Tuesday, 13 September 2016

GDP: More is not Growth

Here we go again; the news about Fed rate hike and immediately global stock markets crumble…again the debate is alive whether USA is on growth path or in fact if it’ll ever be on growth path again. There is always a noise about economic growth, every other day policies are getting drafted for growth, there are all types of wars (Currency, military, political) to secure the growth….but still the equation doesn’t look like in our hands which are still empty. Sometimes I wonder whether we understand what really is growth most importantly economic growth.

We measure growth by adding all the measurable and measured goods and services produced (GDP) in an economy for a given period. But whether growth is that simple?? Just a summation of things produced…we go on adding and think that we have figured out what we have “Added” afresh into the economy. Is it really that simple!! Even our calculation methodology is faulty and primitive. We add the turnover (Value) of a company dealing in providing “Fresh Air” but we never add the massive fresh air produced by Mother Nature every moment; we add the production of a company producing mineral water but we never add the free flowing mineral water belonging to Mother Nature; We measure and add the value of products produced by entertainment industry like music, movies etc. but we can’t measure the heavenly beauty of mother nature (although we enjoy it); We add the value of work done by working mothers when they leave their babies with baby sitters (and Baby sitters’ work also gets counted) but we never Value the 24 hour hard work by homemaker mothers. We at once realizes that we don’t (may be don’t want to or just can’t) measure all the goods and services produced. Our GDP work is just gross and I sometimes surprise why we value this incomprehensive thing so much.

GDP is not Growth

Just to give you an example; suppose with all the hard work we measure and calculate the value of fresh water of our mighty rivers like Ganga, Yamuna and this value is 100000 cr…great work done indeed. And then the great sons of Mother Ganga start putting all types of Industrial wastes in it, destroying the majority of fresh water. We proudly value the goods produced by these industries to 10000 cr. But when we again value the fresh water of our rivers; the value is dismal 70000 cr…and we’ll realize the pain of Mother Ganga as her sons only understand everything in money. But as we can see this small working can reveal that we haven’t added any industrial value of 10000 cr; in fact we have lost 30000 cr of fresh water due to this production and the net loss is 20000 cr. We can see here that all the figures of GDP are distorted and incorrect.

Pain of Mother Ganga isn’t getting evaluated at any stage but to her surprise Indians are now trying to clean her with massive funds…and you’ll see that this cleaning activity will be measured and added into GDP for which every fool will take the credit. You can see and may be shocked that most of our value addition is just repairing work for the nasty treatment of Never Measured Mother Nature and rarely we are adding any real value to the natural equation. In my previous blog posts I have used the word “Natural capital” for the vital support system of Mother Nature. I am of the firm view that any loss inflicted to this Natural capital (In accounting jargon we call it Impairment loss) should be subtracted from GDP and we’ll see that most of our growth stories will turn into nightmares. So Assets comprising Natural Capital should be treated like Balance sheet items and any diminution in the value of these should be adjusted against National Income account to present the true state of our economic activities.

Now we understand the fallacy and incompleteness of our growth parameter. We are having a National Income account without any balance sheet. So let’s see if we can make something out of it. Economic growth is just like a normal thin frame individual wanting to grow his body. So in order to grow, he starts adding into himself all sorts of foods; he is just eating all the time. Overtime, his size will surely grow; he’ll gain weight. But in his pursuit for growth via over eating spree, he might have wreak havoc with his body as he has grown big but fatty and lacks power and strength. So he is vulnerable to all types of diseases now; any outsider can beat him as he isn’t strong but heavy. We can see the weak points in his being in spite of the fact that he is big; he lacks Resilience and Immunity. These are the most important factors affecting our longevity.

Growth entails being Resilient and Immune

So realizing his weakness, he joins a gym and does heavy workouts….he runs, sprints. After some time, he has shed the excess weight, now he is powerful, sharp, and agile. He has rhythm and balance which can ensure his long journey. Thus we can see Resilience and Immunity are the two most important factors of growth. The same is true for an economy also. Size of an economy doesn’t mean that it is healthy but resilience and immunity do. Just take the case of China which has big economy but it depends upon exports…China has created massive infrastructure just to promote export based economy. But now it has realized its economy lacks resilience and any global slowdown can create havoc in its economy, so now it is trying to build much comprehensive indigenous growth based economy. We can see now that although Oil Exporting countries had big economies but they were not resilient and immune as apart from the fact that they were based on single product, oil, but they were also dependent only on exports. Now the plunge in the oil price has exposed their vulnerability.  Our current growth model wants everybody  over-eating all the time (which adds into GDP) then fall ill; goes to Doctor paying hefty fees (adds into GDP) and consumes heavy dosages of medicines (again adds into GDP). There is no place for a society where people eat wisely, they are healthy and so consumes even lesser medicines. In our current schema, healthy people can   de-grow an economy.

GDP is just about calculation of production of New Goods and Services which is not Growth

Again we can see that working population is also a part of the Economic Balance sheet and any damage occurred to the health of these working homo sapiens should again be adjusted into National Income Account and so here too this adjustment will even out any addition made to the GDP due to overeating and medicines. Our GDP activity is just about the calculation of “Production of New Goods and Services” in an economy. But this summation has not anything to do with Growth. Growth is never a Quantitative phenomenon but a Qualitative one. It is not just about the size but about the longevity (sustainability). Our current GDP calculation is just an exercise to measure the production of goods which is not a proxy for calculation of Growth. It is just like if Mr. X has sold one of his kidneys for Rupees Ten lakh and thinks that he has “earned” ten lakh. But this Ten lakh is just the value of one Kidney and it looks like an earning because Mr. X hasn’t provided any value to his kidneys (just like Air, Water) otherwise he has just sold an “Asset” which can impact his longevity. Mr. X can understand better if he has to sell his family Gold for Rupees Ten Lakh; here he won’t regard this as an income. The same mistake is done by us in taking more goods produced as Growth.

The Limits to Growth

Here I remember one interesting book “The Limits to Growth” which was published in 1972 by a group of thinkers called “The club of Rome”. The book was an attempt to forecast the outcome of massive scale consumption of earth’s resources by humanity and the capacity of Earth to withstand such consumption as our Earth is a “Finite sphere” with a limited supply of resources like minerals. The club worked out a model based on five basic variables affecting the resources of Mother Earth industrialization, population, food, use of resources, and pollution. They modeled data up to 1970, then developed a range of scenarios out to 2100, depending on whether humanity took serious action on environmental and resource issues. If that didn’t happen, the model predicted “overshoot and collapse” – in the economy, environment and population – before 2070.

Their main point was Earth being Finite has limited capacity to provide resources for huge growing population. Hence our quest for unlimited growth by over-production and over-consumption of resources will eventually lead to a crash. Although their point was debatable as we never grow only by over-consumption as it is the emergence of new innovative technologies which bring more growth. As we can see much of our growth in last century was mainly related to “Invention of New and Substitute technologies” like the invention of Aircrafts, first telephone and then Mobile phones, Computers and then software. Their theory was largely criticized by eminent names of the economics as being lacking credible data, methodology and conclusions. Their model was not well accepted as it was claimed that Population, capital and pollution grow exponentially in all their models, but technologies for expanding resources and controlling pollution are permitted to grow very marginally.

But in my view, their model has one very valid statement which is-unless we create and discover newer, innovative and efficient technologies we can’t afford to grow by consuming the finite resources of the earth as one day they will be obsolete. So if we aspire to grow then we need to look for new technologies. Like take the case of Oil; Peak Oil is the global fear for decades as end of oil means end of industries. So along with looking for new oil resources, it’ll be more logical to look out for newer technologies which can reduce oil consumption, creating substitutes for oil like solar and wind power. Hence the moment we discover a cheap, long lasting battery to store solar and wind power-there will be a quantum jump in growth as this new technology will shift the balance of resources and consumption will divert from finite to better technology.

USA growth problem is not of growing consumption but newer technologies

USA is facing the same quest of growth; it needs to grow but this can’t be by over-consumption of resources. USA has already consumed much more. They were guzzling resources like anything for past 50-60 years; they used gigantic polluting thermal power resources, agriculture over-exploited the land to feed the over-eating, minerals were exploited uselessly just to make more cars, machines and people were seduced to have more cars with cheap loans, people are living on credit all the time just to be worthy of over-consumption. But this madness can’t go for ever as predicted by Club of Rome. USA is trying to replicate the over-consumption model for last 10-15 years but now people are realizing their chronic indebtedness and in spite of free money offerings from the Banks they are more focused on deleveraging then getting more debt for more consumption. USA needs to find new technologies which can promote more efficient use of finite resources. Although I feel we are at the cusp of a great technological revolution as we have great technologies at our disposal to create even greater technologies. With our current deep understanding of nature of matter, communication technologies, powerful space technology, Enzyme technologies for healthcare, agriculture we can create even better solutions. We can’t claim that we have advanced so much that scope of further advancement is remote. We are still at earth when whole universe is still unexplored.

So we’ll see next wave of growth in USA will be of great technologies like Industrial Internet of things, stellar agricultural technologies to produce big from small farmland, unimaginable healthcare technologies, space exploration etc. Just imagine the impact of billions of dollars if the cure for AIDS is found.

GDP growth model is not credible and primitive

Our current GDP calculation based growth model doesn’t evaluate efficiency while computing the growth. Just take the example of Uber which promotes “sharing economy” wherein we derive maximum value from our productive resources. Uber is clearly providing efficiency and productivity gains. Yet many of the benefits of these new activities are not accounted for in the calculation of GDP, in the same way that private housework and childcare are neglected. In other words, we are increasingly producing and consuming much more value than our economic indicators measure. This indicates that we need a new way of measuring output and productivity, since our current economic models aren’t sufficiently taking into account the value that is being produced in the economy.

Hence our GDP measures are simply not sufficient for measuring the real social, ecological and economic progress. This requires urgent revision in our current productivity growth indicators as most of our future productivity will be derived from more efficient use of our finite resources thus making our planet more environmentally sustainable. We are moving towards a phase where we make better use of existing products rather than merely producing more “stuff”, which while good for the GDP statistics, is not necessarily so for the planet.

So we are not going to see any catastrophic de-growth. We can experience small jitters which are necessary for correcting the past mis-allocation of productive resources like closure of some iron and coal mines due to lower than earlier projected over enthusiastic demand. Past big fierce recessions happened as at that time global supply forces weren’t interconnected. Due to lack of development of communication mediums like satellite and internet, it wasn’t possible to gather and evaluate the date regarding demand supply mismatch so as to press the alarm button to do the corrective action. But today, we are better connected and equipped to foresee these jitters well in advance. Earlier global trade was restricted but today entire globe is like a village where we can shift resources to deficient easily and at the earliest. In fact we are at an inflection point from where, if we can execute well, we’ll see and experience the true meaning of growth.

But growth and development will have different implications for a young man who is faced with a critical situation in a street wherein a girl is being harassed by some street bullies. By choosing to not to fight out of fear he can still contribute towards GDP growth by using his cell for calling police and buying medicines when girl is left wounded or he can leave all his fears and give the fight of his life to save the girl, he will feel a different type of growth when he sees himself in the mirror next morning feeling a strange feeling of bravery and proud and this growth is permanent...within him and around him ALWAYS. 

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