Saturday, February 9, 2013

GNP and GNI are outdated

By Sjoerd Nienhuys

There is a need for new values for wealth and national economic growth figures. GNP and GNI are outdated. 

The Human Development Index (HDI) is a much better measuring instrument for comparing countries than GNP (gross national product) or GNI (gross national income), but it only gives a ranking on a development ladder, and not a value. Bhutan evaluates its national situation, considering welfare and happiness as the most important indicators.

The World Bank and IMF use GNP and GNI as landmark figures to compare economic growth and development in different countries. These national total GNP figures do not reflect reality. It is more sensible to analyse the growth per head of the population (GNI) and additional parameters. But these other parameters are not easy to compile. 

GNP is calculated according to three different models, based on local production and the difference between imports and exports. GNP figures are used as if they were decisive for each country’s economic development.  A few billionaires and a larger group of millionaires on the one hand and many millions of people living in poverty on the other hand, as in India and China, may still produce a reasonable economic growth figure, even if the situation is not very social or democratic. In addition, the five points below do not include the gender gap.

Total GNP figures are based on flows of money, added together and converted to US$. These figures require adjustment and it is time that internationally new figures were developed which offer a better representation of real development. Here are five suggestions:

A.    Inflation correction:  This correction works well if the US$ remains a stable currency and is not devalued. All economic figures need to be corrected to allow for inflation of the US$ itself.  If they are not corrected, all these total GNP growth figures will be inflated. This will be similar to the devaluation of the poverty line of 1 US$ per day.

B.    Informal market: Governments do not measure the value of their informal market and do not include it in calculation of the total GNP; no product added value is calculated or taxes raised over the informal market. Many countries with a current high growth rate used to be developing countries with very large informal markets in which large quantities of goods and services were traded.  Yet many self-supporting people were listed as being under the poverty line as they did not make more than 500 US$ per year. Fifty years ago, in Africa, South America and Asia, many millions of subsistence farmers did not count as part of the economy despite having a reasonable and sustainable quality of living. When calculating total GNP, a realistic estimate must be made of the total value of the informal market, trade and subsistence farming. If these people enter the fiscal circuit, total GNP will grow, while in reality there will be no economic change at all. 

C.    Urban growth: A maize cob may cost a farmer € 0.05 to produce, but € 1 in the supermarket of a large town due to transport and trading. The effect is that the more urbanized a country is, the higher the price level will be, but without any added food quality. A farmer may live in a larger house than a city dweller, but the latter’s expensive house is included in GNP because it was constructed and is serviced within the framework of the formal market, while the farmer’s house is not. A subsistence farmer can have a reasonable quality of life on 500 US$/year, while the same amount may mean extreme poverty for an urban dweller.  Countries that currently have high total GNP growth also have a high level of recent urbanization. Current GNP figures therefore give an indication of the level of urbanization of a country, but not necessarily of wealth.

D.    Natural resources exports: When a country has resources of mineral gold, oil or hardwood forests, these represent a value in the country’s economy when they are made tradable through mining, refining and sawmills. When these resources are sold to another country, they are traded for virtual or paper money, which will lose its value by inflation if not wisely reinvested within that same country. Important here is the investment within that country.  Selling gold for paper money does not make a country richer. The current model of total GNP includes these exported resources and includes them in national economic figures. When Indonesia sells its hardwood lumber to Japan or Malaysia, or when the same lumber is transformed into timber products, and these products are then sold on the exterior markets, the added value makes timber workers and the country richer. A recalculation of total GNP considering only added value without resource exports would considerably change the figures of those countries which now sell their crude oil, raw copper or other minerals.

E.    Population growth: A country which has a total GNP of 3.5% and population growth of 2.5% over the same period has an average GNP per capita of only 1%. GNI per capita is a more realistic figure. A problem with this form of calculation is that birth rates in many less developed countries are estimated. In countries with low birth rates, like France or the Netherlands, the total GNP can be lower than in countries with high birth rates, while GNI per capita will be the same. A focus on total GNP figures is therefore misleading.

The above five issues are some of the reasons why fifty years ago many developing countries had a very low total GNP compared with all-registered and all-taxed European countries. Their large informal sector was not counted, their natural resourses were exported without internally added value, and they had high population growth. Export of unprocessed natural resources and population growth have a large influence on the more realistic value of GNP per capita. To compare growth figures over a longer period, these compensating factors need to be calculated over all these years. The IMF and World Bank should take the lead in presenting these adjusted growth figures. Since people’s social or economic welfare is not rated only to economic growth, better parameters such as the HDI, the Bhutan model or inequality need to be developed.