GDP growth appears positive
The World Bank has added its voice to those predicting the global economy will recover faster from the pandemic than previously thought. According to its latest report, global GDP will grow 5.6% in 2021 – a significant upgrade from the 4.1% forecast at the beginning of the year.
Beneath this headline figure are country forecasts that point to very uneven economic recoveries across the world. The US is forecast to grow at a world-beating 3.3%, for instance, while emerging markets and developing economies as a whole are to grow 0.8%.
But if these numbers turn out to be accurate, they’re not telling us an objective truth about how these economies are performing in relation to one another. What most people don’t realise is that the rules about how GDP is calculated are highly political. In my recent research with Jacob Assa of the UN Development Programme, we unpicked how changes to how GDP is measured over the years have disproportionately benefited countries in the west, including the UK. This has enormous implications for everything from the international political clout of different countries to their credit ratings.
Winners and losers
Economic growth was first measured by governments in the 17th century. In the modern era, the United Nations took over responsibility for measuring output in 1953, and was joined in 1993 by the World Bank, IMF, OECD and EU. They all feed into decisions about the international measurement rules, which are taken by the UN inter-secretariat working group on national accounts (ISWGNA), and all countries are meant to comply. This reflects a gradual move away from national governments controlling the statistics to financial institutions having a larger say.
Both in 1993 and again in 2008, the so-called “production boundary”, which determines what is included in GDP, was broadened by the ISWGNA to include many activities that were hitherto excluded or at most seen as intermediate inputs.
Thanks to these reforms, financial intermediation, research and development, and the production of weapons all began to be counted within GDP data across the world. For example, in 1993 the income banks earned on interest from lending to households was included in GDP for the first time. And then in 2008, even bank money that had nothing to do with intermediation services began to be included.
Since western countries such as the UK and US have specialised in these activities in recent decades – the US is first in weapons and second in financial services and R&D, while the UK leads on financial services – the changes have disproportionately benefited their GDP numbers.
For more from The Mint on the problems of GDP reliance: