If GDP confuses you, here’s some much-needed clarity

Although it wasn’t created to measure progress, a country’s gross domestic product (GDP) quickly became the single measure that defined progress. Economist Diane Coyle has written a nice essay in Aeon magazine that explains GDP and its limitations, while putting it in historical context. Here are some highlights:

  • GDP is the sum in a given time period of everything produced in the economy with a monetary value, which should add up to the same figure as the incomes earned by every person and company, and the same as the total spent by everyone. In practice, these separate sides of the accounts are rarely equal because of the difficulty of getting all that data.
  • GDP was first developed in 1934, and it soon became the main tool for measuring a country’s economy.
  • Most people complain about GDP because it doesn’t measure non-monetary costs, which include environmental damage and social welfare. That is why a national disaster (or war) spurs faster GDP growth, but the loss of life and assets will not be included.
  • GDP is meant to measure market activities and, by definition, housework is not in the market; but there’s no market price for government activities either, and they are included.
  • While changes made to it later introduced hedonistic factors to include innovation, the list of products are severely limited.
  • Initially GDP didn’t count financial trading, but now it does. This leads to situations where, for instance, the biggest contribution from the financial sector to the UK economy occurred in the final quarter of 2008, which is when the financial crisis started.
  • GDP served as a decent measure when economic activity and social welfare went hand in hand, but now the gap between the two is widening.

In the end Coyle suggests that GDP is a flawed but useful number. That is why it must not be scrapped or changed. Instead newer measures for uncounted things need to be given more importance such as OECD’s Better Life Index.

Where can you strike gold in the next decade

Review of Ruchir Sharma’s Breakout Nations, as part of my #100bookschallenge.

In Breakout Nations Ruchir Sharma, a globe-trotting investment banker of emerging markets at Morgan Stanley, takes the reader on a ride too. Claiming to spend a week every month in one of the world’s emerging market economies, Sharma shows the depth with which he grasps the landscape of these oft-misunderstood economies.

The book’s timing is no accident. The 2008 crisis, which Sharma calls the Great Recession, has reshaped many future predictions, especially for emerging markets. And yet, Sharma claims that the world will miss opportunities because it is still looking with the wrong lens. He constructs his own rules (see below) and, apart from standard metrics, he uses his own indices to figure out the next economic miracles: lists of billionaires with how many billions each amassed, second-city populations, prices of cocktails and hotel rooms.

These emerging markets have grown to represent almost 40% of the global economy. which makes treating them as one class a big mistake. Each country comes with its own set of quirks, challenges and opportunities. A point that Sharma makes with great conviction (and few examples) is that economics of a country doesn’t depend on the political ideology of the country, but on the character and vision of its politicians.

His shortlisted nations that will grow at over 3% per annum over the next decade are: Czech Republic, South Korea, Turkey, Poland, Thailand, Indonesia, the Philippines, Sri Lanka, Nigeria and the East African union.

The Economist claims that some of what Sharma wrote is wrong. For instance, he treats economies like companies: “The growth game is all about beating expectations, and your peers”. Whereas the success of a country can mean more opportunities for others. While that may be the case, my fundamentals of economics aren’t anywhere good enough to spot such mistakes.

For me the book was a good read to gain perspective on the most exciting economies of the world. An important part of which was to see how Sharma connects past and present leaders of these economies and their impact on them. And for a number-heavy book, Sharma’s writing makes it interesting enough to read large chunks in one-sitting.

PS: Sharma’s rules of the road

  1. Different operating rules apply in different nations, depending on rapidly changing circumstances. Popular understanding tends to lag well behind the reality: by the time a regime’s rules have been codified by experts and hashed over in the media, it is likely already in decline.
  2. Watch the changes in the list of top billionaires, learn how they made their billions, and note how many billions they made. If a country is generating too many billionaires to the size of its economy, it’s off-balance.
  3. If the local prices in an emerging market country feel expensive even to a visitor from a rich nation, that country is probably not a breakout nation.
  4. Strong companies and stock markets should, but do not necessarily, make for strong economies, so don’t confuse the two.
  5. Be alert to the moment when rulers have outlived their usefulness. No matter what the system of the government, it is a worrying sign when leaders try to extend their hold on power.
  6. Watch for steady momentum behind economic and political reform, particularly in good times.
  7. Check the size and growth of the second city, compared to the first city. In any big country the second-largest city usually has a population that is at least one-third to one-half the population of largest. The ratio reflects regional balance in the economy.
  8. Watch the locals, they are always the first to know. They will be bringing money home to a breakout nation and fleeing one in trouble.
  9. Don’t get hung up on rules.
  10. The sight of local companies going global is often celebrated in headlines as a national success, but the more accurate interpretation depends on the circumstances. If more than 50% of a nation’s corporate earnings are coming from abroad, it could be reason for concern.

The largest human migration occurs annually

Captured in the 2009 documentary The Last Train Home by Lixin Fan:

Ever year tens of millions of migrant workers go home to see their families for the New Year holidays. For most, the cheapest and the fastest route home is by train, but the impossible crowds strain the system past the breaking point. Police use bullhorns, batons, verbal abuse—whatever means necessary—to keep the vast mob under control. Many migrants camp at the railway station for weeks, waiting to by tickets. Others give up in despair, crippled by exhuastion. Those who get a ticket often have to climb through a window to get on the train, for a ride that can last up to three days but seems much longer. Many have to stand day and night, for lack of space on the floor to sit. Some wear diapers to avoid using the lavatory, and struggle to keep their sanity during the ride.

In 2009, an estimated 130 million people made the holiday journey—but each year the numbers were growing by double digits, like so much in China.

Taken from Ruchir Sharma’s Breakout Nations