17 Nov 2015

GDP as a Faulty Measure of Economic Development: The Weapons Industry

Laurens writes*

Gross Domestic Product (GDP) is the most widely used measure of economic activity in the market (Stiglitz et al. 2009). GDP makes no distinction between well-being enhancing activities in the economy and well-being degrading activities. Both are considered equal and more economic activity means in either case a higher GDP. Governments and other organisations often present GDP as a measure of well-being. They assume thereby that more goods in general equates more welfare. This blog post will try to argue why equating GDP with welfare is a dangerous equation, as it enables organisations to mask harmful economic activity under the pretense of economic growth.

The prime example of bad economic activity is the production of weapons. Weapons are in essence made to destroy the well-being of people, as they kill people, wound people and destroy physical capital. This is also the case when used defensively, as somebody defends oneself with weapons by shooting someone or something else. Production of these weapons contributes to the GDP of ‘Western’ countries.** The dependence of countries on the GDP measure gives these countries an extra justification to sell these weapons to other countries as it will provide the country with a boost in economic activity, as the destructive costs are not displayed in the measure.

An example of a stimulation of the economy by selling arms could be the EU move in 2014 to lift the arms sales ban to the Syrian rebels (France 24 2014). The referenced article writes that this ban is lifted, because it would provide strategic bargaining power with Assad and it would provide a counterbalance to the Russian weapon sales to the Assad regime. An interesting implication of the lift of the ban is that the European economy is boosted as the countries of the European Union can now start to deliver to a civil war that has an unsatisfiable thirst for weapons. A few months later when the yearly budget of these countries is presented, politicians are more likely to be able to boast about their great economy. The economic results, however, do not display how many lives and how much infrastructure, the ‘economic activity’ has destroyed in other countries. Furthermore, it does also not display how much the Western weapons are fuelling negative sentiments and instability, two factors that can have negative consequences for the well-being of their own people in the long run.

This last process got painfully visible, when people in France got attacked by ISIL for the second time in a year. The attack is likely to have multiple negative consequences for the well-being of Europe. One of them being that it will increase the feeling of insecurity in the population. When the consequences become visible, the European government should examine whether the initial boost in economic activity was worth the damages that it did to itself and others by stirring up negative sentiments among the Syrian population.

Bottom Line: A good way to make it less likely to reoccur in the future is to stop including harmful economic activity in measures of GDP, as doing this will eliminate one of the tools that organisations can use to cover up the harmful effects of the weapons industry.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

** "Sales from the 44 US-based companies featured accounted for over 60% of all arms sales by the top 100 producers in 2010." (Sedghi 2012)


Thomas Oberhäuser said...

Great description of the today's situation. - I would like to add, your example of harmful production could be expanded to production at all. - We can think by our own or together, what articles are necessary and which ones are not. - At the moment we are forced, to produce what our “master” says to us. Because we have no unconditional income, every employer is our master. And we are slaves. - If we had no ring in our nose, we would be free to decide, what service we would do and what production we would support with our work.

Gerrit Dreise said...

Dear Laurens,

You propose that “harmful economic activities” should not contribute to the growth of the GDP of a country. If we do so, we should agree on the definition of “harmful economic activities”.

Most weapons in the world are not actually used in a war but serve the purpose of scaring the enemy not to start a war. If therefore a war is not started we could say that these weapons have contributed to the GDP and are not harmful economic activities.

Looking to other large economical activities in the world, like the production of cars, we could say that this is extremely harmful. All produced cars are used and produce CO2. The emission of CO2 is causing the global warming of the Earth and should therefore be consider as an extremely harmful economic activity.

Should we stop adding the production of weapons or the production of cars to the calculation of GDP? Or is it better to stay with our current definition of GDP as otherwise we no longer have a common understanding and comparing countries GDP will no longer be usefull?

Look forward to receive your comments.

Kind regards,

Gerrit Dreise

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