22 October, 2017

Could The GDP Figures Be Bogus?

By Hema Senanayake – 

Hema Senanayake

Hema Senanayake

GDP (Gross Domestic Production) is the most common measure of all “goods and services” produced in a country. Since GDP corresponds to the goods and services produced, in general, this figure corresponds to the annually increased wellbeing of the people the country or in any province.

Hence politicians usually quote the percentage of GDP growth to prove the increased wellbeing of citizens. TNA Parliamentarian Sumanthiran said in the parliament that Minister of Foreign Affairs Prof. G.L. Peiris, in a recent visit to the U.S. had submitted that the North Province was recovering. In order to justify his argument he had submitted that GDP growth in the Northern Province was over 25%. Further, Sumanthiran openly claimed in the parliament that G.L. Peiris had to retract it later. Why? I do not know. But I know that the United States has a norm in negotiating with foreign countries; that principle or the norm is, “we trust, but verify.” Perhaps, application of this principle by U.S. officials might have led the Minister of Foreign Affairs to retract from his original submission.

Pointing this incident out, Sumanthiran claims that GDP figures are bogus in Sri Lanka. But he did not mean that the calculation of GDP itself is wrong but I guess he claims that GDP growth figures are not corresponding to the increased wellbeing of people; in that sense GDP figures are bogus. Can this be happened? I think Prof. G.L. Peiris knows the answer better than anybody. My answer to the question is “Yes.” Today let us investigate about it in brief.

What the government is supposed to be doing economically? The short answer is that the job of the government is to produce what is known as “common interests” for the wellbeing of the members of the society. What are the most common “common interests”? Some of those are general administration, maintenance of law and order, general health care, education, taking care of poor and those who are unable to work, infrastructure development, research and development, etc. These “common interests” or services are not sold. In economics what is not sold to generate profit is considered as consumption. Hence, in general, these ‘common interests’ falls into the category of consumption not into the category investment.

In a previous article, I pointed out that the wellbeing of citizens is depended upon the consumption of “consumable output.” Since the production of common interests falls into the category of consumption, any production of common interests must increase the wellbeing of citizens. For example, a long ago the government decided to spend money for free general education and that increased the wellbeing of the people in general. Therefore, the production of these services must be accounted in Gross Domestic Production (GDP). Being true to our logic, the production of “common interests” is duly accounted in GDP.

However, due to the calculation procedure of GDP, sometimes there are chances to record the production of “common interests” without producing such services at all. TNA Parliamentarian Sumanthiran says that mostly this is the case with the present government not only in the Northern Province but in the whole country itself. He expressed this sentiment in two of his speeches during the budget debate. What is the effect of such a situation? In such a situation, the GDP is nominally increased but the wellbeing of the people is not increased. In order to understand this dilemma, let us briefly revisit the calculation of GDP. It is easy to understand.

GDP is calculated by adding up four variables or parameters. GDP = C+I+G+NE, whereas C= ‘Consumption’, I= ‘Investment’, G= ‘Government Expenditure excluding loan repayments’ and NE= ‘Net Exports’. In this article our investigation is about the production of common interests by the government. The government produces “common interests” by spending money or through government expenditure. Therefore, the variable or the parameter that involves with our investigation is ‘G’ in the above equation and the rest of the parameters have nothing to do with our investigation hence for the sake of simplicity we may ignore them as at now.

What happens if ‘G’ is increased? The GDP will go up. Let us assume that the government increased expenditure in constructing a new hospital in Jaffna. This means ‘G’ is increased and by that amount GDP will be increased. Due to the newly constructed hospital, will the wellbeing of citizens of NPC, be increased? Yes. In this case the increased GDP represents the increased wellbeing of citizenry. Now forget about the hospital. Will the GDP of NPC go up if the government increased its expenditure on military in Jaffna? Yes, because again the expenditure on military is considered as government expenditure on the Province and hence such expenditure is included in the parameter ‘G’ in calculating the Provincial GDP. But, will the increased GDP relate to the increased wellbeing of citizens? No. What does this mean? This means the value of ‘G’ is increased with the expenditure incurred on military and hence increased value of GDP is recorded but in fact the expenditure incurred did not produce real “common interest” to increase the wellbeing of people; this implies that calculation of GDP is literarily correct but interpretation is virtually inaccurate.

This is a classic example to prove that sometimes GDP growth figures are not corresponding to the increased wellbeing of the people. This might have been the reason for Prof. G.L. Peiris to retract from linking higher GDP to the increased wellbeing of Northern Province people. Sumanthiran now argues that this is true for the whole country with very large Cabinet. Let us investigate his contention.

A country needs a government for the general administration of the country. It is a necessity. Expenditure on general administration is included in the parameter of ‘G’ in calculating GDP. Now let us assume that we have two scenarios; in the first scenario the country shall have a Cabinet of 20 Ministers. These ministries must produce “common interest” that is what matters for the wellbeing of the people. Apart from that it must include a staff and certain programs that do not directly relate to the production of “common interests”; therefore this administrative cost must be at minimum. So, in this scenario any increase of government Expenditure or the parameter “G” is recorded in GDP and it corresponds to the increased production of common interests which in turn relates to the increased wellbeing of the people.

In the second scenario, the country has the largest Cabinet in the world and hence increase the government expenditure (G) by several folds but the production of tangible “common interests” remains as was in the case of first scenario. In this situation, increased government expenditure is included in the parameter “G” in calculating GDP, hence shall show an increased GDP. Yet, since the increased expenditure did not produce any new common interests the increased GDP figure does not relate to any increase of the wellbeing of the common people. This is defined as over-administration. So, our logical conclusion is that in a situation of over-administration the increased GDP figures do not corresponds to the increased wellbeing of common people.

TNA parliamentarian Sumanthiran claims that the second case scenario is what we have in Sri Lanka for the whole country. Interestingly, Sumanthiran claims that he once said to the President that the President has the largest Cabinet in the whole world and would make a Guinness record. It was wrong. He says that President Rajapaksa corrected him by pointing out that Sri Lanka has the second largest Cabinet and not the largest. Does the President’s answer reflect the shameless stupidity of Professor G.L. Peiris or somebody else’s? I do not know.

But, what I know is that anybody who reads this essay would conclude that there are chances that GDP figures could be bogus if any increase of “G” does not produce tangible “common interests” which common interests shall in turn increase the wellbeing of the people.

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Latest comments

  • 3
    1

    Excellent article exposing the deception of the Rajapaksa regime and his foreign minister the shameless fool GL Peiris. GLP thought he could fool the Americans like the Sri Lankans are fooled but had to eat humble pie and retract his claim. What a pathetic loser!

    • 2
      0

      Good piece! The cabinet of clowns of the Rajapassa regime is not interested in the COMMON GOOD – they are only SELF-INTERESTED! Sri Lanka today needs a massive peoples’ movement against CORRUPTION AND HUMAN RIGHTS ABUSES AND for the RIGHT TO INFORMATION – as in India where an independent party of academics and activists’ fighting against corruption has swept polls in Delhi. Thanks for quoting Sumanthiran who is the most articulate and sensible member of the Diya-wenna Parliament of CORRUPT CLOWNS..
      Today the protests are singe issue-based protests. We need a new party to unite all the protestors on a common platform to send Rajapassa to the gallows and drown Ranil Wickramasinghe and the corrupt politicians in the Diyawenna oya!

  • 3
    0

    I think the JVP secretary described the budget as “just a piece of paper”.. Don’t think the GDP figures from Lanka is any different, IN FACT I don’t think it’s that much different from any other country either… Bullshit in, bullshit out..

    • 1
      0

      This Penetrator [Edited out] thinks very country is like Sri Lanka! Stupid [Edited out] !

    • 0
      0

      This Penetrator [Edited out] thinks every country in the world is like Sri Lanka! Stupid [Edited out]!

      • 0
        0

        Silva, I think you smell like Raja butt crack, yes you also smell like Obama butt crack, we will see who has the last laugh you filthy whore…

  • 0
    4

    sumathiran like harsha is an idiot . all they can see is the negative . if there is no well being of the people how do these guys keep getting elected . Dont tell me it is voter fraud .

    one thing I noticed when I was back this time was that there were no beggars any where(and I mean anywhere from east to west to the center) to be found . actually there are more beggars and homeless people in Ann Arbor .

  • 2
    0

    Sri Lanka’s GDP is a painted old lady marketed by the government’s Marketing Manager Nivad Cabraal of the Central Bank.

  • 2
    0

    Dear Mr Hema Senanayake.

    we are not worried, that Sri lanka’s Gross Domestic Production Figures are to Be Bogus or not.
    We have more important things than those GDPs, poor’s, Educations, Health facilities.
    NOW A days, What We worry is that, OUR PRESIDENTE promised that woman, M P Upeksha Swranamali, from the 2014 Budget Allocation to build 5 nos of Holliday bungalows spending 400 million Rupees each on north , east, central, south, and north central provinces.
    And She was very happy of the PRESIDENTE@S Taking Action on Her request.
    It is said that she is busy with her lawyers of getting divorce from her HUBBY.
    now WE WANT HOLIDAY BUNGALOWS TO STAY AND ENJOY.

  • 0
    1

    I hope sumanthirans knowledge of the law is better than his knowledge of economics. Robert Kennedy made a good speech on GDP.maybe you should read it.

  • 2
    0

    A fine article and explained in layman’s language.
    I would welcome an analysis by Hema Senanayake on how much of GDP actually is due to the expenditure on account of this large cabinet. Also can we find a way to measure the cost of corruption, waste, imprudent investment, commission taking is and relate it to GDP?

  • 0
    0

    While Hema is making an excellent point both he and Suma seem to have only got half of GL’s sentence… Here is a story from 21 May, 2012 on GL’s statement in DC

    UNP National List MP Harsha de Silva yesterday rejected claims made by External Affairs Minister G.L. Peiris in Washington comparing the growth rates of the northern economy with that of the national economy. Peiris who met with Secretary of State Hilary Clinton said that the economy in Northern Province was growing as much as 22% while the average for the rest of the island was about 8%.

    De Silva said that the 22% growth for the Northern Province was a nominal figure which includes inflation in the province (“inflation is certainly very high there but we don’t have data”) while the 8% national average was the real figure after accounting for inflation.

    “There is no way in which you can compare the two figures,” the MP said.

    The exact words Prof. Peiris used during the State Department appearance with State Secretary Clinton prior to the meeting were “The most striking developments have really been in the northern province of Sri Lanka where the economy is growing by as much as 22 percent in comparison with the average for the rest of the island, which is about 8 percent.

    “Now this is the result of an emphasis on the development of infrastructure to a degree that is really without (inaudible) at any other time in the island’s history.”

  • 0
    1

    “There are three kinds of lies: lies, damned lies, and statistics.”
    With all due respect to Mr. Twain, he did not extend the thought far enough, government statistics trump all lies. But then again, the government’s role as both pre-eminent statistical gatherer and manipulator is a phenomenon more applicable to our time. Today, various government agencies monkey with every key macroeconomic indicator, most notably inflation, production (Gross Domestic Product), and unemployment. Deceiving the sheeple is a cake walk.

  • 0
    0

    Impossible! An economists who talks sense!

  • 0
    0

    I believe that this anamoly was pointed out earlier by the (Tamil)
    Reseacher/Economist based in Point Pedro. For that reason it was
    not a serious matter for dilebration?

    Cabraal the author of these figures probably thinks is “Governance”
    is all that matters – not statistics.

  • 0
    0

    Mr. Senanayake, good theory. If you cannot convince, confuse. How much you collected for this piece of shit.

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