Commentary: GDP is not the best measure of a nation’s success (2024)

SINGAPORE: Two and a half years on from Russia’s invasion of Ukraine, the fighting shows no signs of abating.

Since the war began in February 2022, Moscow has faced increasing international isolation and a broad swath of economic sanctions imposed by Western nations, particularly on its primary export commodity, oil.

And yet, its economy has proven remarkably resilient. Or has it?

In July, the International Monetary Fund maintained its 2024 real GDP growth forecast for Russia at 3.2 per cent, faster than its projections for all advanced economies. In the second quarter, Russia’s economy grew by 4 per cent.

However, Russia’s strong economic growth belies underlying weakness in terms of its labour market, productivity and investment in the drivers of long-term economic growth.

It is a reminder of the shortcomings of GDP growth as an indicator of sustainable economic development, besides the well-known limitations of GDP as a measure of living standards.

It is therefore important to pay attention to the quality of economic growth and to consider, in particular, the factors that underpin future economic potential.

These include investment in physical and human capital, technology and firm capabilities, as well as social and environmental programmes, all of which have a significant bearing on a country’s long-term prospects.

RUSSIA: GOVERNMENT SPENDING LIFTS GDP AT EXPENSE OF LONGER-TERM DEVELOPMENT

While trade with China and emerging economies has blunted the impact of Western sanctions, another reason for Russia’s strong GDP growth is government spending, with the country’s economy on a war footing.

Fiscal spending has increased by nearly half between 2021 and 2024, while military spending is expected to almost triple to 6 per cent of GDP this year, from 2.7 per cent in 2021, according to a report by Centre for European Policy Analysis researcher Alexander Kolyandr in May.

This has in turn stimulated consumer and business spending, with inflation at 9.1 per cent in July and unemployment reaching an all-time low of 2.4 per cent in June.

The short-term boost to GDP has come at a cost to Russia’s longer-term development.

Spending has been diverted away from more productive uses, including investment. Russia recorded a 3.6 per cent fall in labour productivity in 2022. The demand for workers by the military-industrial complex, along with mobilisation, emigration and a lower influx of immigrants, has left the Russian economy shorn of manpower.

While the acute labour shortage has boosted pay and lowered unemployment, it does not bode well for the private industry. Meanwhile, the loss of access to Western technologies will stymie productivity and innovation further.

CHINA: DARK CLOUDS AND SILVER LININGS

China offers another case study. The world’s second-largest economy grew by 5.2 per cent in real terms last year. Yet economic sentiment in China has been gloomy, in contrast to the buoyant mood in the United States, which grew by only 2.5 per cent.

Part of this is due to expectations, against the backdrop of previous economic growth. China’s GDP growth has decelerated from an average of nearly 10 per cent between 1979 when economic reforms began and 2017, to an average of over 5 per cent from 2018 to 2023. Income levels are still only a fraction of the United States’, and as an emerging economy China is expected to catch up with the advanced economies.

Beyond the headline numbers, it is evident that the Chinese economy is facing significant headwinds. The property market crisis looms large given that the sector accounts for about 30 per cent of GDP. Foreign direct investment has tanked while pessimism has taken hold among sizeable numbers of Chinese youth.

To understand the situation requires a closer look at the drivers of China’s recent GDP growth.

While the share of state-owned enterprises (SOEs) in China’s economy has fallen over the decade as private enterprises gained ground, the latter have suffered a reversal of late.

A report by the Peterson Institute for International Economics found that the share of the state sector among China’s hundred largest listed companies expanded from 2020 to 2023, with SOE market capitalisation reaching 61 per cent in the first half of 2023. This does not bode well for economic dynamism, given that SOEs are perceived as less productive and innovative compared with their private sector counterparts.

Furthermore, the SOEs are often called upon to shore up the central government’s economic agenda. Recently, they were mobilised to purchase unsold homes with cheap funding provided by the state. Such measures can boost headline growth while masking underlying market weakness.

On a positive note, China’s growth is increasingly driven by new technologies including renewable energy, electric vehicles (EVs) and artificial intelligence. In 2023, China’s clean energy sector accounted for about 40 per cent of the country’s economic growth, according to a recent World Economic Forum report.

This aligns with President Xi Jinping’s stated aim of China transiting from high-speed growth to high-quality growth. For this to succeed China has to stay plugged into global supply chains and trade networks, so that it can export is products and capabilities to support the global climate transition, while obtaining the technology and inputs necessary to stay competitive.

However, the Chinese government’s support for the EV industry have prompted the US and EU to step up tariffs on Chinese EVs. With export growth potential limited by trade barriers, China has to increasingly rely on domestic consumption to support growth. Fundamental reforms may be needed to strengthen social security so that households do not have to build up high levels of precautionary savings.

IMPLICATIONS FOR SINGAPORE

Singapore has never been in a position to significantly boost aggregate demand by government spending, given its very open economy with trade over three times the size of GDP.

Exports, a major driver of GDP growth, depend heavily on global demand, particularly demand for electronics, chemicals and pharmaceutical products. Significant fluctuations in quarterly and annual economic growth are therefore unavoidable. What is more important is the medium-term growth trend, which is expected to be 2 per cent to 3 per cent per year if all goes well.

To achieve this, Singapore has to stay focused on what must be done to secure long-term economic growth. This includes investment in business capabilities, technology and infrastructure.

In this year’s Budget, the government set aside S$1 billion for AI development and adoption over the next five years, an additional S$3 billion for research enterprise and innovation as well as S$5 billion for a Future Energy Fund. Meanwhile, Singapore is expanding its sea and air transport capacity with the construction of the next-generation Tuas Port and Changi Airport Terminal 5.

Perhaps what is most critical for longer-term growth is investment in people and skills. This means having not just a high-quality education system to prepare students for the workforce, but also a dynamic lifelong learning ecosystem that can help workers to reskill for new careers as technology transforms jobs. This will enable inclusive growth that benefits the many and not just the few.

Finally, we must prioritise sustainability. Long-term economic growth depends fundamentally on “natural capital” - the clean air, water and living environment on which all human activity depends.

It is therefore necessary to factor in the impact of economic activity on natural capital and ensure the former does not undermine the latter. The recent oil spill off Singapore’s southern coast has highlighted how dependent we are on the natural environment, and the high cost of damage to the ecosystem. The impact of climate change may be less acutely felt - floods and heatwaves aside - but its consequences for our planet could be dire.

With sustained investment in skills, capabilities, infrastructure and natural capital, Singapore can position itself at the heart of global innovation and talent networks. This will enable citizens to enjoy a “Singapore premium” from living and working here.

Income growth remains a useful yardstick of economic progress, but should be seen in the context of other markers of societal well-being, including work-life harmony, mental health and a liveable environment. Only then would we have a comprehensive measure of our progress as a people, economy and nation.

Terence Ho is Associate Professor in Practice at the Lee Kuan Yew School of Public Policy. He is the author of Governing Well: Reflections on Singapore and Beyond (2023).