By Hema Senanayake –

Hema Senanayake

The word “output” is an important word in economics because the wellbeing of people depends upon the output produced by any country. The popular measure of national output is known as GDP (Gross Domestic Product). The GDP is defined as the value of all products and services produced in a country. The products and services mentioned here are related only to the real economy. Why? It is because, certain services do not directly support to increase the wellbeing of people.

For example, Christina Wang, the Senior Economist in the Research Department, Federal Reserve Bank of Boston, USA) says that, “earning interest is not … a productive activity that contributes to GDP.” Since, in relation to financial institution she further observes that, “…this is obviously sensible in the case of passive investors who buy market securities and then merely receive interest or dividends without producing new goods or services. It seems only logical that the same principle should apply to financial institutions as well. They should not be counted as generating value added and contributing to GDP simply because they earn asset returns.”

However, this does not mean that banks and financial institutions do nothing to contribute to GDP. Instead financial institutions do contribute to GDP when they pay their employees who in turn expend money on consumption and to pay taxes. Also, financial institutions do contribute to GDP when these institutions purchase products and services from the sectors in real economy. All these contributions capture in calculating GDP indirectly through the parameters known as “Consumption (C), Investments (I) and Government expenditure (G). You may all know that if we use the popular approach in calculating GDP, the GDP = C+I+G+NE, whereas C, I, G are referred to as above and NE is defined as net exports. The point I want to make here is that the expansion of financial sector is not same as the expansion of agriculture or industrial sector or education and health-care sectors. Why is this important?

It is because the country should be able to increase the output of real economy in order to increase the wellbeing of people. But for a practical sense I prefer to use a term known as national proceeds in regard to real economy, even though it is not calculated like GDP. According to John Maynard Keynes total national proceeds are the sum of all proceeds of income generating enterprises of the real economy. The concept of national proceeds is not a difficult concept to understand. Let me explain it briefly.

An entrepreneur who produces something would sell his produce either to a consumer or an investor. There is no other third party by definition who can buy the product or service of an entrepreneur. Therefore an entrepreneur generates his or her proceeds from consumption or/and investment. So, sum of all these proceeds are the sum of national proceeds.

In general these national proceeds are generated from consumption money and investment money allocated in the economy. So, if we increase national proceeds what does it mean? It means that we increase the consumption as well as investment. It further means that people’s wellbeing is increased. Isn’t this what we want?

Hence, if any political party which contest for the coming parliamentary election submits any economic plan or proposal I would evaluate them under the spotlight of above said principle. Let us take a quick example.

UNFGG proposes to construct 500,000 houses in their plan. JVP says that they propose to provide a house for each couple who entered into a marriage may be “in good faith.” UPFA has still not revealed how many houses they are going to construct. I support both proposals of UNFGG and JVP only if national proceeds would be increased. This means that I reject the proposition to construct houses by increasing government expenditure or the parameter “G” in GDP equation. If the government wants to intervene in this kind of projects, what I would suggest is to facilitate such projects under enterprising mode. This will immensely help people who cannot afford to build a house and to expand the economy.

This means, in principle I would not agree for any economic proposal of any political party that would hinder the expansion of national proceeds. In other words I would support policies that would increase national proceeds or in other words “sellable output.”

Let us assume that we allow for private universities. It will expand “sellable output.” Hence, the establishing of private universities increase the sellable output or national proceeds, according to the above said theory, I have to support for the establishment of private universities. But you can’t do this, when the distribution of distributable income (or output) is not proper and redistribution of national income is not right.

However, if consumers have to save for their children’s higher education that will negatively affect in increasing national proceeds because excessive savings reduce the potential national proceeds.

Therefore, I would recognize the sector of tertiary education as an important sector that could support for the increase of national proceeds and in turn which would help increasing GDP.

Accordingly, rather than demanding to allocate 6% of GDP to education, I would suggest the new government to look into the subject of education with a new vision in achieving increased national proceeds while ensuring proper redistribution of income for this important sector. This approach is the most economically efficient way, if Sri Lanka is aspiring to have at least 30 to 35% of graduates among its adult population. This is a goal that cannot be achieved by allocating 6% of GDP. We need to think a little more than being superficial.

Please do not apply this same theory to health-care sector because its approach must be totally different and it is a subject for another discussion.