Economy

Economic Metrics: Time To Dump The GDP?

The roots of the Gross Domestic Product measurement of economic health are in World War II. Even in 1968, RFK had doubts, and now criticism is growing about GDP's real value.

How did we end up using a war index in times of peace?
How did we end up using a war index in times of peace?
Itai Lahat

The formula used for assessing countries' economic growth has now been around for 71 years, and has become "the mother of all indicators."

The calculation of a nation's or region's gross domestic product, or GDP, is known for having far-reaching implications for markets as well as monetary and fiscal policymakers the world over.

When the GDP drops, markets go berserk and investors start shaking; when the GDP rises, it reflects a beautiful world full of prosperous, happy citizens. Life is considered good when the GDP increases by 3% or more. When growth is lower — or, God forbid, when it's negative — it spells catastrophe.

Life today could hardly be more quantified.

Yet, does the mathematical theorem of private consumption plus investment plus government expenditure plus export, minus import, really offer an accurate accounting of economic prosperity?

Even critics of this indicator, whose voices have become increasingly louder over the past decade, often forget to mention its roots.

The GDP was born in the shadow of World War II. During the war it was used as strategic index, as important as the allies' battlefield conquests. It was developed in 1934 by the economist Simon Kuznets for the U.S. Department of Commerce.

Kuznets warned that his index was not meant to measure welfare: "The welfare of a nation can scarcely be inferred from a measure of national income," he stated at the time.

Former chief economist of the World Bank Professor Joseph Stiglitz, like others, argued that the GDP outlasted other indices because it was well-suited for war. It allowed decision makers to estimate the tax they can impose on the public and, accordingly, the state's potential military power. In other words, how much stuff can be produced — especially tanks, bullets, guns and bombs.

But how did we end up using a war index in times of peace? Mainly because in 1962 economist Arthur Okun stipulated the golden rule according to which, for every three points that rise in GDP, unemployment would drop by one. But it is hardly clear that this rule is still valid today.

The World Bank is one of the organizations that deal with the global addiction to GDP figures, and its president Jim Yong Kim wrote in one of his books that instead of leading to better life, "the quest for growth in GDP and corporate profits has in fact worsened the lives of millions of women and men."

Economists at the Organization for Economic Co-operation and Development (OECD) have also written that GDP growth is not synonymous with progress.

Interestingly, we can go all the way back to 1968 to hear a full airing of the doubts about the GDP, (then referred to as Gross National Product, or GNP), courtesy expand=1] of then U.S. presidential candidate Robert Kennedy:

"Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product — if we judge the United States of America by that — that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.

"It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.

"It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.

"Yet 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."

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Geopolitics

Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3

-Analysis-

LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.


Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

commons.wikimedia.org

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

For if nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

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