets they finance. That is what resulted in the very same asset being sold over and over again by the then holder to the next, at a profit. It was a result of money being created faster than assets.

    More than retooling economic growth/well-being measuring tools, it is aspirational impulses all around that will need temping down..........conspicuous consumption does generate unreal aspirations to own and consume. However, it cant be anyone's case that services do not contribute to either real GDP or well being of real people. Services of all kinds do help pull the growth engine through specialisation in tasking.

    In the last decade GNP figures kept growing without real savings, through a growing mountain of debt paper, mostly generated not for productive but for consumption purposes (excessively leveraged and without adequate addition to tangible assets created). That led to all enterprises and individuals seeing their incomes growing, governments claiming economies were growing at a higher rate by the day. All consumers got taken for a ride by the propaganda and lost their sense of balance - 'need to live within their current means'.

    Having got burnt thus, they are now rethinking their priorities, saving rates are tending to rise and growth will return but it will cook really slow.

     
     
     
    • John R. Reven
    • President/CEO, City Financial Corporation

    Hello Jim,

    I enjoyed your article. I would be interested to know to what extent sector growth such as Senior care and related services influenced your assessment of future economic growth. Will the percentage of GDP dedicated to such expenditures whether privately or governmentally funded constitute artifical growth as the healthcare sector heads towards more governmental influence? In what way will increased governmental influence in the private sector (General Motors, AIG, etc.) effect the overall economic landscape from a growth standpoint?

     
     
     
    • Samriddha Sarkar
    • Consultant, PwC

    As we know, growth in GDP does not mean an increase in welfare of a nation. So using GDP to measure the economic growth is not fully accurate.

    Economic growth would mean more job generation and higher taxable income generated in the economy. This in turn would mean more disposable income in the hands of the government, which when spent for productive purposes would foster economic growth. An optimal mix of free market in the commodity space and regulations in the financial space is required. In developing economies, more tax should be made available for government spending by curbing the illegal economy.

     
     
     
    • Umesh Gupta
    • Addl GM, BHEL

    We all understand that growth means going on producing goods and services at a consistent or higher rate. But the question is for how long? Can this world sustain such a situation? Definitely a new model has to emerge. How it will emerge, how it will develop, which economy will collapse and which will flourish--only time will tell. But it is definite that a consumption- and wastage-based model cannot survive.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC (India) Private Limited

    A certain level of economic growth is very necessary to meet the various growing needs of the ultimate users. Growth of needs is due mainly to increase in population. Basic needs of food, clothing and shelter have to be met. Healthcare and education follow. Certain other necessities are mobility in the shape of transportation, means for distant communication, etc. The list would expand in the case of developed and even somewhat better developed economies.

    Slower economic growth has its repercussions due to growing poverty-like conditions.

    Politically motivated dosages are face saving devices to create confusion - cost of all essentials galloping but the rate of inflation sliding downwards!

    Gulf between rich and poor is widening. And what is presented is data and statistics most of which is not understood at all. And this sort of research gives satisfaction for announcement purposes but nothing more than that. And, who verifies all this for " there are three types of lies - lies, damned lies and statistics.' Slower growth is a malady as it hurts one and all, directly or indirectly.

     
     
     
    • Tom Dolembo
    • consultant

    Another great question, Professor Heskett. Good or bad growth? Given the misleading, often fraudulent and self-serving reporting by major investment firms and government flacks on everything from oil demand to projected inflation, good data and trusted sources are hard to find. Resource based heavy growth demanding drilling, clawing of earth, destruction of rain forests, depletion of sea life, war, is as you imply, bad. Growth that supports sound health, the quality of life, longevity, and peace is good.

    We are leaving an era of resource depleting growth, perhaps, simply because we're running out. Consciousness of global warming, collateral damage from negligent fiduciaries, and negative global impacts are affecting our thought processes. As a species, we are aging and as a nation we are re-ethnicizing and our new flesh and blood will impact us. Growth demands consumption on a large scale. Capital fuels growth. If we are experiencing a lack of growth, perhaps we should look to the irrational, the sudden impact of fear and mistrust on a global scale, as a failure of a resource, and a also consider this a source of reenergized growth. Capital follows trust. It is hard to unscare.

    This is a revolution, not a business cycle. Capital and GDP has evaporated, it did not just decline. Consumption patterns are irreversibly altered. "Return to Growth" is a false mantra. What if, and this is irrational at best, we don't grow out of choice? What if we demand less, use less, want less forever? What if morbid economic obesity is no longer required for stable economies? What if "Super size" is not a business model? What if an individual consumer of anything can ask for, and get, a specific need or want met by not consuming a product or service? Are we, as a global family, assuming a collective consciousness that our lives depend on what we don't buy and use? If we are, then what you describe as growth will be, to our children, nothing resembling the familiar. This is what revolutions look like. Metrics lag events.

     
     
     
    • Sandesh N. Shringarpure

    Jim, it's really a valid thing to challenge the measures used for evaluation. I think pure quantitative evaluation may lead to better understanding of economic situation. As monetary or real values may reflect a picture based on other influential aspects. Many a time once you convert quantitative aspects into monetary value the true scenarios may get distorted. As many a time perceived values for commodities may be the outcome of other factors which are controlled in a systematic way by the interested parties. For example, if rice is one of the commodities considered for a particular country's evaluation and if price is regulated by authorities, it may not reflect the true value.

    If we bank on pure quantitative evaluation, linking to production / output may help. Further, quality of growth can be linked to demand for production / consumption etc. Also, the resources used may make things complicated but may be a good indicator.

    The social environment will decide the weight-age for a particular commodity in bouquet of economic indicator. If wheat is high on demand based on consumption patterns, it's in-house production and dependency on imports may lead to better evaluation.

    Also, the parameters set at country level will help to understand a country-level need base (qualitative) growth. It will be a real challenge to sum up the global need base (qualitative) growth as rightly mentioned by you the need of growth in particular sector may not be warranted at that particular time horizon for that geographical region. Therefore, global summation will again have a specific weight-age based on human needs all across the globe.

     
     
     
    • Anonymous

    Hi, I'm really glad that you brought up this subject. Although I'm not an economist, it has been irking me for a while that we use such a simplistic gauge of economic (and societal?) success. For example, if we discovered that the american workforce could produce the same amount of goods and services on a 35-hour work week and with an average of 7 weeks of vacation, for the same pay, would that show up in growth measures?

     
     
     
    • Jim Geisman
    • President, Software Pricing Partners

    In simpler times, GDP may have reflected something truly useful but the shifting definitions of what goes into the GDP calculation results in the GDP giving misleading signals.

    GDP (at least in the US) reflects every administration's effort at putting a positive spin on everything or showing things are not as bad as you think.

    Overall, I think growth is overrated. As others have noted, growth is unsustainable. Population growth, growth in pollution, growth in demand for scarce resources (financial and natural), growth in complexity leading to unintended consequences will lead us back to to the Neanderthal era. Only this time there won't be animals to hunt or skin, wood to burn or arable land on which to grow food.

    Perhaps the only growth that should be measured is growth in quality or non-material satisfaction. Given the current levels of consumption contributing to GDP, is there a way to grow customer loyalty? Or grow product quality? Or grow the level of agricultural sustainability?

    Perhaps a GDP that is flat but with growth in the above dimensions would be better than where we are now.

    The pursuit of growth unencumbered by a broader view of its impact or even thought, in some cases, has gotten us to where we are. And it is a sorry state to leave for our kids and their kids.

     
     
     
    • Gerald Nanninga
    • VP, Retail Ventures, Inc.

    GDP is a point-in-time measure. As such, it is a reasonable way to explain what just happened. With some of the changes mentioned by otheres for R&D, etc., it could be an even more reasonable way to explain what happened.

    The problem is when we use this static measure of the recent past to predict economic health, strength, and growth for the future. The correlation between today's GDP and tomorow's economic condition is too week to be useful. Don't blame GDP. It is the wrong tool for that task.

    What we really need is a different tool, a better future economic health indicator. This would move us from that static snapshot of GDP to more of a motion picture. The key factors would be this:

    1) How much of the economic activity today is not reflected in current GDP, but but will improve tomorrow's (like R&D)?

    2) How much of the economic activity today is reflected in current GDP but is really borrowing or taking away from the future (like excessive debt)?

    3) How sustainable is current economic activity? Are we building lasting jobs or not?

    4) How much of the recent growth is in additional economic benefits to society vs. just higher prices which may be false growth (like inflationary moves or perhaps what is happening in health care or what happened in real estate financing)?

    In other words, we need a more robust Future Economic Indicator measure.

     
     
     
    • Deepak Alse
    • Program Manager, Wipro

    Slower growth is not necessarily good or bad. Growth that comes from intent and sustainable approaches , could often be slow. Growth pursued purely for purposes of scale or with no particular intent , would, in the medical world, classify as 'Cancerous' growth. And there's no reason why that should not apply to the economy! Quantitative metrics serve as best indicators when they are based on qualitative platforms. Products and dividends of any kind, would typically be useful metrics in a simple world - As we develop a more systemic view of the economy, measurements of 'real' value-addition are required - The underlying factor will be 'sustainability' - How sustainable is growth, How sustainable is the value-addition ?

     
     
     
    • Kumara Uluwatta
    • Senior Lecture, Wayamba university of Sri Lanka

    Hot issue. Question is, can we care about the GDP as a measure of economic growth? In most countries there are debates about the acceptability of figures that are published by government bodies, because some independent organisations are always questioning the correctness of those figures. In addition, can we measure everything quantitatively? Now where we are going? Blind way of growth.

    Today the most important resources for the growth are people, money and technology. People matter for everything. To have technological advancement the knowledge-base economy should be established in any country. Inflation rates, GDP and all other measures are all comparative and in most cases unbelievable. Some economists are trying to talk about economic growth with the help of fluctuation of stock trading activities. Is it really connected with the economic growth? Look at Sri Lanka. Share transactions (stock market activities) increased just after the civil war with LTTE. Is this a question of qualitative or quantitative? Behavior of people matters ... with the knowledge-based economy.

     
     
     
    • Andrew Llanwarne
    • Consultant, IDEAction

    This is a fascinating and wide-ranging discussion, and I think the most recent comments point out the real reasons why we need to rethink our belief that continued growth in GDP is the be-all and end-all of human progress. It is not sustainable in terms of resources and it perpetuates inequalities within and between nations. Social and environmental conditions are subordinated to economic priorities and the ruthless power of market forces.

    This pre-eminent belief in economic growth has brought us to the position where we face the ominous threat of climate change which will increasingly disrupt our economies, societies and environments at enormous human cost.

    A recent report published by the Sustainable Development Commission in the UK looks at the concept of "Prosperity without Growth", recognising that we need to reshape the way our economic system operates if we are to establish a stable economy without continued expansion. It also recognises the need to allow less developed countries to catch up with the developed world. See http://www.sd-commission.org.uk/pages/redefining-prosperity.html

    With the forthcoming Climate summit in Copenhagen at the end of this year, this really is the right time to be discussing these issues and looking for better ways to measure and promote human progress and prosperity.

     
     
     
    • P. Maxson
    • Consultant, independent

    I have to say I'm a bit surprised that after "Limits to Growth" was published nearly 40 years ago, after "Natural Capitalism," The Natural Step, the Human Development Index, MIPS, Herman Daly, the Global Footprint Network, "Plan B 2.0" and other books, thinkers and initiatives ad nauseam, so many people still seem unaware of the fundamental changes needed - and in fact already underway, like it or not. The question is, will we manage this change, or will we let ourselves be mauled by it? So far we're being pretty badly mauled.

    Our single-minded obsession with growth, along with a few other fundamental flaws, has brought us the downside of globalization, the derivatives orgy, the asset booms, the crushing of unions--largely designed by the rich for the rich.

    According to 2006 IRS data reported in the New York Times, "the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980."

    Computations using Bureau of Labor Statistics data show that the true unemployment rate in May was over 18 percent and that 30 million people were either jobless or underemployed.

    For more than three decades we've taken the easy road and focused on the 300,000, through 'trickle down' and other increasingly discredited economic practices. What we really need to do is to shift to different incentives and measures of "growth" that reconstruct an economy that puts the 30 million back to work, and that serves the employment and income needs of the 150 million Americans who earn the other half.

    As someone else said, this is the best teaching moment in 65 years. Much of the analysis has already been done. It's up to us to provide an alternative agenda. And we can't sit around and expect the Obama Administration to do it for us.

     
     
     
    • Shabbir Merchant
    • Chief Value Creator, Valulead Consulting, India

    We should hope that the slower economic growth, enables the human race to re-emphasise the importance of a measure like "Gross National Happiness"(GNH). GNH may not only be a function of the GDP/GNP of a nation, but also of a philosophy of how we can try and do "More" with "Less" in all that we aspire for.

    History has always asked us to choose from 'unsustainable fast growth' v/s 'sustainable slow growth'. For a change lets choose the latter and increase our GNH.

     
     
     
    • Thomas Stephens Jr.

    I would borrow from applied biology to argue that growth, to be defined, as "advantageous," must exist within the "whole" context of the idea. For example, with regard meristematic tissue, the effect of "dividing in recognition of inherent function" without consideration for the inherent function of the whole (or non-meristematic tissue), a mutation is produced as meristem dominance. Consequently, for advantageous growth and maintenance of living cells requires a balance of both organ initiation and stem cell population regeneration. Therefore, controlled growth, balance, generally describes health and wellbeing of the organism.

    As I reflect on the consequences from the resent economic boom in select markets and its resulting bust, I maintain this postulation and conclude that not all growth is "similarly useful."

    My conclusion is that, unless the accounting measures of economic growth, or stimulation, or decline, include definitive reference to each faction of the economy the data are incomplete. Further, I would suggest that the data, indicating boom for a select market and not THE market, are a signal to adverse impact on the "whole."

    As to economic recovery, the lessons of biology teach that with the removal of the mutation, balance is restored to the whole, resulting in stability, and then controlled growth. How long does the process take? Well, how long will we lament over the mutation thought to be a boom? That is, how long will we maintain life-support (bailouts) to the one (the mutation) at the expense of the whole?

    Economics, biology, finance, business, and even life, reiterates the same lesson in defining and describing health and success. In each case, one facet of a connected organism, or economy, or business cannot benefit or suffer without affecting all the related facets. As business and academia continue to define global economics in all its connectivity, I believe that economic meristematic affect theory offers opportunity for critical review of future global economic do's and don'ts.

     
     
     
    • Srinivas Radhakrishna
    • Senior Advisory Consultant, IBM India

    One of the reasons why this recession is going to last long and affect many is that the hectic economic activity preceeding this economic phase is characterised by unprecedented human greed at the cost of ecological balance and observed from this aspect, it is good for Global economy to be in recession for some more time. It is appalling to see, we thes humans are begining to crave for higher growth rates, exploiting scarce natural reserves rather than thinking of conserving them to sustain in the longer run.

    An analysis of the last economic boom indicate that higher economic mic growth did not transfer in the creation of hihger and disperesed wealth amongst the milieu and it is ironic that the more progress we achieve, wealth gets concentrated.

    What is required to come of this recession is generation of higher economic activity through involvements of smaller communities making them sustainable without exploiting the natural resources. Infact, we need to discover resources to generate economic activity rather than depending on what is scarce. This way, growth rates become sustainable.

     
     
     
    • Kim Allen
    • Sustainability Consultant

    Of course the type of growth matters.

    If the police reported that overall "activity" in an area had increased, we would demand to know what type of activity they were talking about before we could form an opinion. Drug activity? Neighborhood volunteering? Burglaries? Block parties?

    The word "growth" is a lot like the word "activity." Growth in GDP doesn't mean much in terms of things we actually care about in society, like people being able to support themselves and their families, as well as the protection of the natural environment that supports us all. Tabulating the shopping bill is far removed from values. A metric that is neutral as to whether we are building prisons or schools seems less than useful, doesn't it?

    So we need to demand better of those who enthusiastically support "growth." There are many things worth growing -- community harmony, neighborhood gardens, the amount of time we have to simply relax with our families. And there are other things not worth growing, such as industry practices that undermine societal well-being (from pollution of rivers to the insane pace of today's office environment).

    Do we have the courage to measure our lives in terms of what we really value? The prison door is unlocked, but we cower in our cell, preferring the familiar pains.

     
     
     
    • Jay Somasundaram
    • Systems Analyst

    It's time for Triple Bottom Line measures to become mainstream. Businesses should be taxed and countries assessed on a combination of all three measures (economic, social and environmental). Slower economic growth should not be seen as something that is bad, rather an opportunity to apply the resources now availabe to correcting our systems.

    Implementing Triple Bottom Line reporting is the most important change that needs to happen. What gets measured gets done. Nearly all those who talk about financial reform are missing the point. Carbon trading is a partial solution, but it leaves out (i) other environmental issues and (ii) social issues (externalities in economist-speak).

     
     
     
    • Lee Offenhauer
    • Commercial Artist, Coast Magazine

    I've always thought that the notion that the economy has to continue to grow is one of those unquestioned assumptions that's just wrong; perhaps dangerously wrong. Consider the fact that no growth in a natural system remains unchecked. If it does and it's in your body, for example, it's called cancer and if not removed is invariably fatal. So it seems to me we should be more interested in a kind of dynamic and sustainable equilibrium where the opportunity for success is as widely distributed as possible. Having a relative few people with enormous amounts of money (and consequently the power to make even more) and large numbers of people having an increasingly difficult time making ends meet is a recipe for disaster. But it seems to me that a completely unregulated market seems inevitably tilts towards exactly this situation. Is this analysis incorrect? Have I missed something important here, or is this simply a case of "easier said than done?" I'd love some feedback on this.

     
     
     
    • Henry Kwok
    • consultant

    Economies are changing and evolving so fast and they are also getting more complex and unpredictable. Thus it would be foolhardy to think that traditioanl measures of growth will be a good indicators of the economic health. These measures must also evolve to take into account the constant and complex changes in the economies.

    We live in a connecred world thus we need not only measure growth ecoomically but its impact in other facets of live - socially, health, environmentally and so on. Only when we start to link economic conditions to these factors, then we can find true meaning of economic growth!

    Businesses are moving from historical indicators to predicative measures - likewise economic measures of growth or decline must also have these predictive elements.

     
     
     
    • Sat Goel

    If one goes by the reports submitted by GAO on the future of the US financial health, it is obvious that the US is heading towards a financial crisis by 2020. US government income will be only able to pay for social security, medicare and interest on loans. No money for defence, education, infrastructure. No discretionary expenditure.

    Are these not signs of a much bigger crisis coming?

    There is still time to correct the situation. The US and its citizens must learn to live within its means and not live on borrowed money.

     
     
     
    • Anonymous

    How and what really a poor and less educated man feels and understands the " economic growth". He will not understand in the way the more affluent and educated men understand. The parlance in which these two categories talk and understand "economy" is different fom each other. Nevertheless, at any stage if we want to get a real measure of "economic growth" or "economic downturn," we must get to know the feeling and understanding of population in poor man's category which must be derived in their own parlance and converted into an index and compare it with the index obtained from the other category. Then we should see how closely or badly they compare.

    I am not aware of any such exercise having been done by anybody during recent meltdown. As per my observation I have not seen in the poorest category of the society, the kind of panic and helter skelter behaviour I saw among edu cated and affluent category. In fact, most of the men in the former category were not even aware of recession/meltdown that is happening/has happened. They were continuing to live as usual.

     
     
     
    • Anonymous

    We keep talking about False Growth and the collapse of the economy, but we don't ever question the People behind it. The Industrialits, Politicians and the much valued stakeholders. I work for a Large MNC, and i fail to understand its moral value to support the economy, as i am seeing it doing like all the major MNC's cost cutting. When cost cutting is being done by Large Corporations then why do we blame the consumers for not spending and creating the so called recession. It is like the saying in the famous animation "Kung Fu Panda" by the Turtle "One often meets its destiny, on the road, it takes to avoid it." For the fear of recession, recession is actually being created.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC (India) Private Limited

    GDP growth is a statistical measure very pertinent for academic purposes. However, it is a misguiding measuring tool inasmuch as the components are not all that really matter. I'm reminded of the recently announced negative inflation in India. Is there any satisfaction when we know of the ground level realities - cost of essentials gallopping and poor becoming poorer.

    Despite all this malaise, it may not be surprising to hear Indian Finance Minister declaring positive GDP growth on the 6th proximo during his budget speech! Let's admit... slow growth leads to deterioration of lifestyles and various shocks making living miserable.

     
     
     
    • Al K Osterwalder
    • Managing Partner, OSCOT Osterwalder Consulting and Trading

    I think that growth in industrialized countries has to move from mere quantitative growth to qualitative and sustainable growth. This means that economies have to be redirected and focus must be on quality and sustainability in all aspects of life, starting in education, family values, business and work ethics, political objectives and aspirations, honesty and trustworthiness of the media etc. We must move away from quarterly success measurements and short term political objectives and concentrate on medium to long term goals. Such change in behavior and economical and social outlook will create growth as well, but on a higher and more satisfying level. Economies such as the US economy would become more balanced again, industrial sectors would be maintained on a high level and countries would not become so dependent on others as they do now. Excesses such as the financial crisis could be avoided as they do not fit with high quality and sustainability objectives. We have a chance to rethink our values and redirect our economies - as President Obama says "Yes we can".

     
     
     
    • Douglas R. Elliott
    • CEO, TEQ Development LLC

    When thinking about implications of economic growth rate it may be instructive to also consider the nature of economic change. The 'green revolution' in the US renewable energy marketplace is a case in point. On one hand we are trying to conserve energy consumption which will ultimately limit future economic contributions of the energy sector to GDP in an absolute sense. Today most of the economic value in energy is realized in the sale and conversion of natural resources. A relatively few percentage points of the energy marketplace contributes to manufacturing capital and even fewer percentage points to wages to convert natural resources into economically useful energy.

    The 'green revolution' will be substituting the costs of non-renewable resources with manufacturing capital and wages which is the entry cost to harvest free and renewable energy resources of wind, sun and water. The labor intensity of the energy sector will rise around ten fold (or more) as this will be the labor required to build and then maintain the vast increase in capital assets that are required to harness the free but diffuse renewable energy resources.

    Our present 'old energy' economy is a poster child of consumption economics. The burning of fossil fuel must dissipate all of its original economic value as a natural resource to the environment to obtain value. The new energy economy will be capital and labor intensive to access 'free' resources of the environment. At today's natural resource pricing we are at near economic parity between 'old energy' and 'new energy'. Yet we are still looking at a 'zero growth' option on absolute economic output and consumption of energy.

    If you in manaufacturing or part of the labor force, the development 'new energy' is going to seem a lot like a growth economy. Not so for oil exporters or fossil fuel owners.

    In the US and other developed economies it seems we are entering a new economic era where we will displacing disposable (e.g. consumer) economics with renewable and recycle economics. The latter are an outgrowth of knowledge assets (like R&D) and scarce resource pricing. While energy is a conspicuous example, the analogies are there for the economics of food, clothing, healthcare, etc.. And it seems to me, zero growth or otherwise, this may be a good thing.