What’s growth got to do with it? GDP and the measure of success | Maria Giulia Borg

For years now, Malta has been a front-runner in the EU on economic growth, with exceptional GDP growth: a success story. But can we really determine whether a country is successful based on solely one figure?

Gross Domestic Product is a standard measure developed in the 1930s by Nobel prizewinner Simon Kuznets to calculate a nation’s income based on the value of all goods and services produced. Being a relatively straightforward computation, GDP was soon adopted by most countries to gauge their economic positioning, enabling year-on-year and country-by-country comparisons.

Studies indicate that greater income could indeed improve the quality of life of individuals, especially when it can help them fulfil their basic needs. However, past a certain threshold, higher income does not necessarily improve wellbeing. Kuznets himself had declared that “the welfare of a nation can scarcely be inferred from a measurement of national income”, knowing full well the limitations of his tool. GDP cannot and should not be used as the sole metric of true economic wellbeing in an economy.

What’s in the cake?

Let us assume GDP is a cake. Prima facie, one would assume that the bigger the cake, the more abundance and therefore the happier the people. But does this theory hold? One flaw of the GDP metric is that it does not distinguish of what the cake it made up of. The importance is growth rate rather than what is contributing to the growth.

This means that if the ingredients of the cake are suboptimal or possibly detrimental to the wellbeing of people, as long as they are marketable, they are considered as positives. GDP could be growing due to higher production of warfare items, increased production of pharmaceuticals due to a higher incidence of illnesses, or as in Malta, increased construction or over-tourism.

The growth does not distinguish if there is income being generated to provide better education or simply being income inflows from passport schemes. The overall non-financial impact of the growth is not considered.

Is everyone getting a fair share of the cake?

Even though greater GDP growth might be equated to a more prosperous society at large, this is not necessarily the case if wealth distribution is not made in a fair manner. It could well be that despite a larger cake, vulnerable groups have limited opportunities in getting their slice.

In Malta, in spite of the rise in GDP growth, income inequality has been rising, as computed by the Gini Coefficient, moving from 28 in 2006 to 31.1 in 2022. 30% of persons aged 65-plus were at-risk-of-poverty with an income of less than €10,893 per year, one in every 14 individuals could not afford a meal with meat, chicken, fish or vegetarian equivalent every second day and 33% could not afford to pay a one-week holiday away from home. All the while the government is increasing its year-on-year expenditure on social services.

This inevitably leads one to question whether increased wealth in society is actually leading to an increased standard of living for all, or is it being more exclusive?

How are the bakers treated?

An ageing population, falling fertility rates and limited human resources were major stumbling blocks to the growing local economy. The solution to this was the influx of foreign workers, rising from just 18,700 in 2013 to 107,000 in 2023, a 500% increase. Such foreign workers can be seen contributing in various industries, ranging from construction to hospitality, as well as caring professions.

Yet, are they, as major contributors baking this cake, also getting a slice of it? Unfortunately, we have witnessed the extreme commodification of this foreign human resource. Especially in the case of non-EU nationals, they are at the mercy of employers who are responsible for their single permit visa, making them more vulnerable to abusive employers. With an exponentially growing demand for accommodation, many workers with a minimal pay end up having to share residences with numerous others. One hears not so sporadic horror stories of suboptimal employment, health and safety and housing conditions, amongst others. Despite contributing to more than €1 billion in social system, the majority of these workers remain without a vote, effectively unable to choose who represents them.

What is the real cost of the cake?

Ultimately, when looking solely at the GDP growth rate in isolation, we are often disregarding any non-financial elements which are also at stake.

The greater economic activity in Malta and ballooning population growth is leading to noise and air pollution, congested roads, loss of natural environments as well as a sense of being smothered amongst the local population, just to mention a few.

Environmental degradation, deterioration in mental health and the inability to preserve the beauty of our island for future generations are amongst the external costs to the ever-growing GDP which we are not taking into account. This lack of sustainability could mean that having a bigger cake now, might also limit the ability of having a cake at all in the future.

So, is a bigger cake really better?

It is time to start looking at alternative ways of measuring prosperity in our country. This is not to say that we should scrap entirely the GDP metric, but rather, GDP should be seen as a puzzle piece amongst many other indicators used to measure quality of life.

Yet, what is not measured cannot be managed. It is time we develop a wellbeing index which will help us strive for an economy which serves the people and not vice-versa.

Unity Gazzetta is a collaboration between MaltaToday and the Faculty for Social Wellbeing