Measuring economic growth

THE YEAR 2004 WAS A MILESTONE for the world economy, which grew by 5.1%--the fastest in nearly three decades. Output of goods and services increased from seven trillion dollars in 1950 to $56 trillion in 2004, while annual income per person grew from $2,835 to $8,753 during this time.

The U.S., which accounts for 21% of gross world product--the aggregated value of all final goods and services produced worldwide--continues to stimulate global economic expansion. As a result of productivity growth, reduced interest rates, a mounting fiscal deficit, and higher corporate investment, the U.S. increased output by 4.4%. The European Union, meanwhile, expanded at a rate of 2.5%, attributable to weak domestic demand.

In Asia, Japan's economy jumped by 2.6% as a result of decreased consumption, a decline in investment, and weaker exports. The newly industrialized Asian economies--Hong Kong, Singapore, Taiwan, and South Korea--went up 5.5%, up from 3.1% in 2003. South Asia as a whole, with 1,400,000,000 people, enlarged by 7.1%. Economic growth in India, buoyed by strong investment and industrial activity, remained robust, slowing only slightly, from 7.5% to 7.3%.

With booming economic activity, China sustained the remarkable 9.5% a year growth that it has averaged since 1980. The industrial sector remains the biggest contributor despite substantial government initiatives to cool down the economy in an effort to prevent a hard landing. Russia's economy amplified by 7.1% while the Ukraine's rose by a record 12.1% due to burgeoning demand from Russia and China and a favorable exchange rate.

Surging global demand led to an increase of 27% in world commodity prices. This had a positive impact on commodity-exporting countries such as Brazil and Mexico, whose economies expanded by 5.2% and 4.4%, respectively. Output in Latin America as a whole increased by 5.7%. Venezuela's economy alone grew at an unprecedented 17.3%, a strong recovery after an economic contraction of 7.7% in 2003, partly due to a two-month oil industry shutdown. Higher oil prices, a boost in consumer spending, and improved investment triggered Venezuela's impressive showing.

Although economic recovery has become broad-based, there still are concerns about high dependence on oil markets. This was the case in the Middle East where, despite the fragile security situation, higher oil prices boosted the regional economy by 5.5%. Output in sub-Saharan Africa rose 5.1%, the highest in almost a decade. In the countries where oil production increased--Equatorial Guinea, Chad, and Angola--economic growth was particularly strong. Output in Ethiopia grew by 11.6% as a result of agricultural recovery after the country received relief from a prolonged drought. Conversely, poor governance and conflicts triggered economic contractions in Zimbabwe and Cote d'Ivoire of 4.8% and 0.9%, respectively.

Despite rapid economic expansion, income disparities are increasing across regions and within countries. As world output doubled during the past two decades, income inequality worsened within 33 nations. With one in every five people worldwide surviving on less than one dollar a day, poverty continues to afflict significant segments around the globe.

Widening income gaps have a negative impact on development. They indicate uneven opportunities, with a privileged few securing the vast majority of the benefits of economic growth. For instance, the richest five percent of the world's people earn 114 times as much as the poorest five percent. In China, large economic and social gaps exist between the profitable urban coastal areas and poor inland regions. In Mexico, the poorest areas are in the mainly indigenous and rural south, while the north has benefited from strong investment and economic integration with the U.S. and Canada.

Furthermore, the current economic model--assessed by gross domestic product--ignores the natural systems that support it. GDP shows only the total economic output without fully reflecting the costs of environmental input. As a counter to this, a number of sustainability and development indicators has been created. The World Economic Forum publishes the Environmental Sustainability Index (ESI), which benchmarks the ability of nations to protect the environment. The ESI demonstrates that high incomes contribute to the potential for strong environmental stewardship but do not guarantee it. The U.S., for example, ranks first in GDP but 45th in ESI.

Other indicators of environmental sustainability include the Genuine Progress Indicator, which uses the same data as GDP but takes in to account certain costs to the economy, such as pollution and crime, and other unaccounted benefits, including volunteerism and housework. The Living Planet Index is a measure of the world's biodiversity, and the Ecological Footprint documents humanity's consumption of renewable natural resources.

Economic growth comes at such a heavy cost to the environment. With humanity already exceeding the Earth's regenerative capacity by more than 21%, the world's ecological assets--which all economies depend on to grow--quickly are being exhausted. Rapidly increasing carbon emissions, deforestation, collapsing fisheries, falling water tables, and soil erosion are just a few of the trends warning us that our current economic model no longer is viable. Moreover, persistent inequality may limit the benefits of economic growth and restrict development as political disputes and social unrest rise. Relying solely on the value of economic output to measure progress--while ignoring environmental costs--will expand ecological deficits further, eventually undermining the global economy.