• GDP vs. economic development

    2

    wooton

    There have been quite some writings about the non-inclusiveness of the recent economic growth, so no need to get into that again in this column.

    While the numbers say that there has been economic growth recently, 7.8 percent in gross domestic product (GDP), this has been mainly arrived at due to construction activity and election spending. Election spending this time was less of a contributor to GDP increase than it was in 2010, but it was still significant and enough to inflate GDP by 2 percent to 3 percent in order to among other things put into office 277 individuals who had previously been convicted on graft and corruption counts, according to the Philippine Center for Investigative Journalism.

    But construction was a major contributor to this particular GDP rise; construction both by government and the private sector. Coal-fired power plants, apartments and shopping malls are being built like there is no tomorrow. But of course, there is a tomorrow and when it arrives, we will see lots of shiny new empty apartments and shopping malls, and the coal-fired power plants will not be dispatched at the level that the current investment in them predicates, because there will not be enough of a market.

    The problem with GDP being taken as the absolute barometer of economic growth is that it assumes that whatever is invested in will produce the return that the investors hope for; there is no probability assessment in it. Property dealings around here have an expected return of about 30 percent, and in quite a short time [which is why the local oligarchs don’t like to build factories for making things]. I suspect that the current rash of apartment building may not give quite as good a return as desired, for the simple reason that unless the additional wealth indicated by the GDP rise is spread around, nobody will be able to afford to buy the apartments, nor spend money in the new shopping malls—mind you, they could always put what money they have on the tables at the new casinos and try to win enough to contribute to the real estate developers’ desired returns.

    As to the new coal-fired power plants, apart from poisoning the atmosphere, will they reduce the cost of electricity? I don’t think so, in fact I see now that the Manila Electric Co., or Meralco, ever supposedly in dire financial straits are collecting their deposits from the “lucky” consumers who have managed to avoid paying deposits so far. No doubt the money that they collect from everybody [amounting to several billion pesos]and hold for a minimum of three years at peppercorn interest, will allow them to fund their own coal-fired power plants. Well done Energy Regulatory Commission, for looking after consumers interests.

    GDP growth is not strictly reflective of economic development. It is a statistical number, which is in this recent case much misused and is in any event subject to adjustment by fiscal engineering. Economic development means that more people have more money as individuals because they can get proper jobs with ever increasing technical complexity which are created because of long-term investment, it means that exports exceed imports, it means that consumer products are home grown—that cars are made in the Philippines for example, that there is less dependence on imports of fuel [in particular coal which will now have to be imported in great quantities to fuel the new coal-fired power plants], and oil to fuel the ever increasing number of imported cars on the road [bought on consumer credit no doubt], usually spot utility vehicles or SUVs to cater for the appalling quality of the roads, and importantly in a democratic market economy that there is real competition and consumer choice, not only between the oligarchs but also from foreign investment. Economic development would also include a robust rule of law and an acceptable level of safety and law and order for the citizens, an efficient and non-corrupt government administration at all levels, and effective consumer protection. It would also demand a transparently fair voting system! Alas, most of these issues are not reflected in the wonderful and loudly trumpeted GDP numbers. My view is that first you put the “house in order,” and then you see what that brings in terms of GDP growth. Very likely in order to put the house in order, it would be necessary to suffer some negative GDP numbers which could be acceptable provided that the right thing was being done with a strong will and in a sustainable way, understood by all and for the good of all.

    So leave the importance of GDP to the investment bankers, stock traders, and credit rating agencies please, and let’s take some steps to foster real economic development. At the moment, we are just playing with numbers and the local elite are spending like mad in order to support the claims that the Philippines is the latest Asian Tiger Economy. Let’s look behind the curtains . . . [at the ‘fundamentals’].
     
    Mike can be contacted at mawootton@gmail.com

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    2 Comments

    1. GDP growth of 5% along with population growth of 5% equals the average person being no better off, so the two should be offset to give real improvements in the standard of living. Therefor we have GDP growth of 8% less population growth of 2% and a net gain of 6%. Not so good!

      • Brilliant analysis Mr. Mike, economic growth is not the same as economic development.These two characters may tend to be synonymous if there will have social transformation that while there are continuing high rise building being built, there must also have that gradual elimination of marginal communities. But how many years of 7.8% GDP will these economic gains trickle down to the poor? And how can a poor family have at least one graduate to be part of the economic labor force so that, this family will at least up-lift their well-being? I know for a fact that an 8%GNP of a small economy like the Philippines is still behind with the 2%GNP of a bigger economy. Inclusive growth therefore must focus more for the direct provision of educational subsidy of the poorest of the poor.