‘Factors that go into GDP estimation are not written in stone, but are only changed to the benefit of OECD economies’

Ehsan Masood is a science and policy journalist and broadcaster with more than 20 years of experience working on the editorial staff of “Nature” and “New Scientist”, among others. He also teaches science and innovation policy at Imperial College London. He has written several books and made documentaries for BBC Radio 4. He is currently a Knight Fellow at the Massachusetts Institute of Technology (MIT) and a contributing editor at Research Fortnight. As the South Asia correspondent for Nature magazine he was based in Islamabad in the mid-1990s.

He has recently written a book called The Great Invention, which tells the story of how GDP became the world’s preeminent economic indicator of prosperity. He tells the story of GDP through the lives of the people who were its primary proponents and opponents.

Ehsan Masood has been in Pakistan this week speaking at the Planning Commission and teaching a science policy leadership course at LUMS. He sat down with BR Research to share Pakistan’s role in the GDP story, particularly that of Dr. Mahboob ul Haq, the co-inventor of the Human Development Index.

Excerpts from the interview are shared below:

BR Research: Your biography describes you as a science and innovation policy journalist? How did you come to write about economics and GDP?

Ehsan Masood: Although I am not an economist by profession, I have closely explored the subject due to my involvement in R&D policy; financial journalism and higher education have been the dominant themes in my career. As a magazine editor I realized that it was important that I learn about the macroeconomic side of innovation policy.

My interest in economics also goes back to my teenage years. My family returned to Pakistan in the 1980s and I first learnt the subject while at school in Karachi. We returned to the UK a few years later and what struck me when I resumed economics at A’ Level is that we were using the same textbook, Introduction to Positive Economics by Richard Lipsey, as we did at school in Pakistan.

I questioned the claim that the same economic theories could apply equally to two vastly different cultural and economic contexts in Pakistan and the UK. I was fascinated that we use the same metric to measure prosperity in both the City of London and the slums of Mumbai.

BRR: You talk about “natural capital” in your book. Describe it to our readers and explain why you insist that it needs to be incorporated into GDP when so many indicators of human induced environmental deterioration already exist? 

EM: Natural capital is the term economists use to establish the value of nature and the services it provides to all species including of course humans. In 1997 Robert Costanza, an ecological economist co-wrote a research paper for Nature, which made it to the front cover under the title “Pricing the Planet”. The paper tried to put a price tag on natural capital and compared it to world GDP. The paper, which was controversial at the time, came up with the value of USD 33 trillion for something which no one was measuring and was around twice the value of global GNP. The paper woke people up, both to the value of what humans are destroying, but also to GDP’s deficiencies, which excludes many factors of production such as household work and volunteer work.

GDP is at best a proxy measure and yet it has become a cornerstone of modern macroeconomics. Why is it that we do not ask questions as basic as why does GDP always go up? There is an incentive externally to always show growth pointing upwards. Political careers for one thing depend on it and the sorts of opaque and not-so opaque methods that we use to show growth are not even questioned. I believe incorporating these factors into GDP estimation will offer a context to human action that separate and independent measurement of each metric does not offer.

BRR: Your book talks about Pakistan’s role in making GDP a widely recognized metric. Please share the context for the interest of our readers.

EM: Dr. Mahboob-ul-Haq wrote a book called The Poverty Curtain in which he chronicles the history of the first 20 years of Pakistan’s development, including the first Five Year Plan devised by Zahid Hussain, who was his boss at the Planning Commission and went on to become Governor of the SBP. The Hussain plan envisaged building 1,200 hospitals, 1,200 dispensaries, 4,500 primary schools and 7 million jobs for the refugees. Pakistan approached the US government for assistance. The US administration turned to Harvard University which led to the formation of Harvard’s Advisory Group.

As part of writing The Great Invention I spent a lot of time with the last surviving member of the group, Gustav F. Papanek, who lives in Boston and, at 92 is still an active researcher. The group advised Pakistan on what it called “growth” philosophy, and insisted that before the country develops its social sector, it should develop private industry at scale. Remember that Pakistan at the time did not have a tax base to pay for its social investments, and in effect, it was declined developmental assistance as the leading economists at the time saw industrial growth as the key to unlock development.

The book chronicles how the initial blueprint of Zahid’s plan was effectively ripped apart, and targets were set for public spending on industrial development and agriculture, with around roughly 5 percent allocated for schools and healthcare. In the decade that followed, GNP growth averaged at 6 percent and Pakistan was called a “development miracle” as it became the poster child of an early model of how economies can “grow” their way to prosperity.

At the time Dr. Mahboob-ul-Haq had used the phrase “functional inequality” to describe how relentless growth requires society to force inequality by making a small group of people fabulously rich out of which follows prosperity.

But he was a smart man and could see that other indicators weren’t changing. There was relatively little movement on overall poverty for example, nor on some of the other priorities identified in Zahid Hussain’s plan. A decade later, he had a change of heart, epitomized in his now infamous speech about “22 families” owning 75 percent of the wealth on Karachi’s stock exchange.

Today, many recognize that the speech probably did as much harm as good as it victimized a group of wealth creators. But at the same time, it put a spotlight on a policy of creating inequality and it also helped to start a debate about how GDP in and of itself is not good enough to value prosperity.

If the state wanted to use its resources to boost industrial output, it could have created more transparent ways to achieve this goal, such as broadening the base of entrepreneurship so there are many more wealth creators, or providing more equal access to capital. I don’t think it was very prudent to essentially pre-select a group of winners and to make them richer.

BRR: But indicators of social, ecological, environmental, and human prosperity have come very far since that time. From MDGs to SDGs, there is a lot of chatter about inclusive growth. Why do you think it is still essential to incorporate these factors into GDP estimation instead of being used in tandem?

EM: You are right and I am not against the use of a basket of measures, including of course the Human Development Index, which Dr Haq later went onto co-invent with Amartya Sen and inclusive growth has become a powerful metaphor that something is wrong. But these indicators will mostly be subservient while GDP remains in use. If GDP were to go extinct, there’s a much stronger case to look at a dashboard, but I can’t see that happening soon. At the same time, it is possible to change GDP so it is better at measuring what matters.

Today, OECD countries largely control what factors go into calculation of GDP, but it also means that change could happen in other ways. Recently, R&D spending was reclassified from a cost to investment, which led to an overall revaluation of national accounts largely to benefit research intensive economies such as USA, EU, Israel and Japan. While the lobbying for this reclassification took a long time, it indicates that factors that go into GDP estimation are not written in stone, though they changed to the benefit of developed economies.

That in a sense is the greater struggle. To value natural capital, or housework, or volunteering in GDP, a much larger group of countries will have to agree, because the benefits do not automatically accrue to just a small segment of the world’s population.

Today, there is a lot of chatter about how to value intangibles in national accounts. These are the services provided by the large tech companies, but which present GDP methodology is unable to capture. It is likely that within the next decade, the work that these companies do will be recognized in a different way and that this will lead to another revaluation that is likely to benefit the OECD economies the most.

Improving and changing the factors that go into GDP may be a lesser option, but it certainly is the more powerful option. I believe it will change economic policymaking for the better. If destruction of a forest is required to set up a power plant, planners at finance ministry will be forced to avoid making binary decisions and instead will have to estimate positives as well as negatives, instead of treating ecological degradation as an externality on a separate indicator.