In measuring the economic direction of a country, economists generally focus on GDP growth. It is also assumed that if the gross domestic product is growing, the people in a country are better off. This seems to make sense at first glance. If there is more wealth people should be doing better. Even if we don’t believe that people get happier with more large-screen televisions and all the other pleasures money can buy, it is clear that money can also buy medical care, education, and other things that most of us could agree are real values.
There are two flaws with this thinking though. The first has to do with how money is used. If we don’t use it in ways that are actually beneficial, it doesn’t actually improve anything. In other words, if we do get richer as individuals, and as a country, we still can use that money in ways that don’t enrich our lives. It can be gambled away or spent on drugs, for example. These activities will become a part of the GDP as measured by economists, but won’t necessarily make life better. In that case, the nominal amount of wealth isn’t terribly relevant. Money doesn’t make things better if we don’t use it wisely. But there is a better example of why an economy that is larger as measured by GDP isn’t necessarily better.
GDP Growth is Just Numbers?
The gross domestic product simply measures the total economic output of a country. It doesn’t mean that everyone or even most people share in that increasing wealth. Imagine for a moment if a few billionaires like Bill Gates and Warren Buffet made a small country their new home. Their incomes would become part of the GDP of the country, and this would make the economy look like it is booming. But what relevance would that have to all the other residents of the country unless they started to spend and/or invest that money in their new home country? None.
The distribution of wealth is also important, in other words. It doesn’t necessarily mean much to citizens if their country becomes wealthier and nothing changes for them. Now this is an extreme example, but the reality isn’t always so different.In his book, “Confessions of an Economic Hit Man,” John Perkins described how in the 1970s and 1980s he helped to bring huge infrastructure projects to poor countries, by making the economic forecasts that justified them. I’ll give one quick example of how this worked.
A team goes into a poor country because there is oil there – oil that American companies want. In order to get the oil, roads and bridges and electricity are needed. The leaders of the country are told that these things would be wonderful for their country, and if they can build them, the economic activity that results will provide a tax base that will enable them to repay the huge loans necessary. The rosy forecasts that justify the whole scheme are faked by an “economic hit man.”
The country borrows billions of dollars from the IMF (International Monetary Fund) or World Bank – both largely controlled by the U.S. government – and construction begins. Part of the arrangement is that U.S. companies are hired for the projects, so the borrowed money quickly goes right back to the United States for the work done. The oil starts pumping, and the country gets a small share of the revenue (3% originally in Ecuador, for example). This is not enough to repay the loans, of course, but the additional economic activity generated is supposed to raise tax revenues to make repayment possible.
Since the economic forecasts were lies, the tax revenue doesn’t materialize, and soon half of all the tax revenue in the country is needed just to pay the interest on the loans. GDP does go up due to the oil drilling and associated activities, as well as the sale of electricity to the oil companies from the new hydroelectric plant. A few people in the country get wealthier, and a lot of people in the United States get wealthier. Meanwhile, since the lands for the roads, drilling and hydroelectric facility were stolen from the residents (for the “public good,” of course), and since the roads and bridges and electricity are in jungle areas where few people are served by them, few citizens see any benefit at all.
In fact, a generation later, millions of poor people who had no say in the matter and may not have even been born when the contracts were made, are forced to pay for the roads and bridges that they didn’t need. The 50% of total national tax revenue that is now required just to pay the interest on the loans precludes many government projects to build roads and bridges where they are actually needed by the people.
GDP growth is there in theory, and according to all the careful calculations of World Bank economists, and yet poverty actually increase in many of these cases. Obviously we need to get past this focus on gross domestic product. the amount of money doesn’t determine the success of a country. It matters how it is made, who makes it, and how it is spent.