What is GDP? It is a macroeconomics index reflecting the market value of all final goods and services produced over a year’s period in all branches of economy in the country, to be consumed, exported, or accumulated, irrespective of the national identity of the used agents of production.
However, some countries of developed democracy have doubted whether this index indeed reflects real economy. In February 2008, French President Nicolas Sarkozy invited Nobel laureates in economics Joseph Stiglitz and Amartya Sen, as well as the eminent French economist Jean-Paul Fitoussi to set up a committee of leading economists in order to investigate if GDP was a reliable measure of economic and social progress.
The committee was set up and, having worked for several years, came to the main conclusion: the use of market prices in the assessment of economic development is vicious in itself!
The Nobel winners discovered suddenly that market production was not a criterion of well-being. Mixing up the two notions can bring about erroneous conclusions on the degree of people’s prosperity and can result in wrong political decisions. The material life standard is more closely connected with factors of real income and consumption; production can be expanding while income can be going down, and vice versa, if one takes into account capital amortization and revenues that are repatriated from the country or come into the country in the form of investments or other types of receipts.
Latvia can serve an example of the income index distortion. Latvian GDP has been growing steadily over the last five years. If you look at Eurostat data you will see that, with regard to the PPS (purchasing power parity) level, Latvia approximately equals the Czech Republic, being far ahead of Lithuania, Poland and Hungary, let alone Bulgaria and Romania. However, its GDP index makes Latvia a backbencher of the statistics: it lags behind Czechia by 20 percentage points. To put it simply, incomes in Latvia by no means correspond to the current prices in the country, which limits drastically the consumer purchasing power of the people.
It should be noted that Czechia, Poland and Hungary still have their national currencies which they can use to spur budgetary receipts, curb prices, or boost exports, especially as, after Greece, the Brussels commissars do not pay particular attention to the Maastricht standards of convergence. While Latvia, with the stable euro, is already deep in the hole for outsiders of economic progress. That is why residents of the country more often visit hypermarkets not as shops but rather as exhibitions, preferring to do their shopping in Poland (skipping Lithuania where prices have been inflated with monetary pumps even higher than in Latvia). The master budget revenues are low because of the drop in the retail chain turnover from which Latvia gets the biggest piece of the tax pie - through VAT: the main component of the tax receipts is the value-added tax. And VAT has not been growing for the last four years. Why? Because the internal consumption is not growing.
If the GDP in itself is vicious as an index, then the plentiful growth of quite a number of the former Soviet states may well be a profanation. By the way, the Sarkozy Committee immediately paid attention to the following: the current national accounts show that in some OECD countries the effective revenue of households was grrowing in quite a different manner than the effective GDP per capita and, as a rule, much slower. Besides, a considerable part of economic activity takes place beyond markets and is seldom reflected in national accounts.
The committee has also come to some disappointing conclusions: the manufactured products could appear unwanted at market prices and, hence, distort the actual statistics. There are no methods to measure the cost of people’s leisure; for some assets there are no markets where they could be tradable; there is no serious and precise account of services and goods exchange between households, like daily joint commuting to work, baby-sitting or caring for the elderly neighbors.
According to experts, one cannot count the services in an industry branch all of a lump: classes with a freshman student and with an undergraduate are services of different cost; treatment of different diseases also differs in price. The above are examples of investing in human capital assets. The Nobel laureates believe that, in order to know what is happening to economy, one should define precisely the changes in the wealth level. That is why they suggest considering income and consumption jointly with wealth. Wealth measurement should be the primary tool when measuring stability. Things that will last in the future should be represented as reserves of physical, natural, human, or social capital. Besides, computations should be focused on households, and income should also be estimated in non-market spheres.
Now imagine what will happen if we use the Sarkozy Committee’s methodology to sum up the wealth the former Soviet republics inherited from the USSR and compare the results with the present situation. I am afraid, we will owe the Soviet power for "our happy childhood": any government who tightens screws in the social sphere can be disappointing inspite of its harping on liberal economy. Just take into account that Soviet investments in human capital, in healthcare and education, though based on the leftover principle, were significant, and social benefits and paymetns were unprecedented. Look at the government members in the CIS countries: most of the deputies got education back in the Soviet time and underwent "hardships" of the regime in their early years; now many of them smash down social spheres as they are accustomed to getting everything free from the state and do not understand where the benefits should come from.
One should admit that statistics is distanced greatly from real life allowing politicians to justify their unreasoned measures and blunders.
The falling economy often has no finance sources except the raise of deductions paid by state enterprises, which holds back their development. The tax policy, instead of encouraging business, focuses on punitive measures. More and more proposals to cut down unemployment and sickness benefits are made public. But these are the items included in the notion of wealth used for calculating national accounts according to the new methods suggested by the Sarkozy committee – that is, if you consider the principal criterion of the country’s prosperity the human capital and not the phony figures of today’s GDP. In the Soviet Union there was the so-called gross index of product manufacture which comprised both quality and quantity and even demand for this product. So, armed with our GDP, we can only find ourselves "Back in the USSR" (the Beatles).
Jurijs Baltgajlis, Dr. oec
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