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The meaning of growth: paradigms, old and new

    • Milan
    • 17 January 2011

          Once upon a time, there was GDP. Or rather, once there was “just” GDP, understood as an aggregate indicator used to measure a country’s economic growth by quantifying the flow of goods and services for end-use and produced within a certain period of time in a given territory. The participants in this national roundtable discussion noted, however, that with the advent of the major crisis which hit the global economy beginning in 2008, international public debate over the quest for new paradigms for measuring growth, though already in progress for some years in expert circles, gained unprecedented prominence, helping to focus attention on other parameters little-inured to traditional economic theory or not considered key determinants of the macroeconomic stability of a country, such as household wealth, private debt, and employment trends.

          In some European countries, it was observed, the debate has been marked by an attempt to lay down models in black and white capable of gauging the wealth of nations by weighing up variables not strictly or exclusively linked to production flows. In France, as is widely-known, these efforts culminated in the Report of the Stiglitz-Sen-Fitoussi Commission, intent on emphasizing the prime importance of “measuring the wellbeing of the people” as opposed to mere economic output. Whatever the real applicability may be (especially in comparative terms) of any given indicator, there is no doubt that, today more than ever, what stands out is that the accounting tools at the disposal of governments are not adequate to the task of analyzing the state of the economic health of their respective countries and, consequently, of coming up with the most appropriate and discriminating diagnosis possible. The participants remarked that, ironically, the financial crisis has intensified the perception of this inadequacy, without however resulting in a widespread awareness of the unreliability of so-called “lessons learned from the crisis” that are based solely on GDP performance. Put more simply, analyzing the pre-crisis and post-crisis years merely on the basis of GDP fluctuations could, according to many observers, lead to the endorsement of a partial – if not an outright misleading – interpretation of the situation.

          The case of the United States, it was felt, provides a telling example. For years the US economy, in terms of GDP and household disposable income, grew at a relentless pace, artificially buoyed however by an accumulation of private debt and by two extraordinary “financial bubbles”, the last of which had no equivalent in contemporary Western history. At the same time, this “induced rush” of growth fueled an employment rate which, in hindsight, could be described as “artificially high”, linked as it was particularly to the housing boom. With the bursting of the “second financial bubble”, the house of cards of American growth came crashing down, dragging with it household income. In the wake of the crisis, GDP has gradually begun to grow again, this time through public borrowing, but households, notwithstanding the rollercoaster ride of gross domestic product, are poorer today than seven years ago. Similar examples could be given of other countries commended for their dynamism in previous years and then suddenly brought to their knees by the crisis. In contrast, economies such as those of Germany and Italy, which were more static over the course of the past decade, have proven themselves better able to withstand the impact of the crisis, thanks to a large pool of private savings and, particularly in the case of Germany, good export performance. The fact remains that, to date, a mix of household wealth and unemployment indicators paints a far more reassuring picture for Italy and Germany than any assessment based exclusively on GDP might suggest. France, on the other hand, represents a unique case – one in which forward-looking and effective demographic policies have in part contributed in recent years to a parallel increase in disposable income and in the stock of household wealth.

          In concluding their discussion, the participants noted that this quick rundown of examples, although not exhaustive, still serves to highlight the complexity of an issue that in reality impacts on all “mature” economies in the aftermath of the crisis, some of which are facing the prospect not just of a jobless recovery, but also of a rather limited GDP-growth forecast and the need to turn their hands to redistributive policies in a climate of low growth and public debt containment.

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