Please don’t mention the GDP growth again
Posted on September 19th, 2010

Ajit Randeniya

 Everyone associated with the Sri Lankan government, its financial institutions and the ‘big end of town’ in Colombo has been crowing over the last few days about the ‘impressive growth’ the economy seems to have recorded in the second quarter of 2010, with the additional boast that this is the highest ever recorded quarterly GDP growth since 2002.

 In actual quantitative terms, the economic output of Sri Lanka, as measured by Gross Domestic Product (GDP), for the second quarter (April-June) of 2010 is estimated at Rs. 635.0 Billion, has grown by 8.5 per cent compared the corresponding period last year. The significantly increased production in agriculture and industry sectors and the growth of services, has contributed to this particular measure of economic activity.

 On the back of these figures, the Central Bank (CB) Governor Ajith Cabraal has outlined plans to set up an export-import bank to provide financial assistance of Rs. 3.3 trillion needed to exporters and importers, in order to promote the country s international trade, linking it with the CB s objective to increase the per capita income to USD 3000 by 2011 and USD 4000 by 2014.

 Without necessarily wanting to belittle the government’s achievement, a word of caution needs to be added to both the interpretation of a statistic such as the ‘GDP growth’ figure, and the total and exclusive commitment to this particular measure as the key indicator of Sri Lanka’s well being, economic or otherwise, without sparing a thought for the millions of poor who seem to be still awaiting some tangible benefits of the end of the war.

 By way of interpreting the so-called ‘growth’ figure, economic planners need to tone down the euphoria reflected in statements such as winning the economic ‘war’ etc because firstly, that is the militaristic language of the west; they regularly declare ‘wars’ against drugs, crime, refugees etc as a way of preconditioning the population for illegal invasions overseas. Impulsive borrowing of such language does not bode well for a country like Sri Lanka attempting to develop an ‘independent’ posture in the world; a more civilised slogan such as ‘overcoming poverty’ will probably suit a peace loving country like Sri Lanka better.

 But secondly and more importantly, it should be obvious to anyone that a country that has just managed to stop a civil war that has been bleeding the economy and preventing economic activity over a thirty year period is bound to experience an invigoration under the prevailing, more peaceful conditions: this ‘peace dividend’ is reflected in the GDP growth through activities such as increased wholesale and retail trade, patronage of hotels and restaurants, transport, communication, and most noticeably in increased tourist arrivals and fishing activity in the north and east. This reality demands a more sober assessment of the ‘growth’ figure.  

Quite apart from such sobering re-assessment of the GDP growth figure per se, its usefulness and appropriateness as a general measure or indicator of the particular ‘sort-of’ future Sri Lanka President Rajapakse has set out to achieve needs to be urgently evaluated.

 GDP is defined as ‘the sum of all goods and services produced in a country over time’, using arbitrary conventions. The quirkiness of the measure makes GDP ‘increase’ when there is terrible destruction following natural or manmade disasters; the Asian tsunami of 2004 that wiped out communities and their economic activities wholesale, led to a GDP boost in many of the affected countries, due to investments in rebuilding! Neither does GDP include transactions in the ‘informal’, or ‘cash’ economy that is particularly important in developing countries. It excludes the output of domestic work that is carried out by a housewife whereas the same work carried out by a hired nanny is included!

 The key problems with measuring national progress using the GDP growth however, are: it measures growth without regards to the destruction of the environment, and social cohesion that usually accompanies such growth; it measures ‘average’ per capita income, but pays no attention to equality of distribution of income.

 The foundation of capitalism on the use of GDP growth as the ‘be-all and end-all’, and basing policy directions exclusively at achieving higher rates of GDP growth, is based on the claim that: ‘if the top income earners invest more into the business infrastructure and equity markets, it will inevitably result in more goods at lower prices, and create more jobs for middle and lower class individuals’. The theory is further stretched to suggest that a richer economy gives society the time and resources to develop its creativity, in art and science just as in new production methods.

 The obvious failure of this theory during the Great Depression prompted the humorist Will Rogers to name it the ‘trickle down’ theory. Many reputed economists, particularly those with a conscience, have argued that economic policies aimed at ‘trickle-down’ generally do not work, and if there is any trickle-down effect it might be extremely slim. The theory and its practice became so disreputable by the mid 1970s it required renaming by David Stockman, budget director in the puppet presidency of Ronald Reagan (who cut the marginal tax rate on the highest-income tax bracket in the US from 70% to 28% as per the theory), “supply-side economics”.

 That remarkable human being and economist of rare powers of intellect, wit, and pen, John Kenneth Galbraith first expressed skepticism about the value of economic growth, indicated by the GDP as a measure of human progress in The Affluent Society, in 1958. It took several decades for Galbraith’s views on the topic to become the ‘conventional wisdom’ (a phrase coined by him!).

 Galbraith demolished the underlying assumptions of the ‘trickle down’ theory such as the view that consumers who have unlimited power of choice are sovereign in the economy. Instead, he says it is producers, in the guise of corporate management, who truly control the economy.  

Galbraith considered the issue important enough to dedicate his last book The Economics of Innocent Fraud, published in 2004, to launch a final attack. He wrote: “Good performance is measured by the production of material objects and services. Not education or literature or the arts but the production of automobiles, including SUVs [sports utility vehicles]: Here is the modern measure of economic and there with social achievement.”

 He argues in Innocent Fraud the all-powerful role of companies defines contemporary capitalist society, dominating the state and forcing government institutions to obey the narrow interests of companies. He was unequivocal in his assertion that the Iraq war was fought for the military establishment and weapons industries. He wrote: “Central to my argument here is the dominant role in the modern economic society of the corporation and of the passage of power in that entity from owners, the stockholders, now more graciously called investors, to the management. Such is the dynamic of corporate life. Management must prevail.” He observed that the state economic activity that occurs through central banks and financial regulators, make the state simply an arm of private sector corporations.

 Galbraith pointed out that the modern capitalism dominated by large enterprises, and based on GDP growth require an abundance of ‘contrived wants’ (that depend on the process by which they are satisfied) that are the product of corporate planning and massive advertising. The higher level of production merely has, a higher level of want creation necessitating a higher level of want satisfaction.

 According to Galbraith, the most sinister consequence of economic growth based on the creation of artificial wants through advertising is the shift in resources toward private goods, away from public goods that have greater inherent value, creating a “social imbalance”: the under allocation of resources to public goods. New cars are seen as being more important than new roads; vacuum cleaners in the home are desired more than street cleaners. Alcohol, comic books, and mouthwashes take on a greater aggregate importance than schools, courts, and municipal swimming pools. One way to remedy this imbalance, said Galbraith, would be to impose sales taxes on consumer goods and services, using the proceeds to increase the availability of public sector goods and services.

 In fact, for this writer, some of the detail of the much acclaimed GDP growth revived the nightmarish memories of being driven around in Colombo streets by a friend during a recent visit to the old hunting grounds! The reduction of import duty on vehicles in the latter part of the quarter has apparently contributed to an increase of 78.6 per cent in the total number of new vehicles registered in Q2 as opposed to a 36.2 percent decline in the same quarter of previous year! But where are the new roads for these cars to drive on?

The TV programs in all major channels appear to be mere ‘packaging’ for advertisements that seem to be telecast without any limits on the hourly quotient, (a maximum of 13 minutes per hour) as in the US, Australia or the UK. The inference is that many ad agencies and the ‘operators’ who run them unethically exploit the ignorance of the officialdom. Such behavior is encouraged by unbridled ‘capitaliam’, an euphemism for ‘money grab’.

It is also claimed that Sri Lanka’s per capita income has exceeded USD 2000 and the aim is to reach the USD 4000 per capita income by 2014; but none of the stop overs on the Colombo-Kandy road showed signs of any villager counting SLRs of the magnitude being talked about (annual income of approximately Rs 230 000? they certainly wish!)

 What the above critique is showing is that Sri Lanka needs fresh thinking if it is to progress in to the future as an ethnically harmonious, self-respecting, modern country. Economic progress is an important part of future aspirations; but its aims, parameters and measures need to be redefined based on the particular needs of the country and past experience in the developing world.

 For the past fifty years, since the so-called ‘independence’ wave began in the 1960s, the developing world has relied on, and attempted to progress using the western capitalistic economic model garnished with extras like the Green Revolution and other fads periodically; no country has succeeded due to the aims of the model being aligned with the resources and other needs of the capitalist centre rather than the developing country needs (please don’t mention Singapore!).

 The GDP is simply a measure designed to enable the money market operators in the west to assess investment opportunities for their excess billions for quick gain. Catering to this need can only help Sri Lanka to the extent of attracting some of that loot for transient advantages such as temporary employment in the industry sector.

 But there are inherent economic and political dangers in reliance on this model, especially with the current overt and covert antipathy in the west towards President Rajapakse and the Rajapakse regime in general.

 Creative thinking on the part of the Sri Lankan academia, intellectuals and the constructive sections of the media, and avenues for their active participation are needed to choose the right path.

 To end with the words of John Kenneth Galbraith: “The shortcomings of economics are not original error but uncorrected obsolescence. The obsolescence has occurred because what is convenient has become sacrosanct.”

  The GDP definitely is obsolescent, and should not be sacrosanct!

One Response to “Please don’t mention the GDP growth again”

  1. Nanda Says:

    If you copare GDP with salaries in some countries they are close enough.
    I fully agree that one cannot imagine an average Sri Lankan earning Rs 200000. I should be not more than Rs 40000. Why is this figure worng by so much only in Sri Lanka ?
    Salute to the writer on the wisdom of not using “war” on everything.
    We should be using more civilised words like love, compassion not “war”.
    “Government progressing well in effort to overcome proverty” is much more civilised than “winning economic war” – are we war mongers ?

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