That Self-Defeating Obsession with GDP

The wind of anti-globalization is blowing with renewed force. Whoever speaks against globalization gains votes on either side of the Atlantic. Proponents of the free market increasingly start to look like prophets clamoring in the desert. My opinion is that this is inevitable, not so much because the advantages of globalization are hard to explain, but rather because they are hard to measure.

  Paradoxically, economists have built sophisticated arguments detailing the benefits of free markets, but empirical findings fail to confirm their existence, because they are ill-suited to measure the advantages of free trade. But there is worse. Statistical indicators seem to record a worsening in economic performance, precisely where globalization has spread its wings to the full.

  The most relevant example is GDP. Statistics on the growth of real GDP affect public opinion, political debate, and the fate of governments. Government incumbents usually get re-elected, when real GDP grows. Conversely, when GDP stagnates, governments get voted out. GDP data thus are a lot more than a statistical curiosity. GDP would thus have to be an accurate measure of the benefits of globalization, if it were to bolster its cause. Unfortunately, this is not so.

  In a nutshell, the reason is that the benefits of trade liberalization mainly work two ways. On one hand, there is a variation in relative prices, with a consequent expansion of the opportunities for arbitrage on international markets; on the other, an increase in the variety of intermediate and final goods available for production and consumption (the so-called variety effect). Both effects determine an increase in real spending, that is, of consumption possibilities of a given country, and thus an augmentation of its welfare. But these effects don't leave a trace on GDP. This is because, by construction, in its computation real GDP records neither the relative price effects nor the variety effects. And this is not all. Insofar as globalization produces the desired effects, and thus determines a reallocation of productive resources that increase the overall efficiency of an economic system, this reduces real GDP. This is because real expenditure and real GDP can substantially diverge in an open economy. And only the former keeps track of economic welfare.

  It is thus not surprising that, generally speaking, those who defend free trade in public often end up playing the role of fools. Take competitive devaluations. Undervaluing a currency makes the country able to seize market share at the expense of its trading partners. There is ample evidence that this protectionist practice is rewarding in terms of real GDP, and thus there is a powerful incentive for governments to use it to speed up growth. But there is little to be proud about, because devaluations usually result in squeezes in real spending, and thus in countries getting poorer. For instance, Chinese would be much happier with lower growth rate and a less undervalued exchange rate. But, as long as public opinion is obsessed by GDP, it will be hard to persuade people that things work this way. And thus we witness the prevalence of the raucous claims of those who balame the strong euro, China, or the WTO for their own economic predicament.