The South African Civil Society Information Service

Don't be Fooled by the GDP Figure

By Saliem Fakir · 8 May 2008

The Gross Domestic Product (GDP) has become an end all, and be all, when we look to economic indicators as a measure of a country's success and progress.

In general, when people speak of GDP, they speak loosely and without meaning.

When the government says it wants to grow the economy by five or six percent, this usually means relative to the GDP growth rates of other high-flying countries. There is always that eye of envy caste upon rival economies.

Everything looks good on the surface especially when we compare ourselves just with numbers. GDP targets can mystify economic claims because they give us an illusion of prosperity that is often not warranted.

GDP defines the total market value of all final goods and services produced within a given country in a given period of time (usually a calendar year). It takes into account consumption, gross investment and government expenditure.

However, GDP figures are notoriously one-sided and deceptive. They do not give a full picture of the economy's health.

An economy's health is determined by the diversity and strength of its skilled workforce; the way skilled labour is deployed and its capacity enhanced; the level of industrialisation that deepens our economic roots; the ability to attract foreign investment in diverse sectors; the rate of debt against savings capacity; the level of technological development; entrepreneurial ingenuity; and growth in trade in non-traditional regions and sectors.

In general, this translates into our ability to deal with vulnerability when the tough-times, like now, hit us so unexpectedly.

When you look at the economy in this way, the engagement with GDP figures becomes more nuanced and enlightening. When you are simply comparing growth rates, you are not comparing apples with apples.

The GDP ratios, often, also tell us more about what is not reflected in the accounts: the depreciation of the environment when we grow the economy without proper environmental measures and safeguards, undervaluing and not accounting for the contribution of the labour of women not employed formally in the economy, and the contributions of the informal sector.

A country may have a high GDP growth rate but this does not imply that we will, as a result, inherit a sound and sustainable economy running into the future.

Angola has a higher GDP rate than South Africa, but Angola’s GDP is distorted by the fact that it receives large junks of foreign direct investment (FDI) for two major resources – the mining of its oil and diamonds.

Nobody can suggest that Angola is going to be better off once its oil runs out unless Angola invests in sectors that help it diversify its economy, so that it is not so dependent on a single commodity. Unless Angola spends money on its people, taking care of their health and education, the country will look rich, but be much poorer in the future.

A better indicator of a country’s stability and share of wealth is also the disparity of income between rich and poor, the so-called Gini co-efficient. This too tells us whether GDP growth is leading to the spread of wealth or not, as economists and politicians usually promise.

In the United States (US), as Robert Reich in his book Supercapitalism so aptly demonstrated, there has been a marked shift from the late 80s onwards, about the manner in which the American economy has benefited different categories of its society.

After the depression things looked good for the ordinary US worker. Their share of national income allowed them to buy a good home, car, have a good medical insurance, pay the kids tuition for school and college, and even have a little surplus for a holiday.

But the 1990s brought something different – the era of Supercapitalism. It was the era in which the power of investors and bankers grew disproportionately.

It was the era in which ruthless corporate behaviour got rewarded and CEOs like Jack Welch of General Electric became celebrities and heroes for kicking the butts of workers, as well as, a cadre of middle management that were regarded as too much fat within the management echelons.

It is no wonder Welch became known as ‘neutron Jack’ for saving shareholders’ value at the expense of worker job security and earnings. Welch sacked 100 000 or more workers in the name of the bottom-line and ‘creative destruction'.

The power of financiers and investors ensured that the rich got even richer. It is as a result of investments in the stock market, property and other speculative instruments.

The US too had the luxury of borrowing beyond its means, as long as the dollar served as the world’s reserve currency. Money, as a result was available cheaply and the federal government created incentives for rampant speculative investments by lowering taxes for the rich and giving them the license to squander surpluses.

Rich speculators were also helped by the deregulation of the financial markets, allowing capital to move around the world with greater ease, without the threat of capital controls or other restrictions from national government

George Soros, a hedge fund manager and investor himself, recently wrote in the Financial Times that as a result, the US benefited from a 60-year boom cycle that is coming to an end, as the current financial crises deepens and a recession looms in the US.

Soros of all people is calling for more government regulation and Alan Greenspan, the much admired former Federal Reserve Bank Governor, in the same newspaper, said in an interview that the crisis can only be averted in the long-term by increasing worker’s share of the national income, rather than adjusting inflation targets.

Indeed workers’ share of national income in the US declined rapidly while that of CEOs' rose exponentially; on average about 350 percent. In 2005, Wal-mart CEO, Lee Scott's pay cheque was 900 times that of an ordinary employee.

The reasons for this were uncovered by the investigative work of Barbara Ehrenreich, in her work Nickel and Dimed, where she went undercover impersonating a worker in one of Wal-Mart's stores.

Wal-mart was able to undercut competitors at the expense of its workers by paying them low salaries and cutting other benefits and procuring most of its goods from countries where labour costs were substantially cheaper.

What has happened in the US was merely a template for the rest of the world. Like in the US, South African CEOs and investors emulated the culture of their US counterparts.

When investors speculate or demand good returns on their investment they usually mean that company directors and CEOs must find ways of trimming out the fat of companies that have a monopoly for essential goods in the market, like food or pharmaceutical companies, must make the best of their monopoly position and hike prices so as to increase shareholder value. In return, CEOs and managers are assured handsome bonuses and lucrative share options.

It was an irony not to be missed in South Africa, when Tiger-Brands rewarded its outgoing CEO for ripping off the poor. He received a huge payout, just as the Competition Board was fining the company for fixing the price of bread.

Not too soon after, Tiger-Brands was also found to be conducting the same old dirty business of price-fixing at one of its other subsidiaries, a pharmaceutical company. Clearly, the bread price fixing was not an anomaly or the doings of a rogue manager. It was company practice.

The fetish for the bottom-line has become a norm in market fundamentalism. It has come at a huge cost to jobs, savings capacity, and our sense of community.

So what of South Africa’s GDP growth and the state of our economy?

Research undertaken by Seeraj Mohamed, an Economist at the University of Witwatersrand, demonstrates that our growth is largely debt driven and consumption led. It has not contributed to skills development and we have deepened income inequality.

South Africa too, showed patterns of what Mohamed calls the financialisation of the market, similar to developments in the US.

Growth has led to accumulation but in the wrong sector.  Mohamed has defined them as rent sectors such as the cell-phone industry, security services, financial speculation and property markets.

Simultaneously, these investments were accompanied by the large amounts of capital flight a sure indicator that those who are supposedly investors who care about our country would rather prefer to keep their money safely somewhere else.

Essentially, we managed an economy that allowed a first world sector to benefit at the expense of a vast underclass, where the top echelons get overpaid and the underclass underpaid.

The South African Institute of Race Relations (SAIRR) released figures earlier in the year, which showed that the number of people who live on less than a dollar a day, has risen from 1.9 million to 4.3 million. In percentage terms, this translates to from 4.5 percent to 9.1 percent.

The SAIRR came under tremendous flack from President Thabo Mbeki, who sent a letter in protest to them, suggesting that their figures were incorrect, suspicious and full of political invective, aimed at disparaging the government and the ANC.

We had such a twinkle in our eyes from this GDP thing. However, caution is in order: at present a four percent GDP growth tags along a 7.5 percent deficit.

The deficit is largely a result of a high bill for oil, the outflow of capital as a result of the payments of dividends or sale of shares on the JSE and payments for other imports. A deficit in the interim may not be a problem if you are making the right investments for the future.

We live under a false pretext if we take GDP at face value.

The next time we ask about GDP, we should be sure to also ask about the quality of living standards for poor workers, whether our economy has a strong and diversified industrial base that helps us to build our skills and technological capacity, and whether we have not depleted our natural stock for short-term gain.

On this account we may come to think of Trevor Manuel differently. He may not be such a hero after all. The next time he speaks in parliament we may hold a more sanguine view of him and look beyond the mystifications.

By then you too, won't simply fall for the deceptive GDP figure.

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