The GDP Fallacy

The China bogey

The recent statement by the International Monetary Fund (IMF) that the economy of China will probably overtake the USA in overall Gross Domestic Product (GDP) in five years has the pseudo-economist talk show hosts of the Western media agog with their analyses. The Chinese media and government, meanwhile, remain silent except to maintain that China is still a developing country with a long way ahead. Both parties are only partially truthful.

 The rapid economic expansion of a developing country and its massive levels of poverty reduction should, normally, be welcomed. But the world economy and its politics is still within the control of the former Western imperial powers who still retain their white supremacist attitudes and strive to dominate the non-European world by economic manipulation of currencies and political manipulation of the mass media and international organisations. When Germany or Australia grows, it is hailed as an important contribution to the world. But if a non-European country grows, the media pundits and the pseudo economists will find reasons to decry it and claim that the growth was achieved using unfair practices. When Japan began its rise after World War 2 they faced the same hurdle till it decided to become a part of the Western imperial team. But China is not likely to subjugate itself in this manner. And Indians must remember that the praise showered on them as the prospective second largest economy of the world (the Indian GDP is less than half that of China and any prospect of it catching up with China is too remote) is only because of the West resents the growth of China much more.

 Calculation and miscalculations

The expression GDP is parroted without the majority of us having any idea of what it constitutes. Gross domestic production cannot be measured by taking the value of all products and services because much of these are the myriad activities that go into the final product that is sold to consumers. So the calculation is based on the consumption of the final product or service either by consumers or the government. Since such sales are subject to taxes which have to be declared to the government revenue department, a calculation of their value is possible. About 68% of the US GDP comprises private consumption and about 27% is public consumption.

 There arise immediate problems when we compare different national GDPs. Actual costs differ from country to country. On the whole, costs in poorer developing countries are much less than in rich developing countries. A pound of wheat bread that costs US$2.50 in a developed country will cost US$0.50 in a poor country. Since incomes and costs in developing countries are lower, the costs of comparable services will be much less. Many developing countries in Asia, including China, also have some forms of price control to prevent excessive profiteering by certain businesses. For example, a course of antibiotics that costs US$40 in the USA costs a little as US$5.0 in India or Sri Lanka, even though it may be produced and sold by the same transnational corporation.

 The United Nations and World Bank statistical data now tries to overcome these national price differentials by translating costs to their purchasing power parity by using a concept of “the law of one price”. This gives a more realistic assessment of value as it exists among different nations.

 But even then the GDP of a country is not a real indicator of a country’s economic health. When we assess a company’s worth we take into account both assets and liabilities. When liabilities are also factored into the economies of some countries with seemingly high levels of prosperity, they are now seen to be unsustainable.

 The following table gives a brief glimpse of the GDP figures converted in this manner plus the national debt levels in actual US dollars (there may be slight variations in debt levels as data was drawn from sources at various times in 2010).

Future prosperity

The Republican opposition in the US Congress has suddenly discovered that the approved US debt ceiling of $14.5 trillion should not be increased further as the rising national debt is unsustainable, though the Republican Party itself was responsible for most of the debt while they were office since the presidency of Ronald Reagan. The rating agency, Moody, has declared that the US economy will be downgraded from its premium status if measures are not taken to curb the debt within three months.

 The US, the UK and some EU nations are living largely on debt-based prosperity. Their consumers and the governments are both enjoying an extravagance based on continuous borrowing. They are akin to the village spendthrift who puts on a grand show by ever increasing borrowings from more thrifty neighbours.

 How was this possible? It all goes back to the dominant role of Western industrial nations after World War 2. The dominance of the US economy after the war allowed it to establish the US dollar as the international currency at the Bretton Woods conference in 1944. The British pound sterling was also an international currency. The euro was created by many EU nations in 1999 and also established as an international currency. So other nations of the world had to buy these currencies both to trade internationally and keep as currency reserves in Central Banks. This allows these privileged countries to create excessive money selling bonds, securities and different treasury bills. But extravagant money creation to pay for profligate spending will eventually come home to roost. Despite promises to rein in spending, there is no evidence that meaningful actions will be taken. Compulsive spending is an addiction for which there is no known cure.