With the ‘World Economic Forum on Africa’ taking place in Durban it is inevitable that economic development of African countries assumes central stage.
It is equally inevitable that economists will focus on economic growth rates and GDP trends.
GDP (Gross Domestic Product) is widely presented as a scientific measure of wealth or social welfare of any country. By examining GDP the size of economies can be compared and progress to development measured. GDP is however a poor measure of wealth and social welfare and, in recent years, its value has been questioned. Despite this the concept will certainly be the central focus of many development economists at WEF.
GDP is a measure of economic activity in a region and, as such, is closely related to wealth. Wealth, in turn, is often taken as a measure of social welfare. It is inevitable that GDP is taken as a measure of both wealth and social welfare. To understand why GDP does not measure up we have to see what it measures and what it doesn’t. This wil show why GDP will dominate discussions on development.
In essence GDP is derived by adding the value of all economic activity in an economy. Every sale of goods or services make a tiny contribution to national estimates of GDP. When these are all added together the national GDP is derived. If sales increase so too does GDP. Conversely if people, feeling the pinch, buy fewer things or services the level of economic activity declines as does GDP.
There are some key omission from the calculations that affect African and other economies. For example, if a farmer drills a bore hole economic activity increases as the farmer contracts services and buys drilling supplies. If successful the value of the farm increases as the borehole that can be used to irrigate crops etc. However if the farmer digs a well (or drills the borehole) on his/her own without contracting services or buying supplies the level of economic activity remains stagnant. In terms of GDP estimates no economic activity took place as nothing was purchased and no contribution to GDP is evident. Despite the fact that money has not changed hands the wealth of the farmer and the value of the farm has increased as the farmer is able to irrigate more crops.
In many under-developed areas farmers rely heavily on their own labour or that of their communities to improve assets. If this work is unpaid (or paid for by barter) the activity will not be reflecting in GDP trends. To the extent that African economies rely on ‘sweat equity’ or barter GDP estimates will und value the size of the economy.
Estimation of GDP thus depends on the exchange of money and not on the true value of the service or good provided.
This weakness of GDP is not confined to under-developed economies. A similar trend is evident in the use of computers and smart phones software. Economic activity increases as software licenses are purchased or renewed. As the software enables users to do more (thats why they bought the stuff in the first place) the purchase increases their wealthor ability.
However if the person uses free or Open Source software no financial exchange takes place. Despite the fact that the users can still do all kinds of wonderful things, their adoption of the software has no impact on GDP estimates. Today most smart phones use free Android software and as users of this software are not required to pay those ‘purchasing’ the technology do not contribute to GDP. On the other hand smart phone (and computer) and users buying Apple or MicroSoft software have to pay and are seen as being ‘economically active’. In fact the more they pay the more they contribute to economic activity.
Estimation of GDP thus depends on the exchange of money and not on the true value of the service or good provided. From the users perspective GDP seems aribitrary and even non-sensical. Given this why do governments promote GDP as the definitive measure of economic activity? The answer is simple – if no money changes hands when goods and services are obtained the government cannot extract tax. In South Africa purchasing software or the services of a borehole driller at the very least attracts VAT. Using Open Source (or pirate) software or digging the borehole yourself does not attract and revenue for SARS.
As long as taxes are important (and they always will be) measuring economic activity in terms of how much money changes hands will be central to national economics. The problems come in when GDP is equated with wealth. If two farmers end up with the same ability to water crops who is wealthier – the one who paid money for the drilling or the one who did it himself. Clearly the person who did not fork out hard earned money has lost the least (the farmer still has his/her money). But in terms of GDP only the economy in which the individual paid for the service has grown and is ‘wealthier’.
Given that GDP is of central importance to governments it is helpful to compare economies in terms of GDP size. This can even be done at a sub-national level using GDPR (regional GDP). StatsSA for example estimates that the largest provincial economy in South Africa is the province with the largest population. In 2015 one-third of GDP activity in the country took place in Gauteng. StatsSA estimates SA’s GDP to be just over R4-million-million (i.e. a 4 followed by 12 zeros). Gauteng’s GDPR was estimated to be R1,300-thousand million. The next largest economy was also the province with the second largest population – kwaZulu-Natal. The GDPR of kwaZulu-Natal is estimated to be R640 thousand million). It has an economy less than half the size of Gauteng’s.
The Northern Cape has the smallest population and he smallest economy. It has a GDPR of only R85-thousand million.
The map below illustrates the relative size of the provincial economies or, to be more accurate, the relative size of monetary exchanges that took place in 2015.
Western Cape 552731
Eastern Cape 315603
Northern Cape 85282
Free State 205350
KwaZulu-Natal 649124
North West 264616
Gauteng 1382096
Mpumalanga 305015
Limpopo 289940
– By Michael O’Donovan
