Saturday, 6 October 2012

Why GDP growth alone does not make a nation better

I wouldn't be wrong if I make an assertion that very few of us have at best only a basic education in economics. We leave it to the experts to understand economics and the elite group of economists set the policies which our nation follows. But I would also not be wrong by a very great margin when I say that thanks to the media coverage on economic issues, most of us who are even remotely aware on current affairs know quite well what this thing called Gross Domestic Product(GDP) is. I am not going to go into the detailed definition of GDP, briefly as we all know it is the total value of goods and services produced.

We are all aware that the GDP growth percentage of China is more than India's and we are all witness to the euphoria  that existed in media when we were seen to be growing at 8 to 9%.  Not a day goes by when we don't have policy experts and business Czars(Maharaja's would be more appropriate) and financial analysts telling us how we had lost the plot when the growth rate fell, and how we can still reach that 9% target if we get our policies right. Readers would be aware of another jargon that has been often reported in media which goes as the 'Hindu Rate of Growth' describing the pre-reform period in India's economic growth. Prime Minister Manmohan Singh had mentioned in August this year that GDP growth is a matter of national security.

The argument in support of GDP growth is made that growth has lifted millions out of poverty and has the potential to lift millions more. Lifting people out of poverty is a compelling argument, but the fact is that the current poverty line set by the government itself is disputed by many. There are many criticism of the Below Poverty Line and the poverty figures that I have read and I can make an argument about that. But I don't want to make criticism of governments BPL the main premise of my argument in this article. But I would like the reader to keep in mind that by our own estimate on the basis of our own poverty line, there are still 30% of the population who are poor. Now I would like to draw the reader's attention to the curious case of a nation which has these figures(est. as of 2011) of economic development.


  • GDP growth rate - 7.1% 
  • GDP per-capita  -  $19,600(PPP)
  • Industry's contribution to GDP  -  89.7%
  • Agriculture's contribution to GDP - 3.6%
  • Capital Investment - 49% of GDP
  • Budget Surplus - 1.7% of GDP
  • Public Debt - 4.6% of GDP
Compare these with the figures of India in the same period:
  • GDP growth rate - 7.2% 
  • GDP per-capita  -  $3,700(PPP)
  • Industry's contribution to GDP  -  26.4%
  • Agriculture's contribution to GDP - 17.2%
  • Capital Investment - 32.8% of GDP
  • Budget Surplus - -6.7% of GDP(deficit)
  • Public Debt - 48.5% of GDP
I have deliberately limited myself to the figures related to GDP(per capita), GDP growth, industry and agriculture's contribution to GDP so as to stick to the popular metrics that the policy makers and the media usually use while selling current economic policies to the citizens. A quick comparison with India's numbers should make us almost certain that an average citizen of Utopia must be much more prosperous than the average citizen in India. The most important factor being the per capita GDP figure which is a whopping $19,600(PPP) which is comparable to some of the European nations and more than 5 times that of India.We would be convinced even more if I were to tell you that the GDP growth figures in this nation have been double digit in the 90's. That must surely be the reason for this high per capital GDP number, and that must surely be the way to go in order to achieve prosperity i.e. high GDP growth. If you believe this argument then I agree with you that per capita GDP numbers are more important that absolute GDP numbers, and I agree that this number should surely rise if GDP growth rate is high. But shouldn't that mean prosperity?

Before I come to that and before I reveal which country this mystery Utopia really is, let me tackle some more aspects of our national discourse. So what are the problems that Indian economy faces currently which we are all aware of thanks to the communication from the experts that media delivers us? It is lowering GDP growth rate, high budget deficit, increasing current account deficit and high public debt. Solution we are told as per the current policy makers, experts on the subject and the media is 'Foreign Direct Investment' related 'economic reforms'. Incidentally we are also being told by the media at present, as has often been repeated in past, that the reason why we are not able to implement reforms as well as China is because well, we are a democracy. So chaotic democracy which we have, is an impediment to FDI reforms and FDI reforms is a solution for growth and growth (at all costs?) is the solution to poverty. Those are the broad contours of the national discourse on growth. 

Since two economies we are comparing are of different sizes, let me talk in terms of percentage when tacking the issue of FDI.


Average FDI as a percentage of GDP in 1990's - 38.34%
Average FDI as a percentage of GDP in 2000's - 14.46%

Average FDI as a percentage of GDP in 1990's - 0.39%
Average FDI as a percentage of GDP in 2000's - 1.58%

That is it! The figures speak for themselves, surely the Indian policy makers and the business channels are right. FDI is the answer! More FDI means more growth rate and more growth means more per-capita GDP. Surely this country in question has got its policies right and surely it does not have the same problems of policy paralysis and difficulty in decision making that India faces because of its 'chaotic democracy'. India's democratic decision making was a problem as the Economist article argued "Some reformers pray for a financial crisis that will shake the politicians from their stupor, as happened in 1991, allowing Mr Singh to sneak through his changes". I have managed to write an article in great defense of the current policies sneaked through by Mr Manmohan Singh despite 'chaotic democratic' opposition by 'rabble rousing' opposition parties and I have managed to use all the prevalent cliche'. 

Until of course when I tell you that the mystery country in question is none other than the great African Republic of Equatorial Guinnea, and then suddenly my entire argument begins to fall apart. The figures I shared are not wrong they are estimated figures from the CIA world fact book, other sources may quote sightly different figures, but yes I admit I have selectively lifted the figures. The figure I had not mentioned until now is that the poverty rate in Equatorial Guinnea is a whopping 75%. The per-capita GDP figures mean nothing,  the industry's contribution to GDP means nothing, the lower budget deficit(or surplus) means nothing, the GDP growth rate means nothing, the FDI means nothing to the vast majority of the country's population. Spectacular GDP growth rate alone has not been able to lift a population of 700,000 out of poverty in that country, but we in in India are being fed the notion that a single minded pursuit of GDP growth rate is what will bring millions out of poverty in India.

Question arises what is the problem in Equitorial Guinnea? Why has the magic potion of GDP growth not worked for them? The problem my dear readers is that Equitorial Guinnea is only a nominal democracy, where the current President Obiang has ruled for last 30 years and will continue to do so for a foreseeable future, the problem is of concentration of political power and corruption, the problem is of concentration of  economic wealth in only a few hands, the problem is of unequal distribution of wealth. This is why the High Income per capital GDP figures are worthless when compared to the poverty figures.

Surely I must be out of my mind comparing the next world super power with Equitorial Guinnea. I need to get more of my facts right to come to the conclusion why India will not be the next Equitorial Guinnea. We are a democracy where free and fair elections are held every 5 years, chaotic but free and fair. So the chaotic democracy with 'rabble rousing' opposition which was until now an impediment to our growth will prevent us from going down the path of Utopia. Our democracy and a free and fair(?) media will prevent corruption and crony capitalism to cause concentration of wealth in only a few hands. The top 70% of our  population cares about the bottom 30%. Our rich are better than their rich. Our billionaires are ethical and moral so are our businesses. Our politicians are aware of their obligation towards the poor, they are not hand in glove with the big Indian and foreign businesses. Our policy maker are educated in the elite institutions of the world and know what is good economics. They have the cause of the country at heart. Our large and growing middle class is educated and it will always make the right choice about who should be leading us and who should be making policies and what policies it will support.

Well if these facts are true especially about the middle class then I concede. After all the middle class is quite vocal in support of reforms. I will write more about the middle class some other day. In the meanwhile let us do all we can to invite FDI. Because FDI leads to growth and growth leads to higher per capita GDP and that leads to lifting millions out of poverty. Really? Is that so?

PS: There was no disrespect intended to the people of Equitorial Guinnea. I was sarcastic in my assessment of the democracy and development record there because in an interview to CNN I heard Mr Obiang describe the country as not a dictatorship but a Republic and described himself democratically elected.He even mentioned that he will remain in power as long as the people wanted him to.
           It has been alleged that the oil wealth of the nation was siphoned off to the notorious Riggs Bank by the corrupt politicians and administrators in Equitorial Guinnea. I had to make this comparison because many middle class Indians thanks to the recent boom in our economy appear to have forgotten that the poor in India are in many aspects poorer than sub-saharan Africa despite the recent boom in our economy. The effects of corruption and concentration of wealth on the poor are not lost on us. Equitorial Guinnes to me is a typical case of failure of the 'trickle down' theory. I need not be an expert on the subject to make this assertion.


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