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Economy

Moving Away From GDP: Suggestions for Metrics to Assess Economic Performance

Saurabh Malkar

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Gross Domestic Product (GDP) is, most certainly, an important yardstick for the economic performance of a country. Economists, policy makers, and central banks use GDP to gauge the health of the economy and direct fiscal and monetary policies to boost it.

GDP, along with unemployment rate, are some of the most popular metrics discussed in newspapers and on cable news. Political pundits and lobbyists use GDP to buttress positions, especially on immigration.

Despite the high esteem GDP figures are held to in media and political circles, politicians rarely mention this metric while campaigning for public office. This makes common sense, as GDP figures have very little bearing on the lives of ordinary citizens. At a macro level, rising GDP figures might speak of a productive and growing economy, but the benefits don’t necessarily seem to trickle down to enhance the well-being of the average Joe and Jane. The employment of the word ‘trickle’ should not be construed as a call for a heated debate on ‘trickle-down theory.’

China’s 2016 GDP was estimated to be around $11 trillion, close to two-thirds of that of the US, which was estimated to be in the vicinity of $18.5 trillion. Third on the totem pole was Japan, just shy of the $5 trillion mark. But neither does China fare well than the US in areas of individual liberties and economic freedom, nor does it outdo Japan in securing prosperity and welfare for its masses.

The same principle can be applied in cases of India and Russia, both of which finish above The Netherlands, Switzerland, Australia, and all of the Nordic countries.

Perhaps, a rising GDP and other such titular accomplishments, like undertaking the cheapest Mars mission in the world, aren’t issues to gather around and feel cheery. Perhaps, there are other subtle factors that maximize individual liberties, create wealth, bring prosperity, and provide opportunities to individuals to better their socio-economic condition over time.

Most important of all of these subtle and not oft discussed factors, is economic freedom. Simply put, economic freedom, as conceived in the work of Adam Smith and defended through the efforts of Milton Friedman, is the ability of members of society to trade freely with one another, to buy and sell at prices determined by markets, and to own and defend private property. All of this set within a diligently enforced legal framework constitutes economic freedom and makes up the central idea of Laissez-faire.

Economic freedom dovetails with prosperity and growth, as illustrated in Adam Smith’s ‘The Wealth of Nations’ – a landmark work in the field of classical economics. When people pursue their economic interests in a market free of government intervention and undue regulation, thus, resulting in mutually agreed exchanges, not only do the individuals benefit, but also a greater good emerges.

This ‘greater good’ manifests in the form of a highly industrialized, organized, wealthy, and prosperous society, where resources are plentiful and life for the ordinary citizen is livable.

More importantly, a Laissez-faire arrangement provides its partakers with opportunities to better their socio-economic condition.

The Heritage Foundation, every year, releases an index of economic freedom, based on twelve qualitative and quantitative factors, grouped into 4 categories: Rule of Law, Government Size, Regulatory Efficiency, and Open Markets. Countries are ranked by the net average of their scores on each of the twelve factors.

In the 2017 edition of the economic freedom index, the countries that are designated ‘free’ and ‘mostly free’ are all, but for a few exceptions, developed, industrialized, and provide a high standard of living and superior quality of life to their citizens. The countries that are labeled ‘mostly unfree’ have become hotbeds for economic misery, social problems, poverty, corruption, and offer their citizens an inferior quality of life. Much worse is the predicament of those countries that are grouped under the ‘repressed’ label.

The United Nations Development Programme, each year, publishes a Human Development Report (HDR) which exposits and measures human development in different countries around the globe. The report acknowledges that income growth is a means to an end – individual development – than an end in itself. It works off of the conviction that people’s ability to better their lives, the abundance of opportunities, and the freedom to make beneficial choices lead to human development over time.

The HDR publishes the Human Development Index (HDI) – an attempt to quantify the development potential of a country. While not comprehensive and deeply insightful, the index is a composite measure of life expectancy, access to education, and standard of living that people of a certain country get to enjoy. Gross National Income (GNI), which is one of the dimensions of the index, enters the index in its logarithmic form. This is done to indicate the diminishing ability of increase in income to spur human capabilities.

A close comparison of the GDP and HDI rankings reveals some incredible findings.

  1. Except the US, Canada, and Germany, none of the countries that make the top ten on the GDP rankings, makes it into the top ten on the HDI rankings. Iceland, which finishes 9th on HDI, is placed at 105 on GDP, below Sudan, Algeria, Kenya, and even Yemen.
  1. The BRIC economies – Brazil, Russia, India, and China – that are among the top fifteen by GDP don’t make the cut on HDI. In fact, India, the worst performer in the bloc, is ranked under ‘medium’ category on HDI.
  1. With the exception of a few petrodollar economies and a few developed Asian countries, most of the top 50 entries on HDI, categorized under ‘very high development,’ are western, industrialized, developed economies. Only 21 of these nations make it to the top 50 on the GDP rankings.

This undergirds the initial premise that while a rising GDP heralds a growing national economy, the benefits of this growth rarely reach the masses; and that certain other factors like opportunities and freedom of choice determine the well being and prosperity of individual citizens.

Businesses are the heart of an economy. Not only do they create valuable goods and services, they also create jobs, catalyze innovation, create affordability through competition, and help raise revenues for the government through taxes. Even more important is the role of small – and medium – sized enterprises (SMEs), which account for more than half of formal jobs created across the world. SMEs also hold keys to solutions for development issues like energy, clean water, sanitation, and education in third world countries

Thus, it should follow that countries, regardless of the stage of development, should encourage entrepreneurship and create a business friendly environment, not just for large international businesses, but also SMEs.

The World Bank, in 2002, started a project to quantitatively measure business environments in 190 countries and rank them based on their ease of doing business. It is no wonder that the top 50 entries are packed with mostly developed, high- and upper-middle income economies of Europe and North America. A similar trend can be seen in innovation according to the Global Innovative Index.

Entrepreneurship, innovation, and commerce cannot thrive without trade. Trade helps exchange not only goods and services, but also capital, know-how, business culture, and ideas. It also opens up business opportunities abroad for domestic businesses, while the entry of foreign businesses enriches the markets with a variety of goods, sparks competition, lowers prices, and creates jobs in the local economy.

It’s no surprise that countries that have encouraged open trade have flourished over time, while those that have pushed back against it have penalized their people with economic suffering. The Enabling Trade Index (ETI) published by the World Economic Forum illustrates this very fact: wealthier, more prosperous countries also happen to be the staunchest promoters of trade, while the ones who hold a feeble or antithetical position on trade also happen to be poorer.

So far, the suggested metrics have yielded an approximately homogenous trend, providing far better insights, than a cursory and obfuscating metric like GDP can, into an economy’s potential to deliver progress and welfare for its citizens.

The pièce de résistance, however, of this verbose article is the index of global migration flows. As Milton Friedman put it, to judge a country’s economy empirically, we only need to see how people vote with their feet; that is to say whether people are leaving a nation, like rats off a sinking ship, or are clamoring to get in.

In a report, accompanied by a brilliant infographic, released by The Wittgenstein Centre for Democracy and Global Human Capital, investigators estimated immigration and emigration by regions and countries. Looking at the recent estimates (2005 – 2010), one would be hardly surprised to see a net influx for most European countries along with the US and Canada, while a net efflux for South Asian nations and many African, East Asian, South-east Asian, and Latin American countries.

Gross Domestic Product (GDP) is just part of the story of economic growth; the real narrative, however, rests in the subtleties of every day life for the average individual. These subtleties are determined by the degree of economic freedom, the abundance of opportunities, the freedom to choose, the support for entrepreneurship and enterprise, and the openness to trade; all of which lead to prosperity, growth, wealth creation, and a high degree of social mobility. Migratory flows remain a firm testament as to whether an economy provides its people with sufficient freedom, resources, and choices to better themselves.

An ex-dentist and a business graduate who is greatly influenced by American conservatism and western values. Having born and brought up in a non-western, third world country, he provides an ‘outside-in’ view on western values. As a budding writer and analyst, he is very much stoked about western culture and looks forward to expound and learn more. Mr. Malkar receives correspondence at saurabh.malkar[at]gmail.com. To read his 140-character commentary on Twitter, follow him at @saurabh_malkar

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Economy

Turkey’s financial crisis raises questions about China’s debt-driven development model

Dr. James M. Dorsey

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Financial injections by Qatar and possibly China may resolve Turkey’s immediate economic crisis, aggravated by a politics-driven trade war with the United States, but are unlikely to resolve the country’s structural problems, fuelled by President Recep Tayyip Erdogan’s counterintuitive interest rate theories.

The latest crisis in Turkey’s boom-bust economy raises questions about a development model in which countries like China and Turkey witness moves towards populist rule of one man who encourages massive borrowing to drive economic growth.

It’s a model minus the one-man rule that could be repeated in Pakistan as newly sworn-in prime minister Imran Khan, confronted with a financial crisis, decides whether to turn to the International Monetary Fund (IMF) or rely on China and Saudi Arabia for relief.

Pakistan, like Turkey, has over the years frequently knocked on the IMF’s doors, failing to have turned crisis into an opportunity for sustained restructuring and reform of the economy. Pakistan could in the next weeks be turning to the IMF for the 13th time, Turkey, another serial returnee, has been there 18 times.

In Turkey and China, the debt-driven approach sparked remarkable economic growth with living standards being significantly boosted and huge numbers of people being lifted out of poverty. Yet, both countries with Turkey more exposed, given its greater vulnerability to the swings and sensitivities of international financial markets, are witnessing the limitations of the approach.

So are, countries along China’s Belt and Road, including Pakistan, that leaped head over shoulder into the funding opportunities made available to them and now see themselves locked into debt traps that in the case of Sri Lanka and Djibouti have forced them to effectively turn over to China control of critical national infrastructure or like Laos that have become almost wholly dependent on China because it owns the bulk of their unsustainable debt.

The fact that China may be more prepared to deal with the downside of debt-driven development does little to make its model sustainable or for that matter one that other countries would want to emulate unabridged and has sent some like Malaysia and Myanmar scrambling to resolve or avert an economic crisis.

Malaysian Prime Minister Mahathir Mohamad is in China after suspending US$20 billion worth of Beijing-linked infrastructure contracts, including a high-speed rail line to Singapore, concluded by his predecessor, Najib Razak, who is fighting corruption charges.

Mr. Mahathir won elections in May on a campaign that asserted that Mr. Razak had ceded sovereignty to China by agreeing to Chinese investments that failed to benefit the country and threaten to drown it in debt.

Myanmar is negotiating a significant scaling back of a Chinese-funded port project on the Bay of Bengal from one that would cost US$ 7.3 billion to a more modest development that would cost US$1.3 billion in a bid to avoid shouldering an unsustainable debt.

Debt-driven growth could also prove to be a double-edged sword for China itself even if it is far less dependent than others on imports, does not run a chronic trade deficit, and doesn’t have to borrow heavily in dollars.

With more than half the increase in global debt over the past decade having been issued as domestic loans in China, China’s risk, said Ruchir Sharma, Morgan Stanley’s Chief Global Strategist and head of Emerging Markets Equity, is capital fleeing to benefit from higher interest rates abroad.

“Right now Chinese can earn the same interest rates in the United States for a lot less risk, so the motivation to flee is high, and will grow more intense as the Fed raises rates further,” Mr. Sharma said referring to the US Federal Reserve.

Mr. Erdogan has charged that the United States abetted by traitors and foreigners are waging economic warfare against Turkey, using a strong dollar as ”the bullets, cannonballs and missiles.”

Rejecting economic theory and wisdom, Mr. Erdogan has sought for years to fight an alleged ‘interest rate lobby’ that includes an ever-expanding number of financiers and foreign powers seeking to drive Turkish interest rates artificially high to damage the economy by insisting that low interest rates and borrowing costs would contain price hikes.

In doing so, he is harking back to an approach that was popular in Latin America in the 1960s and 1970s that may not be wholly wrong but similarly may also not be universally applicable.

The European Bank for Reconstruction and Development (EBRD) warned late last year that Turkey’s “gross external financing needs to cover the current account deficit and external debt repayments due within a year are estimated at around 25 per cent of GDP in 2017, leaving the country exposed to global liquidity conditions.”

With two international credit rating agencies reducing Turkish debt to junk status in the wake of Turkey’s economically fought disputes with the United States, the government risks its access to foreign credits being curtailed, which could force it to extract more money from ordinary Turks through increased taxes. That in turn would raise the spectre of recession.

“Turkey’s troubles are homegrown, and the economic war against it is a figment of Mr. Erdogan’s conspiratorial imagination. But he does have a point about the impact of a surging dollar, which has a long history of inflicting damage on developing nations,” Mr. Sharma said.

Nevertheless, as The Wall Street Journal concluded, the vulnerability of Turkey’s debt-driven growth was such that it only took two tweets by US President Donald J. Trump announcing sanctions against two Turkish ministers and the doubling of some tariffs to accelerate the Turkish lira’s tailspin.

Mr. Erdogan may not immediately draw the same conclusion, but it is certainly one that is likely to serve as a cautionary note for countries that see debt, whether domestic or associated with China’s infrastructure-driven Belt and Road initiative, as a main driver of growth.

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3 trends that can stimulate small business growth

MD Staff

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Small businesses are far more influential than most people may realize.

That influence is felt well beyond Main Street. Small businesses make up 99.7 percent of all businesses in the U.S., and these firms employ nearly half (48 percent) the workforce, according to the 2018 Small Business Profile compiled by the U.S. Small Business Administration.

In addition, take a look at recent trends and developments in technology. It’s clear that these changes can give entrepreneurs that extra leverage to scale up. Here are three to consider.

Big companies have big opportunities for small firms

Back in the 20th century, a large company would get things done in this very straightforward way. Wherever there was a need, they hired someone directly to perform that task, whether it was a driver or an accountant.

Under today’s leaner models, these big companies are finding it’s much more efficient to partner with other firms to fulfill certain needs. According to Deloitte, 31 percent of IT services have been outsourced, as well as 32 percent of human resources. This increasing acceptance of outsourcing is a huge growth opportunity for small businesses owners.

For example, Amazon recently announced it is actively seeking and helping entrepreneurs who are willing to deliver packages as their contractors. The mega retailer will even go as far as helping with startup costs so long as these smaller firms deliver their packages. Landing a contract with a big corporation is a significant milestone for any company, but starting out with that lucrative contract is sure to let these startups hit the ground running.

Better connections for greater flexibility

When today’s entrepreneur has a new role to fill, they’re not confined to the talent pool in their immediate community. Because we now have the tools and connectivity to work from anywhere, a business owner can expand the search across multiple states!

What’s more, these flexible, work from anywhere options can give business owners the inspiration to do things differently. Having greater collaboration means having access to more options to fit specific needs.

For example, what is the very nature of being a small business owner? It’s dealing with a fluctuating volume of work. Tapping into the talent pool of freelancers to work on these specific, short-term tasks and projects is easier than ever, because for a segment of workers, freelancing is increasingly becoming a way of life. Freelancers currently make up 36 percent of the workforce, according to a study from Upwork. And, if trends maintain, most Americans will be freelancers by 2027.

Thanks to remote options with easy access to talent, small businesses can easily set up temporary or ongoing as-needed work arrangements. When you partner with Dell for your computing needs, you’ll get the expert help and support so you can set up the perfect flexible workspace system.

More automation brings better efficiencies

Without a doubt, new technology works in favor of small businesses and entrepreneurs because they have many tools at their disposal to automate labor intensive processes, be more productive and cut costs. For example, entrepreneurs can use software to process client payments and even set up automated payments, saving hours and costs associated with collecting, processing and reconciling under the traditional paper check payment system. That translates into a more efficient billing department that can spend more time focused on complex issues.

Let Dell equip your small business with the right tech tools, tailor made for your venture and backed with support, so you can focus on running your business.

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Transitioning from least developed country status: Are countries better off?

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The Least Developed Countries (LDCs) are an internationally defined group of highly vulnerable and structurally constrained economies with extreme levels of poverty. Since the category was created in 1971, on the basis of selected vulnerability indicators, only five countries have graduated and the number of LDCs has doubled.  One would intuitively have thought that graduation from LDC status would be something that all LDCs would want to achieve since it seems to suggest that transitioning countries are likely to benefit from increased economic growth, improved human development and reduced susceptibility to natural disasters and trade shocks.

However, when countries graduate they lose international support measures (ISMs) provided by the international community. There is no established institutional mechanism for the phasing out of LDC country-specific benefits. As a result, entities such as the World Bank and the International Monetary Fund may not always be able to support a country’s smooth transition process.

Currently, 14 out of 53 members of the Commonwealth are classified as LDCs and the number is likely to reduce as Bangladesh, Solomon Islands and Vanuatu transition from LDC status by 2021. The three criteria used to assess LDC transition are: Economic Vulnerability Index (EVI), Human Assets Index (HAI) and Gross National Income per capita (GNI).  Many of the forthcoming LDC graduates will transition based only on their GNI.  This GNI level is normally set at US $ 1,230 but if the GNI reaches twice this level at US $ 2,460 a country can graduate.

So what’s the issue?  A recent Commonwealth – Trade Hot Topic publication confirms that most countries graduate only on the basis of their GNI, some of which have not attained significant improvements in human development (HAI) and even more of which fall below the graduation threshold for economic development due to persistent vulnerabilities (EVI).  This latter aspect raises the question as to whether transitioning countries will, actually, be better off after they graduate.

Given the loss of ISMs and the persistent economic vulnerabilities of many LDCs, it is no surprise that some countries are actually seeking to delay graduation, Kiribati and Tuvalu being two such Commonwealth countries despite easily surpassing twice the GNI threshold for graduation.

How is it possible that a country can achieve economic growth but not have appreciable improvements in resilience to economic vulnerability?  Based on a statistical analysis discussed in the Trade Hot Topic paper, a regression model, based on all forty-seven LDCs, was produced.  The model revealed that there was no statistically significant relationship between economic vulnerability and gross national income per capita.  The analysis was repeated just for Commonwealth countries and similar results were obtained.

Most importantly, analysis revealed that there was a positive relationship between GNI and EVI. In other words, increases in wealth (using GNI as a proxy) is likely to result in an increase in economic vulnerability.  This latter result is counterintuitive since one would expect more wealth to result in less economic vulnerability.

So what’s the take away?

The statistical results do not necessarily imply that improving the factors affecting economic vulnerability cannot result in improvements to economic prosperity.  It does suggest, however, that either insufficient efforts have gone into effecting such improvements or that there are natural limits to the extent to which such improvements can be effected.

One thing is clear, the multilateral lending agencies should revisit the removal of measures supporting climate change or other vulnerabilities for LDCs on graduation, since the empirical evidence suggests that countries could fall back into LDC status or stagnate and be unable to achieve sustainable development. Whilst transitioning from LDC status should be desirable, it should not be an end in itself. Rather than to transition and remain extremely vulnerable, countries should be resistant to such change or continue to receive more targeted support until vulnerabilities are reduced to more acceptable levels.

What are your thoughts?

Commonwealth

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