Colombo Telegraph

Regrettable Component Of GDP

By Hema Senanayake

Hema Senanayake

Global economic revolution is overdue: Part 2

This is a period of time that most of the concerned citizens are interested in economics globally. This is especially true for Sri Lankans because the national budget debate of Sri Lanka would begin in this month. Therefore, this period of time is more appropriate to discuss about certain economic concepts which would have an impact on the people. Regrettable component of GDP (Gross Domestic Product) is one of such concepts.

During the budget debates which will take place in the parliament or outside the parliament as well, there will be special emphasis on the economic parameter known as GDP. The reason is that the economic wellbeing of citizens mostly related to the growth of GDP.

All economists agree that GDP is a fairly good measure of value of the total output (or goods and services produced) of a country within a given period of time usually within one year. But this measure of value of output has its own weaknesses too. One important and significant weakness is that GDP includes a component which does not contribute to the increase of economic wellbeing of citizens. That is the component we define here as the “regrettable component of GDP.” Why is this important?

Let us take an example. It has been reported that IMF has predicted that Sri Lanka’s GDP would be increased at a rate of 5 to 5.5% in the year 2016. Let us just assume that the said GDP increase would be resulted from the increase of the “regrettable component of GDP.” In the event, it means that there will be no increase in the general wellbeing of citizens. Unfortunately, as at now, this component of regrettable GDP is not accounted or calculated. Yet understanding about it might give policy makers, politicians and the general public to have an enlighten view in regard to the efficiency of the economy because regrettable component of GDP is at minimum in a highly efficient economy which ensures the highest wellbeing of the people. Let us investigate this matter further.

There are a few methods of calculating GDP. But most popular and common method of calculating GDP is by adding up four variables. So, we can write GDP = C + I + G + NE whereas, C = consumption, I = investment, G = government expenditure and NE = net exports. Do not worry about the calculation of GDP. Our focus here is to understand as to how and where the component of regrettable GDP is accounted. Let us take a couple of examples first.

The variable “G” is government expenditure in the above GDP equation. It means that if Rs.100 is expended by the government that Rs.100 will be added to the variable “G.” If this Rs.100 is expended on education or to provide additional health care by that amount the wellbeing of people would be increased. If this Rs.100 is expended to meet the expenditure of the Jumbo Cabinet, that too includes in the GDP under the variable “G.” Will the Rs.100 expended on Jumbo Cabinet increase the general wellbeing of our people? Most people of the country would say “NO”; hence, this is the component of regrettable GDP because the GDP is increased but no increase of the wellbeing of general public.

Our most venerable Maduluwawe Sobitha Thero has passed away recently. Did he aware of the regrettable component of GDP? I would say “Yes” but not in this same terminology. He made an astounding campaign during the last presidential election to reduce the size of the cabinet to 30. If that effort had been successful the economic impact is that there would have been a reduction of the regrettable GDP. By that amount the government could have increased its expenditure where general wellbeing would be increased so that GDP would be increased while reducing the regrettable component of GDP.

For the first time I found the term “regrettable GDP” in a research report produced by Deutsche Bank of Germany. If you browse this term on internet perhaps you might not still find it. But I was fascinated in finding this terminology. In that particular report of Deutsche Bank it refers to the government’s defense expenditure as “regrettable”; exactly true, but this point needs further explanation.

Before that let me discuss a few points as to what it means by “socially necessary labor.” As far as I know this is a terminology developed by Karl Marx. It is an interesting one. He intimates that all labor expended in producing something (goods or services) is not essentially a “socially necessary labor.” If the labor expended is not “socially necessary labor” it is a waste of important productive resource. If this component is more in an economy that would be an inefficient economy. In regard to “socially necessary labor” Karl Marx explained as follows:

“The actual sale of commodities for money tests the validity of the expectation that any particular labor expended is indeed social and necessary labor. It is only after sale that the social and necessary character of the labor expended in producing a commodity is guaranteed. The commodity producer produces the commodity on a speculation that the market will validate the social and necessary character of that labor.” (Marx’s Theory of Money in Historical Perspective, Duncan K. Foley, Nov. 01, 2003)

In general, goods and services market is not a so called tool for exploitation but it is a useful mechanism in ensuring the social and necessary character of labor. This is an important point that all socialist must learn. But this does not necessarily intimate that the labor expended in producing all goods and services under present “market order” do fall into the category of “socially necessary labor.” It means that a certain amount of labor expended even under the market order is a waste and hence the consumption arising from such labor must be a component of “regrettable GDP.” This intimates that not only some government activities contribute to “regrettable GDP” but also certain entrepreneurial activities that take place under market mechanism contribute to increase the “regrettable component of GDP.” In this regard let me quote a main stream economist from the United States.

She is Christina Wang, the Senior Economist in the Research Department, Federal Reserve Bank of Boston, USA. She 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.”

Christina says that “earning interest” is not a productive activity and it is not counted in the GDP. All economists, I guess, agree with her on this point. But there is consumption and the use of social resources (investment) arising from the business of financial institutions which are accounted in the calculation of GDP. If the end product is not productive can this component of GDP contributes to the wellbeing of the people. No, it is not. Then, that component of GDP should fall into the category of “regrettable GDP.”

Hence the term “socially necessary labor” must be redefined in a different way. The labor expended in producing things that matter for the current wellbeing of people and the labor expended in solving true human problems such as the labor expended by researchers and scientists should be known as socially necessary labor.

However, this does not mean that we can do without banking institutions but the above understanding shows that such businesses should not have extensive expansion in an efficient economy. Banking should be like the government; both must bring to have contributed the smallest possible “regrettable GDP.” So, should be all other businesses. This adjustment is possible if the economy has been designed to operate with zero or near zero unemployment rates always. Near zero unemployment rate has nothing to do with the growth level of an economy. Yet, it has something to do with human imagination. Let us further continue this discussion in the next week.

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