Pakistan debt, is it really grim as we think. Part-2

[RajaRawal111]

Note:
This is along Article, if anyone does not want to read all please go to summary at the end
Admin please do not merge this thread it with Part-1. This part has different facts discussed.

First of all sorry for the delay in the putting the part-2. It took some time and effort to collect all the authentic data and analyse it. Before starting I thank all who participated in the discussion in Part-1 and specially thank Br. Shahid Abasi Sahib, Br. Will bite, Br. Sahir Shah and Br. Munawar Khan for contributing into the positive discussion.

As mentioned in Part-1, the intent of this study is to see if Pakistan Economy is really in trouble. In simple words I want to know if we are really about to drown or we are being told by our politicians and TV master of all analyst to sit in the pond and drown whereas we could have lived if we kept standing.
If anyone wants to have refresh the memories following is the link of part-1. It has very constructive discussion to look into details.

https://www.siasat.pk/forum/showthread.php?528447-Pakistan-debt-is-it-really-grim-as-we-think-Part-1

Part-2: Debt Figures

In this part we will look at the Pakistan economic and debt ranking compared to world in terms of
1. Gross Domestic Product GDP of Pakistan.
2. Debt to GDP ratio of Pakistan
3. Debt Per Capita of Pakistan. (most scary picture that analyst present).
4. Public debts the Govt of Pakistan owes.

Hope everyone will agree with me that since we all are not professional economists so for layman like me to understand the figures it will be easier to compare it with other countries. So following are the comparison figures of Pakistan with other countries. This comparison will tell us that if we are about to die with debt burdons than what is happening with othere and how else is in trouble.

I have provided link of each site from which I found the latest and greatest data. My intent was to have the data from the sites which are authenticity level of ICIJ website. Which is so authentic that it can shape the future of the country? (That was just a joke please). So the data I have posted and used for analysis is from IMF, world bank, Bloomberg and CIA fact book etc. I have used this data for analysis, the excel files made (for analysis) are on my google drive. I have also placed the links of my google drive for everyone to see details.

We will start with the most scariest term Debt per capita.

1: Debt per capita of Pakistan and other countries of world.

Debt per capita is the most scariest thing as per our Master of all TV anchors and analyst. It is portrayed with following statement

******* this is how much a new born child owes even before he opens the eyes in the world *******

A really scary statement, isnt it. Just ask a mother I want to take your three year old to make him do some work because he/she has to pay off his debt. And see what mother does to you.

In Fact this figure actually made me shiver as well and it provoked me to look deeply into this matter. Why the hell this Govt is not looking into this important issue. It turned out that in reality this is bogus number which means not much to the economists. The countries strength or weakness towards debts is actually measured in terms of debt to GDP ratio. The phoniness of the statement can be see if we take the following silly example.

If by chance Pakistan population doubles in one month, our debt per person will become half. If we work harder and make our population 4 times the debt per person one drop to quarter of what it is today. Here I just proposed a solution to reduce the burden on our new born. Gear up and increase the population to double, triple and quadruple as soon as possible. Every one who is not married should their parents we need to work for country on the noble cause so find our match within couple of days.
I deserve a medal here for presenting the revolutionary idea dont I

Actually this is the phony figure just used to scare us. Economists dont use it to determine the strength or weakness of a nation towards the debt. They actually use the debt to GDP ratio in conjunction with GDP growth to determine how bad situation a country is in for its debts. (Actually Br. Shahid Abbasi told me this I dont want to take credit)

The latest one I could find was the Bloomberg data. According to that data following are the astonishing facts.

In per capita debt figures Pakistan stands 55[SUP]th[/SUP] in world. That means each new born of 54 countries owes more than a new born Pakistani. Our per capita debt of 822 UDS and the Per capita income of 480 USD. So the debt is 1.7 times the income. So hypothetically speaking if each Pakistani gives all his income to pay on the debt, he will have to work for 1 year and 9 months to pay of all its debt. And if everyone starts paying just 10% tax all debt collected in 70 years will vanish in 18 years.

Japanese are most in debt nation where every Japanese has to pay 99,725 USD which is 121 times more than a Pakistani. With per capita income of 10.840 USD it will take a Japanese 9.2 years to pay of all of its debt if they stop eating and just start paying their debt.

People of most developed countries are more in debt compared to Pakistan. This includes US, Singapore, and almost every European country.

Even People of India and China owe more than a Pakistani. I repeat Indians owe more than Pakistanis in terms of debt per capita.

But as I said above this is not a true figure. That is why we dont see waves of panic emerging in these countries. Only because they dont have Raoof Klasra, Mateen, Kamran Shahid and Dr. Qityamt to scare them. So please when someone tries to scare you with this figure just tell him to shutup and be sensible.

The data is obtained from the Bloomberg site at following link.

https://www.bloomberg.com/graphics/best-and-worst/#most-government-debt-per-person-countries

The analysis of payoff ratio is done on the excel file on my google drive at following link.
https://drive.google.com/open?id=0B0cBDSBAlcNqMHFkOEFtQTd5UTQ

2: Gross Domestic Product GDP of Pakistan and other countries.

The GDP data is used here is from wold bank website. The latest update in the data is dated Feb-01/2017.
Per latest figures,

Pakistan ranks 41[SUP]st[/SUP] in the world with the GDP of 271,050 million USD. With 154 countries on the globe below us. So in other word, as of today we are economically strong enough to stand as 41[SUP]st[/SUP] economy.

India ranks 7[SUP]th[/SUP] in world with 2,095,398 million USD. GDP of India is 7.73 times bigger than Pakistan. While Indias population is 6.82 times Pakistan. If the population factors into the GDP, than India is ahead of us by factor of 0.91. I may be wrong here but if it is true that we are not too far behind India.

USA has highest GDP of 18,036,648 USD. GDP of USA is 66.54 times bigger than Pakistan. While US population is 1.7 times Pakistan. If the population factors into the GDP, than USA is ahead of us by factor of 64.84

Bangladesh GDP is 195,079 USD. Pakistan GDP is 1.34 times higher than Bangladesh. Pakistan population is 1.2 % of Bangladesh. If population factors into GDP than we are only ahead of Bangladesh by factor of 0.14. This shows remarkable progress of Bangladesh which rose from dust and is about to touch Pakistan limits, and may surpass is in near future.

Source of data: http://data.worldbank.org/data-catalog/GDP-ranking-table

Download (Excel): https://drive.google.com/open?id=0B0cBDSBAlcNqTHdTY2t1bkg3elk

3: Debt to GDP ratio of Pakistan and other countries.

Br. Shahid Abassi told me that actual indicator of the debt problem is the debt to GDP ratio. So this is the real place where we all should focus and be worried (if we have to).

According to definition
The debt-to-GDP ratio is the ratio of a country's public debt to its gross domestic product (GDP). By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt. Often expressed as a percentage, the ratio can be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

The website from which this definition is copied further says that the creditors do not worry if the debt to GDP ratio is higher when the countrys economy is growing. The problem comes when the economy starts sliding down. That is why Eurozone is falling apart because the debt to gdp rations are higher but the economy of most Eurozone countries are sliding down on the other hand no one is worried about USA and Japan who have even higher debt to GDP ratio.

In this ranking following is the statics
Pakistan debt to GDP ratio is 64.8, ranking it as 45[SUP]th[/SUP] most in-debt country.
India with debt to GDP ratio is 69 ranks 39[SUP]th[/SUP] in debt ratio. So in fact India is in worst situation than Pakistan.
Japan debt to GDP ratio is 229.2, ranking it as most in debt economy
USA stands 12[SUP]th[/SUP] with ratio of 104.17, United kingdom with 89.2 ranks 19[SUP]th[/SUP] in-debt nation. Germany with 71.2 stands 37[SUP]th[/SUP] in dept.
Similarly, the other developed countries with higher debt to GDP ratio higher than Pakistan are France, Canada Germany, Singapore, and Austria. Etc.

This data is taken from Trading Economics site at following link
http://www.tradingeconomics.com/country-list/government-debt-to-gdp

The download in form of excel is available at
https://drive.google.com/open?id=0B0cBDSBAlcNqelVFM2tHNldnZTA

4: Public Debt figures of Pakistan and other countries:

Definition of Public or sovereign debts:

The public debt is defined as how much a country owes to lenders inside. These can include individuals, businesses, and even other governments. The term "public debt" is used interchangeably with the term sovereign debt. Public debt usually only refers to national debt, but some countries also include the debt owed by states, provinces, and municipalities.

I was able to find fresh 2016 years end data on the CIA fact book site. The data compares the public debt as percentage of the GDP again. Following are the major facts.

Pakistan stands 67[SUP]th[/SUP] in the world on public debt of 58.5%. of GDP
India is slightly better than Pakistan. It stands 83[SUP]rd[/SUP] in world with 52.3% of GDP.
Bangladesh is in much much better position with only 25.9% of GDP.
Japan has most public debt of 234.7% of its GDP.
Most other developed countries such as US, Canada Germany, UK, France, Italy, Netherlands and Finland ets are in worst position than Pakistan.

Link: CIA Fact book
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

Excel file for analysis is at following link
https://drive.google.com/open?id=0B0cBDSBAlcNqbFVja1htbFU4LTA

Summary:

The summary of this analysis is my opinion. Every one is welcomed to present his opinion in the authentic figures I have collected. All loans are provided and the analysis files are available to download from my google drive.

1. Please dont let everyone scare you words that every Pakistani owes so much. It means nothing.

2. Even our exports are declining, even we dont have gas & power to run our industry, even our Govt is taking loans after loans. But still as of today Maan Dhurti Masha Allah stands as 41th strongest economy in world. Please see it as half full glass not as half empty. Go in Sajudah in front of the creator, as we are far far better than most on the face of earth.

3. Our debt to GDP ratio is 64.8 percent meaning we have to more tha half of our GDP to our debts, which is very bad situation and it needs lots of care and vision from our rulers to improve our exports and GDP to take us out of this dangerous situation. May Allah help us get out of it and come in the comfortable zone.

4. Public or sovereign debts are also close to 60% of GDP which needs to be improved.

In Part-3 I will try to address the nature of loans that Govt is taking. I will try to break it down into
very necessary loans,
necessary loans and
not so necessary loans.

So we will try to understand what wrong is this Govt doing in debt servicing. It may take me some time as this data will be most difficult to find.

 

[Scholar1]

All loans which Pakistan is taking is going into accounts of Nooras, Zardari and other policans which is again money launderied to the overseas accounts

 

[Unorthodox]

This line

If we work harder and make our population 4 times

[hilar]

If by chance Pakistan population doubles in one month, our debt per person will become half

Be realistic at least how can population double in one month as pregnancy period is 9 month


Rest you wont find numbers on Government loans details as these are not available to MNAs Senators. Hum tu kisi ginti main nahi atay

 

[RajaRawal111]

For all members who got the invitation on other threads. Please note that due to limitations i am not able to send you the private message.

 

[RajaRawal111]

That was a joke brother. To laugh, just like your are.

This line

[hilar]


Be realistic at least how can population double in one month as pregnancy period is 9 month


Rest you wont find numbers on Government loans details as these are not available to MNAs Senators. Hum tu kisi ginti main nahi atay

 

[Unorthodox]

That was a joke brother. To laugh, just like your are.

So this 1000 word thread is a satire post or you are serious? Looks like a complete satire piece to me

 

[Shahid Abassi]

Raja Sahib, I haven't read it all yet but already want to correct on some of the figures given in your article Pakistan's per capita income is 1620 (2017) USD and not 480
Per capita debt should be explained further. Is it only the foreign debt per capita, we are talking about? If it is so then it couldn't be 822 USD.
They say our current debt is 74bn. So 74,000,000,000 divided by our population of 210,000,000 will give you 352 USD per capita. I think 822 USD (if authentic) shows our total debt including the domestic one too.

Is our foreign debt really 74bn, we will talk about it later.

​

THE EXPRESS TRIBUNE > BUSINESS
Pakistans per capita income rises slightly to $1,561

SHARE TWEET​

Pakistans per capita income rises slightly to $1,561

[FONT=&amp]By Shahbaz Rana / Creative: Talha Khan
[FONT=&amp]Published: May 24, 2016

SHARE TWEET EMAIL

​

[FONT=&amp]Pakistan misses critical savings and investment targets in 2015-16. PHOTO: INTERNATIONAL DIASPORA

ISLAMABAD: Pakistans per capita income has marginally grown to $1,561 but targets to increase investment and savings the two most critical economic indicators after national output goal have been missed again during the outgoing fiscal year.
The governments inability to increase investment as percentage of total size of national economy is probably the biggest failure after it failed to achieve outgoing fiscal years gross domestic product (GDP) target of 5.5%.
Per capita income: A Pakistani now makes $1,513 a year
Missing of the targets on savings, investment and GDP growth also puts a question mark over the acclaimed structural reforms introduced under the $6.2 billion International Monetary Fund bailout package.
Pakistan has one of the lowest investment and savings rates in the region and the world, obstructing progress towards a sustainable and inclusive economic growth path.
Slow progress on the China-Pakistan Economic Corridor due to lack of political vision and usual bureaucratic inefficiency also pulled back investments.
Sources said in dollar terms the per capita income has grown by only 2.9% to $1,561 up $44 in the outgoing fiscal year 2015-16. Despite a marginal increase in per capita income, the country continues to be in the league of low middle-income countries. It needs to enhance per capita income to $4,000 to be labelled a middle-income country.
Pakistan faces Rs3.3 trillion revenue black hole, says IMF
In rupee terms, there was a 5.8% growth in per capita income that increased to Rs162,568.
[/FONT]
[/FONT]
[/FONT]

 

[Will_Bite]

1: Debt per capita of Pakistan and other countries of world.
If by chance Pakistan population doubles in one month, our debt per person will become half. If we work harder and make our population 4 times the debt per person one drop to quarter of what it is today. Here I just proposed a solution to reduce the burden on our new born. Gear up and increase the population to double, triple and quadruple as soon as possible. Every one who is not married should their parents we need to work for country on the noble cause so find our match within couple of days.
I deserve a medal here for presenting the revolutionary idea dont I

I hope you wrote that in jest:)
Anyone who is born adds further to debt. The first 18-20 years, that person is only a consumer, and not a contributor. He/she becomes a contributor when he/she joins the workforce and pays taxes.

In per capita debt figures Pakistan stands 55

[SUP]th[/SUP] in world. That means each new born of 54 countries owes more than a new born Pakistani. Our per capita debt of 822 UDS and the Per capita income of 480 USD. So the debt is 1.7 times the income. So hypothetically speaking if each Pakistani gives all his income to pay on the debt, he will have to work for 1 year and 9 months to pay of all its debt. And if everyone starts paying just 10% tax all debt collected in 70 years will vanish in 18 years.

Japanese are most in debt nation where every Japanese has to pay 99,725 USD which is 121 times more than a Pakistani. With per capita income of 10.840 USD it will take a Japanese 9.2 years to pay of all of its debt if they stop eating and just start paying their debt.

People of most developed countries are more in debt compared to Pakistan. This includes US, Singapore, and almost every European country.

Even People of India and China owe more than a Pakistani. I repeat Indians owe more than Pakistanis in terms of debt per capita.

But as I said above this is not a true figure. That is why we dont see waves of panic emerging in these countries. Only because they dont have Raoof Klasra, Mateen, Kamran Shahid and Dr. Qityamt to scare them. So please when someone tries to scare you with this figure just tell him to shutup and be sensible.

If Dr. Shahid Masood goes to one extreme, you are going to a polar opposite. The reason why Pakistan's situation is scarier than the countries you cited is because Pakistan has a stagnant and erratic manufacturing sector.
Japan has a huge manufacturing sector, and they usually have a trade surplus. Just that the past few years after the recession resulted in a slight deficit, otherwise it is back up.
China again, biggest manufacturing hub. For the first time in a long time, they had a trade deficit, otherwise they too routinely have a surplus.
India, in terms of service provision, is eons ahead of Pakistan. They have a 10 times better manufacturing sector than Pakistan. They have domestic cars, bikes, buses etc. They export their buses and bikes to the mideast....they have what you can call a 'rolling income'.

Compare this to Pakistan. I will give you a very small example. Its first hand, so you have to take my word for it. Sialkot is Pakistan's biggest manufacturing hub for skilled labor based products. In the 90s, Sialkot was hit with sanctions from the ILO, and our government did NOTHING to cushion the fall of the industry. The local industry picked itself up, complied with international regulations, and propped back on its feet after a few hard years. Then came China. China started manufacturing machine stitched soccer balls, which employed cheap chinese labor. Plus, they got subsidies from their government. As a result, China at one stage was about to inch ahead of Pakistan in terms of sports goods sold. Sialkot manufacturers were actually forced to shift factories to China in order to benefit from the lower costs their. Our own govt didnt subsidize their production. Shame on them
And this is just a small glimpse of why Pakistan's manufacturing sector is unstable, and cannot withstand any shakeup.

Japan, China and India dont suffer from 'bad governance' syndrome, which is why business runs there as usual, whether its Modi, or someone else at the helm. This bad governance results in Pakistan's debt situation being on the teetering edge all the time.

This is just for the first point. I will give my feedback on the other points later.

 

[Shahid Abassi]

Secondly, you have taken my words on debt to GDP ratio but have discarded 3 other necessary indicators, which are interconnected when appraising an economy.
As you yourself mentioned that USA, Japan and many European countries have a worse debt to GDP ratio than us. So I am sure you and every other reader will understand that debt to GDP ratio alone too does not tell much as no sane person will think that our debt position is better than Japan, USA and Europe. Debt to GDP ratio needs other indicators with it.

(1) Debt to forex reserves
(2) Current account
(3) Growth

An other important factor is the break-up of the debt, that how big percentage of it is a short term debt.

 

[Will_Bite]

4: Public Debt figures of Pakistan and other countries:

Definition of Public or sovereign debts:

The public debt is defined as how much a country owes to lenders inside. These can include individuals, businesses, and even other governments. The term "public debt" is used interchangeably with the term sovereign debt. Public debt usually only refers to national debt, but some countries also include the debt owed by states, provinces, and municipalities.

I was able to find fresh 2016 years end data on the CIA fact book site. The data compares the public debt as percentage of the GDP again. Following are the major facts.

Pakistan stands 67[SUP]th[/SUP] in the world on public debt of 58.5%. of GDP
India is slightly better than Pakistan. It stands 83[SUP]rd[/SUP] in world with 52.3% of GDP.
Bangladesh is in much much better position with only 25.9% of GDP.
Japan has most public debt of 234.7% of its GDP.
Most other developed countries such as US, Canada Germany, UK, France, Italy, Netherlands and Finland ets are in worst position than Pakistan.

There are 2 types of debts. Internal and external.
INTERNAL
The internal debt is obviously raised from the federal reserve/state bank etc. Govts usually have a legislated cap on how much they can borrow domestically in a year. (in other words, how much money can the SBP print). Usually govts take a lot of leeway with this.

EXTERNAL
The external debt is the more important one, because that is where problems arise. Let me first give you Pakistans scenario. Dont know why you have compared Pakistan with US, Japan etc. Pakistan's external debt is almost entirely loan based. We have loans from IMF, World Bank, other international consortium, and foreign govts. These loans come with strict conditions, limited terms, which are routinely renegotiated unfavorably, because we cant pay them in time. Worst of all, they have to be paid back in US Dollars, since that is how we receive them. And because of low forex reserves, that tends to become a problem for us as well occasionally.
Other countries have external loans far far higher than ours. But the nature of those 'loans' is where the difference lies. Japan's majority foreign debt is in the form of investments foreign govts have made into Japan's manufacturing sector, or public debt. So in many cases, countries like US, Japan and China tend to sell off a large chunk of their internal debt to overseas buyers as well, for long term coupons. Pakistan is not in a position to sell its internal debt to outsiders yet. Our sovereign guarantee carries stigmas, rather than pride on its back.

Now how is it that local economists warn us of dire straits, while overseas papers have recently posted positive reviews? Because the local economists know that Pakistan doesnt have a plan B. In the past almost 4 years of PMLN rule, we have seen a lot of movement on the infrastructure front...but nothing on the manufacturing side. No new revenue streams have been added. So now what happens when the loans we have taken begin to mature? In order to get the answer to that, rewind back to 1993, and 1999.
In 1993, 2 domestic banks defaulted because of overborrowing and defaults of the PMLN govt.
In 1999, the country defaulted to the IMF twice because of overborrowing, followed by false figures presented to IMF.

Right now we are in the exact same situation. Our loans will soon mature, and when it comes time to pay, we will start exhausting our so called forex reserves at the rate of $2 billion every quarter. And it wont take more than a year to empty that 'enormous' reserve Dar claims to have built.

The driving force for any economy is its manufacturing sector. So long as we lag behind in that, we will continue to be burdened with fearful debt situations. We need manufacturing, manufacturing, manufacturing. And by that, I dont mean just improving on what we have. We need new manufacturing sectors.

 

[arafay]

The problem with munshi type economists is that they only know how to do hera pheri and have no clue about the actual economic effects of their decisions.

Let's deconstruct the above myth. Firstly debt is of 2 types

1) Domestic debt - this is in pkr and is not really a problem. Govt can improve tax collection, print more currency, issue bonds etc. to pay of this debt.
2) foreign/external debt - this is mostly in USD because USD is the default currency of international trade. There may also be some EUR debt but even EUR debt can be paid of in USD. However, foreign debt CANNNOT be paid in PKR. And this is the biggest problem.

pakistan's exports = $21 billion per year and remittances = $21 billion per year and imports = $45 billion per year. This means pakistan needs US$ 3 billion in aid/loan/coalition support fund etc. every year just to balance the import bill. This is why pakistan has to go to IMF every few years.

With the chinese loans coming in pakistan will hit 100 billion USD in external debt. Even a 2.5% interest (equivalent to zakat) on this amount is a massive $2.5 billion or 10% of our exports. This is in addition to the current foreign exchange deficit of $3 billion per year. So pakistan will need to find another $5-6 billion per year from somewhere just to pay the US$ interest and import bill.

With current foreign exchange reserves at 22 billion, we can only go 4-5 months without a taking a loan just to pay the interest on foreign debt and import bill. Keep in mind that once oil prices go back to $100/bbl, the import bill will jump by $4 billion per year.

 

[Salmandaud]

The author has emphasized on the size of loan and just forget the markup which it carrys. Just have a look at first six months expenditure of government as shared by ministry of finance. http://www.finance.gov.pk/fiscal/July_Dec_2016.pdfMark-up payment on loans is Rs. 647 billion rupees which is almost double of our defence expenditure which is Rs. 336 billion. There is deficit of Rs. 800 billion in six months only. with this trends, budget deficit will be Rs. 1,600 billion (US $ 16 billion) which government will fulfil by taking additional loans which will result in additional markup payments. Our more than 35% of government income is going to markup payment which will be increasing every day as we are going toward debt trap.

 

[nepali.nationalist]

Good analysis brother plus you can also ADD that if we ever get serious and write to Swiss authorities to confiscate Ill-gotten wealth which is around 30 - 40 billion then this Debt becomes INSIGNIFICANT.

This line

[hilar]


Be realistic at least how can population double in one month as pregnancy period is 9 month


Rest you wont find numbers on Government loans details as these are not available to MNAs Senators. Hum tu kisi ginti main nahi atay

 

[RajaRawal111]

Appreciate your response, It is getting too late and I need to study your input in a little depth. We will have some constructive discussion Insha Allah tomorrow.

Secondly, you have taken my words on debt to GDP ratio but have discarded 3 other necessary indicators, which are interconnected when appraising an economy.
debt.

[/COLOR]

There are 2 types of debts. Internal and external.


year.

The author has emphasized on the size of loan and just forget the markup which it carrys. Just have a look at first six months expenditure of government as shared by ministry of finance. http://www.finance.gov.pk/fiscal/July_Dec_2016.pdfMark-up payment on loans is Rs. 647 billion rupees which is almost double of our defence expenditure which is Rs. 336 billion. There is deficit of Rs. 800 billion in six months only. with this trends, budget deficit will be Rs. 1,600 billion (US $ 16 billion) which government will fulfil by taking additional loans which will result in additional markup payments. Our more than 35% of government income is going to markup payment which will be increasing every day as we are going toward debt trap.

 

[RajaRawal111]

Agree with your, hope what Govt has initiated does not turn to be just a game.

Good analysis brother plus you can also ADD that if we ever get serious and write to Swiss authorities to confiscate Ill-gotten wealth which is around 30 - 40 billion then this Debt becomes INSIGNIFICANT.

 

[yasirashraf271]

Agree with your, hope what Govt has initiated does not turn to be just a game.

same my opinion

 

[Sohail Shuja]

Whole of the article is revolving around what is termed as "GDP Fetishism" (mind you, in economics, fetishism has different connotation). The fact that GDP is in itself quite a deceptive measure of economy has been discussed by different economists, specially over the past decade. The terms circumscribing the definitions of GDP are sometimes so vague is describing the economy of a nation that the French President Sarkozy authorized a research on it. The findings of the paper are very interesting. Though, I cannot post the paper due to some limitations here, but you can see the title and search for it if you can get lucky enough.

GDP Fetishism


By: Joseph Stiglitz


The Economists' Voice, 2009, vol. 6, issue 8, pages 1-3

Alternatively, you can also read an article published by The Economist (I am pasting the article here as some of you may not be able to get the premium link to it) It is a good read to comprehend the topic

Measuring economies
The trouble with GDP


Gross domestic product (GDP) is increasingly a poor measure of prosperity. It is not even a reliable gauge of production​

From the print edition | Briefing
Apr 30th 2016



ONE of Albert Einsteins greatest insights was that no matter how, where, when or by whom it is measured, the speed of light in a vacuum is constant. Measurements of lights price, though, are a different matter: they can tell completely different stories depending on when and how they are made.


In the mid 1990s William Nordhaus, an economist at Yale University, looked at two ways of measuring the price of light over the past two centuries. You could do it the way someone calculating GDP would do: by adding up the change over time in the prices of the things people bought to make light. On this basis, he reckoned, the price of light rose by a factor of between three and five between 1800 and 1992. But each innovation in lighting, from candles to tungsten light bulbs, was far more efficient than the last. If you measured the price of light in the way a cost-conscious physicist might, in cents per lumen-hour, it plummeted more than a hundredfold.


Mr Nordhaus intended this example to illuminate a general point about how flawed economists attempts to measure changes in living standards are. Any true reckoning of real incomes must somehow account for the vast changes in the quality of things we consume, he wrote. In the case of light, a measurement of inflation based on the cost of things that generated light and one based on a quality-adjusted measure of light itself would have differed by 3.6% a year.


When a first-year undergraduate first encounters the idea of GDP as the value added in an economy, adjusted for inflation, it sounds pretty straightforward, says Sir Charles Bean, the author of a recent review of economic statistics for the British government. Get into the details, though, and it is a highly complex constructand, as Mr Nordhauss fable shows, a snare for the unwary.


The production boundary


Measuring GDP requires adding up the value of what is produced, net of inputs, across a wide variety of business lines, weighting each according to its importance in the economy. Both the output and the materials (if any) used up in making it have to be adjusted for inflation to arrive at a figure that allows for comparison with what has gone before.


This is tricky enough to do for an economy of farms, production lines and mass marketsthe setting in which GDP was first introduced. For todays rich economies, dominated by made-to-order services and increasingly geared to the quality of experience rather than the production of ever more stuff, the trickiness is raised to a higher level. No wonder GDP statistics are still so prone to constant and substantial revision (see article).


The problem is not just that it is hard to make these calculations. It is that what the calculations produce is a measure put to too many purposes, and, though useful, not truly fit for any of them. And there are worries that things may be getting worse. As the price of light illustrates, standard measures miss some of the improvements delivered by innovation. But at least new lighting products show up in the figures once people start buying the things in sufficient volume. These days it seems that a growing fraction of innovation is not measured at all. In a world where houses are Airbnb hotels and private cars are Uber taxis, where a free software upgrade renews old computers, and Facebook and YouTube bring hours of daily entertainment to hundreds of millions at no price at all, many suspect GDP is becoming an ever more misleading measure.


The modern conception of GDP was a creature of the interwar slump and the second world war. In 1932 Americas Congress asked Simon Kuznets, a Russian-born economist, to estimate national income over the preceding four years. Until he produced his figures just over a year later, no one knew the full extent of the Depression. In Britain Colin Clark, an enterprising civil servant, had been collecting statistics on national income since the 1920s, and in 1940 John Maynard Keynes made a plea for more detailed figures on Britains capacity to make guns, tanks and aeroplanes. He went on to establish the modern definition of GDP as the sum of private consumption and investment and government spending (with account taken for foreign trade). Kuznets had treated government spending as a cost to the private sector, but Keynes saw that if wartime procurement by the state was not treated as demand, GDP would fall even as the economy grew.


Keyness idea of GDP won out on both sides of the Atlantic and soon spread further. Countries that wanted to receive post-war aid under Americas Marshall plan had to produce an estimate of GDP. In the 1950s Richard Stone, a protg of Keynes, was asked by the United Nations to prepare a template for GDP accounting that could be used by all member states. To be a nation was, in part, to know your GDP.


In wartime, GDP was concerned with managing supply. With peace, the influence of Keyness ideas on fighting slumps flipped it into a way to manage demand, as Diane Coyle notes in her book, GDP: A Brief but Affectionate History. Either way it was (and is) a measure of production, not of welfarewhich, as GDP growth became a goal for politicians, also became an occasion for criticism.


A measure created when survival was at stake took little notice of things such as depreciation of assets, or pollution of the environment, let alone finer human accomplishments. In a famous speech in March 1968, Robert Kennedy took aim at what he saw as idolatrous respect for GDP, which measures advertising and jails but does not capture the beauty of our poetry or the strength of our marriages.


Its a manufacturers world


From time to time, such dissatisfactions have brought forth alternatives. In 1972 Mr Nordhaus and James Tobin, a colleague at Yale, came up with a measure of economic welfare which counted some bits of state spending, such as defence and education, not as output but as a cost to GDP. It also adjusted for wear-and-tear to capital and the disamenities of urban life, such as congestion. The paper was in part a response to environmentalist concerns that GDP treats the plunder of the planet as something that adds to income, rather than as a cost. It was much talked about; it was not much acted on. In 2009 a report commissioned by the French president, Nicolas Sarkozy, and chaired by Joseph Stiglitz, a prominent economist, called for an end to GDP fetishism in favour of a dashboard of measures to capture human welfare.


Kennedy was right. Much that is valuable is neither tangible nor tradable. But much that is tradable is also not tangible. A problem with GDP even when it is being asked to do nothing more than measure production is that it is a relic of a period dominated by manufacturing. In the 1950s, manufacturing made up more than a third of British GDP. Today it makes up a tenth. But the output of factories is still measured much more closely than that of services. Manufacturing output is broken down into 24 separate industries in the national accounts; services, which now make up 80% of the economy, are subdivided into only just over twice that number of categories.


A bias toward manufacturing is not the only distortion. By convention GDP measures only output that is bought and sold. There are reasons for this, only some of them sound. First, market transactions are taxable and therefore of interest to the exchequer, an important consumer of GDP statistics. Second, they can be influenced by policies to manage aggregate demand. Third, where there are market prices, it is fairly straightforward to put a value on output. This convention means that so-called home production, such as housework or caring for an elderly relative, is excluded from GDP, even though such unpaid services have considerable value. In early editions of his bestselling economics textbook Paul Samuelson joked that GDP falls when a man marries his maid.


Despite convention, a lot of what is included in GDP lies outside the market economy. Many government services are provided free, and for decades the value given to such output was simply the cost of provision. It is only fairly recently that statisticians have started to measure some bits of public-sector output directly by, for instance, counting the number of operations performed by health services or the number of students taught in schools.


Some private-sector services are also measured indirectly. Housing services is one. This is straightforward wherever householders rent the property they live in. Rental payments capture both the value of housing services to tenants as well as the income of landlords from providing them. But in places where most people own the home they live in, a large part of the total value of housing services has to be imputed.


Finance is another activity that is mostly measured obliquely (and badly). Typically financial services are not paid for directly in fees: banks make a large part of their income from charging more interest on loans than they pay on deposits. To capture the value being added, statisticians use an imputed figure, the spread between a risk-free interest rate and a lending rate, and multiply this by the stock of loans. The problem with this method is that the lending spread is a measure of the risk banks take. For this reason its use in GDP figures can have perverse results. For example, at the turn of 2009 Britains financial sector was close to collapse. But because fear of bank defaults was driving spreads up, GDP figures recorded a spike in the sectors value added, and thus its contribution to GDP (see chart 1).

As statisticians try to capture ever more of the economys output in their figures, new activities are added to GDP. In 2013 an EU agreement on GDP standards, for example, included income from selling recreational drugs and paid sex work. In Britain, the changes added 0.7% to GDP. How much credence should be given to that figure, though, is open to doubt. The statisticians have to fall back on crude proxies to estimate what is going on: thus the paid-sex market is assumed to expand in line with the male population, and the charges at lap-dancing clubs are taken as a measure of the price of sex. Leaving aside the appropriateness of these approximations, Paul Samuelson might have been spurred to muse on the GDP implications of a woman marrying her gigolo. Robert Kennedy might have asked if a nation is really doing better when its sex- and drug-trades are growing more quickly.


The price is wrong


A further complication is that, for all the caution that statisticians offer against seeing GDP as a measure of welfare, the two are intertwined in perhaps the trickiest part of their calculations: adjusting for inflation. Inflation is a measure of how much more you have to pay this year than you did last year to achieve the same level of well-being. It is at least as challenging to measure as output.


For a start, a change in the price of a product will influence how much of it people buy. If red apples rise in price, people buy more green apples; if the price of beef shoots up, they buy more pork. There are tricks that capture this sort of substitution when compiling price measures. One is the geometric-mean aggregation of price quotes. Multiplying together the prices of n goods and then taking the nth root of the product allows price aggregations to take into account a degree of switching proportionate to the change in relative prices. This sounds abstruse: but getting it right has an effect of lowering inflation by half a percentage point or so. Broader shifts in consumer preferences are picked up by updating the weights attached to each category of goods in the overall price index.


Then come adjustments for changes in quality. This years smartphone might cost more than last years, but if so it will also do more. If statisticians focus only on changes in price, they will overstate the true inflation rate by missing improvements in performance. An advisory committee of leading economists set up by Americas Senate in the mid-1990s and headed by Michael Boskin, of Stanford University, reckoned that failure to adjust for quality and new products meant true inflation was overstated by at least 0.6% a year. It called for greater use of hedonic estimation, a technique that captures the implicit value of each particular attribute of a product by measuring how variation in those traits affects the products price: for example, how much more do people pay for a brighter light bulb? Once an implicit price for each attribute is establishedprocessor speed, or memory, say, for a phoneprices are tweaked accordingly.


Hedonic estimation helps. But it is a labour-intensive business, because the implicit prices have to be updated frequently to ensure accuracy; in practice only a small fraction of prices are adjusted in this manner. It also runs into problems when quantitative changes get so large as to become qualitative. A modern flat-screen television is simply a different beast from the squat little cathode-ray tube numbers of the 1980s.


Such adjustments are even harder to do for services, which tend to be bespoke, than for goods, which are still for the most part standardised. The value of a meal, for instance, depends on the cooking and ingredients but also on the speed of service, the background noise, how close together the tables are, and so on. Each of these factors can change from one period to the next. The true value of public-sector services is even harder to measure comparably over time. The number of operations can be counted quarter by quarter. Their effects on health and longevity may not be seen for years or decades.


As the Boskin commission pointed out, new products are a particular headache. In theory their value to consumers is the gap between the reservation price (what consumers are willing to pay) and the actual price, known as consumer surplus. In practice, new products enter the consumer-price index without any such adjustment. Then there is the sort of novelty that broadens choice. The number of TV channels or over-the-counter painkillers available in America, for instance, is overwhelming. Yet in 1970 there were just five of each. Though people may complain about too much choice, this greater variety is to a great extent a boon. But it is invisible to GDP measures. For GDP, the output of a million of shoes in one size and colour is the same as a million shoes in every size and colour.


The benefits of many new products are simply not picked up at all. The upfront costs of providing services on a digital platform, such as Facebook or Twitter, are hefty. But the marginal cost is close to zero, and the explicit price to users is normally nothing. By global convention, zero-priced goods are excluded from GDP. So are all voluntary forms of digital production, such as Wikipedia and open-source computer programs. Some of this unpaid-for activity can be picked up in the accounting; although there is no charge for a Google search, consumers pay a shadow price by supplying information and attention, for which advertisers pay. But the advertising revenue is likely to be well below the benefits that consumers get.


The review chaired by Sir Charles Bean outlined two other possible approaches to valuing free digital services. One is to estimate the value of the time spent on the internet. The Bureau of Economic Analysis, Americas main statistical body, has used market wage rates to estimate the value of home-production activities, such as cooking, cleaning and ironing. Following a similar approach, Erik Brynjolfsson and Joo Hee Oh of MIT estimated that the welfare gain of free internet products added 0.74% a year to Americas GDP between 2007 and 2011 (other studies reach somewhat lower estimates). The other approach uses rising internet traffic as a proxy (see chart 2). The review cites research which found consumer internet traffic in western Europe growing at 35% a year from 2006 to 2014. If the output of IT services had grown at a similar clip, official GDP growth rates in Britain would have been 0.7 percentage points higher each year.

It is not just that many new services are now given away free; so are some that used to be paid for, such as long-distance phone calls. Some physical products have become digital services, the value of which is harder to track. It seems likely, for instance, that more recorded music is being listened to than ever before, but music-industry revenue has shrunk by a third from its peak. Consumers once bought newspapers and maps. They paid middlemen to book them holidays. Now they do much more themselves, an effort which doesnt show up in GDP. As commerce goes online, less is spent on bricks-and-mortar shops, which again means less GDP. Just as rebuilding after an earthquake (which boosts GDP) does not make people wealthier than they were before, building fewer shops does not make them poorer.


These problems do not invalidate the use of GDP. But given the direction of technological change in an ever-more digital world they seem likely to grow more serious, and solutions to them are both hard and imperfect. Measuring the consumer surplus from new or free products relies on brave assumptions; estimates vary widely depending on which ones are used. To be consistent over time would require measuring the consumer surplus of goods and services that are well established in the consumer basket.


A sense of the scale of the task can be gained from looking at estimates of how fast the economy grew during a previous time of headlong technological changethe Industrial Revolution. Around the time that GDP was first being used to measure contemporary economies, some economic historians ventured to apply it to the past, too. They concluded that there had been a sudden take-off in economic growth after 1750; a landmark post-war study reckoned that GDP per worker rose by 1.4% a year, an unprecedented rate, in the first half of the 19th century.


You say you measured a revolution


In the 1980s, research by Nicholas Crafts of Warwick University found that the 18th centurys glut of industrially transformative inventions had been applied rather narrowly, with madcap growth seen only in a few sectors of the economy. He put productivity growth at a less revolutionary 0.5% a year. A generation further on colleagues of Mr Crafts, led by Steve Broadberry, published research which nudged the figures back up a bit. Even centuries on, it is hard to settle on GDP estimates in times of upheaval. And they still miss many of the changes wroughtthe consumer surplus due to railways, say.

It is a big mistake to think that one number serves for all purposes, says Sir Charles. The problem is that, as things stand, GDP risks serving all its purposes ever-less well. The Bank of England has become so chary of GDP figures that it publishes a range of numbers both for its forecasts of growth and for its history. Its latest projections put recent GDP growth in Britain somewhere between zero and 4%. Such hyper-scepticism might seem a bit silly. But is it really no more absurd than proclaiming, with great certainty, that GDP growth in China fell from 6.8% to 6.7% in the year to the first quarter, when it almost certainly didnt?


If comparisons of GDP from one quarter to the next are dodgy, those from decade to decade are perilous. Americas Census Bureau calculates that median household income, adjusted for inflation, was barely higher in 2014 than it was 25 years earlier. Measured living standards for a typical American have stagnated for a quarter-century, in other words. This finding undoubtedly reflects something real. But would a typical American really be indifferent between 1989 medical care at 1989 prices and todays medical services at current prices, asks Ken Rogoff of Harvard University? If GDP figures really measured what they try to measure, that would be the rational stance.


The challenge, said Mr Nordhaus in his paper on light, is to construct measures that account for the vast changes in the quality and range of goods and services that we consume. But that means finding ways to more readily compare hand-held e-mail with fax machine, self-driving car with jalopy, vinyl records with music-streaming services and custom-made prosthesis with health-service crutches. Perhaps an Einstein could do it. Odds are, though, that hed take one look and stick with the simplicities of physics instead.

Source: http://www.economist.com/news/brief...reasingly-poor-measure-prosperity-it-not-even

 

[Munawarkhan]

Raja a very basic question that you forgot to add in the discussion is after all the debts; what do these countries give back to its public.

Free healthcare
Free education
Unemployment benefits
Multiple subsidies
.....

The list goes on. Greece was going bankrupt and still their parliament was fighting on reducing the benefits to the citizen.

What benefit do u get from the Pak govt?

 

[Wake up Pak]

phateecher charsi pm thatta may kahara ho kar bakwaas kar raha hay aur doosra be choo kisi key maa behno ko galiyaan daay raha hay khabees kay bachay haaram khor pm ko defend karnay harraam kjoor aa jaatay hain...

 

[نادان]

لگتا ہے آپ مجھ سے اکنامکس پڑھوا کر دم لیں گے .

کیا ایسا نہیں ہو سکتا کہ ہر بندہ آخر میں اپنی تقریر کا اصل پواینٹ ایک جملے میں آخر میں لکھ دیا کرے ..



:please: