Illegal drugs in the GDP: short-term gain but long-term loss

European Union - Sep 06 2018

Analyst insight

A few weeks ago, the French National Institute of Statistics (INSEE) decided to include illegal drug trafficking in the calculation of GDP (for an additional amount of at least EUR 2.7 bn). This followed a 2013 Eurostat request that aims to make such practices widespread in the EU, after previous moves by countries such as the Netherlands to include prostitution and drugs in the GDP.

However, such a decision is questionable. In theory, GDP aims to measure (mainly) economic value added in the most accurate possible way, but is this really what is measured by the consumption of cannabis, cocaine or new Chinese psychoactive substances? And can a statistical approach be sufficient to answer this question given its cultural implications on the status of drugs in relation to socio-economic development? Such a decision sheds light upon the very diverse nature of the elements that are taken into account in GDP. Moreover, it highlights the limits of GDP, thus calling for other indicators as those developed by ESG assessments.

Let us start with a few words on the illegal drugs market as this is today’s subject. As detailed in a recent EMCDDA report published almost at the same time as the announcement of the French statistical decision, drug use is “a recognized cause of avoidable mortality among European adults” (c.8,000 deaths in 2016, with notable under-reporting issues). In addition, drug-induced deaths are increasing in almost all age categories. For a given age and sex category, European opioid users are five to ten times more likely to die than their peers, with mortality rates that can reach 1-2% per year for high-risk drug users. While this situation is better than in the USA (64,000 deaths in 2016 and a 22% overdose death rate increase in just one year), but it remains serious.

Drug-induced deaths reported in the EU in 2012 and 2016 (or most recent data) by age band

And of course, mortality is not the only problem associated with illegal drug use. Cannabis (of which Canada has just announced the legalization) tends to present different risks but its impacts in terms of addiction, mental health issues, bronchitis or fertility loss, etc. should not be underestimated. Just to give an example, a 1987 Swedish study assessed that people who used cannabis more than 50 times before the age of 18 were three times more likely than others to have schizophrenia at 45 (which has also been supported by other studies since then). And there are still many things that we do not know about drug effects that call us to caution, especially given the delicate and deep matters at stake involving both bodies and minds.

So, as the US opioid and current trends in developed countries make clear, there is a drug problem. However, this also poses questions that are beyond the question of drugs, bringing us to the question of the quality of our economic indicators given the recent inclusion of illegal drugs in GDP. GDP has become the dominant indicator to measure the economic value produced every year by any given region, country or the world. GDP per capita is in general the most common indicator of wealth and a key factor as for example in conventional sovereign ratings. But what if part of this “wealth” is in fact toxic or has negative side effects at least in the medium or long term? And what if it reflects social problems, suffering and dissatisfactions, as can be the case of drug use and its growth?

These are actually examples of questions raised by the development of ESG analysis, as in our methodology to adjust GDP based on ESG criteria. Indeed, if drug use causes deaths or even just harms social relationships, family structures or professional lives, indirect negative impacts can be significant even if they are not factored in. A similar view applies when ESG analysis highlights the potential negative impacts in the long-run of excessive dependence on fossil fuels, poor governance or low education and health performance. For a given quantitative level, all GDPs are not equal and do not present the same resilience. Societies can truly be weakened by some of their GDP-generating activities (at least through externalities), and even if impacts can be mainly long-term, this type of risks should also be considered. Compared with GDP from these activities, GDP from competitive industrial sectors or essential services obviously brings something more. And this “additional” value can serve the whole economy and society, such as when a new bridge is built compared with the refurbishment of a damaged bridge (which can by the way be also an ESG or climate-related risk).

Lastly, it is a real question to see that illegal drugs are now included in the calculation of GDP for more and more countries while a range of non-market but highly valuable activities are not really taken into account, such as free volunteer work and parents’ work at home to take care of children (unlike similar work conducted by childminders). Trying to measure everything or focusing on an economic perspective indeed has limits.

This is not to say that we should give up on the GDP. The GDP offers a synthetic view of the size and dynamic of an economy without which it would be difficult to conduct macro-financial analysis of sovereign assets. However, the recent French statistical move provides a good illustration of its limits. Even economic data are not perfect, and this can result in notable biases. A few years ago, in Ireland, accounting changes to include drugs and prostitution in the GDP had led the 2013 GDP growth to be revised from a 0.3% loss to a 0.2% increase.

This also strengthens the case for going beyond GDP to integrate a clearer view of the environmental, social and governance impacts of our activities, with a more long-term perspective. While freedom is generally highly valued (and is even in the French national motto), addictions paradoxically seem to continue to take a notable socio-economic toll in our societies (see also alcohol, tobacco, food, TV/internet, gambling, the tragedy of prostitution, etc. or even the fact that the WHO just recognized a few days ago that addiction to video games can be a disease). However, real freedom participates to the common good and this also matters for economic and social resilience based on a broad ESG perspective.

Guillaume Emin, Project Manager  –  Sources: Beyond Ratings, EMCDDA

 

 

 

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