Going beyond GDP: a better tool to assess economic strength

Sharon Thorne

For decades, investors and policy-makers have relied primarily on traditional economic indicators such as gross domestic product (GDP) to measure the success of societies and estimate their future potential. These indicators, while useful, are also limiting. GDP can tell us about a country’s economic strength, but is silent on matters of health, education, personal rights and freedoms – the things we know are important drivers of sustainable growth. 

The Social Progress Index was created in 2014 to tell the rest of the story. The most recent index ranks 149 countries on 51 indicators of quality of life, aggregated into 12 thematic components and a single overall score. It measures social progress independent of any economic performance, making it an ideal complement to existing indicators such as GDP. Viewed alongside traditional measures of success, the index can untangle the relationship between economic development and social progress to better understand a country’s trajectory and prospects for growth. 

By comparing a country’s performance on the index to its GDP per capita, we can see which countries are most successful at turning income into better social outcomes. This index reveals that there is a strong relationship between income and social progress: as we would expect, richer countries tend to perform better on the index. However, despite the seemingly straightforward overall trend, there is plenty of variation. 

Defying expectations

Some wealthy countries perform significantly worse on the index than their high-income peers. Similarly, many countries regarded as important emerging markets achieve lower levels of social progress than countries of similar income. Some countries provide more positive examples. Costa Rica, for instance, achieves levels of social progress comparable to many EU member states despite having a significantly smaller GDP per capita, while Nepal outperforms both its income peers and its wealthier neighbours on the Indian subcontinent. 

The index also highlights the hidden potential for growth of some countries. For example, the data on Ghana suggests there might be more to the story than investors see at first glance. While the index shows Ghana’s challenges related to water and sanitation, it also reveals that the country outperforms countries of similar income in key areas such as personal rights, safety, communications infrastructure and access to information.

These strengths could end up differentiating Ghana from its peers with regard to its potential for future growth. Ghana has also been one of the fastest improving countries since the first index was released in 2014, a strong positive trend that suggests it may be a better bet for investors than a quick glance at the credit ratings suggests. 

This is precisely the sort of data that investors must examine more closely. By supplementing data on countries’ economic progress with insights into their social progress, we can assess more accurately how investable they are. Particularly during these days of rapid change and disruption, we can no longer assume a country’s productive output tells us all we need to know about its economic prospects. An assessment of future growth that fails to account for whether people have the freedom to innovate or the education to thrive in the Fourth Industrial Revolution is simply incomplete. 

Check your assumptions

These examples only scratch the surface of the insights that the index provides, particularly when used in combination with the indicators that investors currently rely on. Where the index aligns with the economic data, it can serve as an important confirmation. Where it appears to conflict with the data, it provides a valuable check on our assumptions and highlights an opportunity to dig deeper to understand a country’s prospects for sustained growth. This can be seen in Colombia, for example, where investors are leveraging the index as a framework to measure the social impact of financial products and services. 

We already know a country’s long-term success is not just about GDP growth; it is also about having a thriving society in which people have the foundation and the opportunity to innovate. We also know that new investment can jump-start an economy and help a society and its people to fulfil their potential. Using the index, investors can identify those countries poised for success and become contributors to – and beneficiaries of – growth that is lasting, sustainable and inclusive.

Sharon Thorne is the chair of Deloitte global board of directors and a Social Progress Imperative board member.