Colombo Telegraph

Could The GDP Figures Be Bogus?

By 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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