Dec 8, 2011

Foreign capital based economy does not translate into more welfare for the people

Chakravarthi Raghvan drew my attention to a very important issue that most of us find it very difficult to decipher. We therefore tend to accept what is being told to us. I am talking of the relationship (or difference) between GDP (Gross Domestic Product) and GNP (Gross National Product). Many of us use the acronyms inter-changeably or as if they are synonyms. He wrote: "Those moaning and bemoaning failure of the government to push through 100 percent FDI in retail trade, equating more FDI with more growth and 'welfare' (Financial Times has both a news report and comment), might look at the Paul Krugman blog on difference between GDP and GNP in such cases as the Irish example, where Foreign investor based economic growth (GDP) actually did not translate into welfare for ordinary Irish (GNP).

I was curious to know how is he substantiating his statement. I looked at Paul Krugman's blog and found it very fascinating. Under the caption Irish Pfizer Smiling, he writes: "Ireland, you see, is a country with an extraordinary amount of foreign-owned capital; this means that gross national product, the income of Irish residents, is substantially smaller than gross domestic product, the income generated in the country. We normally focus on GDP, because it’s easier to measure accurately, but in Ireland’s case this can be misleading — because the gap between GDP and GNP has been widening." It means that the more foreign capital flowing into your country does not translate into welfare of the people, as measured by GNP. In other words, what Chief Economic Adviser to Prime Minister, Kaushik Basu, deputy chairman of the Planning Commission Montek Singh Ahluwalia, and a horde of other neoliberal economists are saying in support of FDI in multi-brand retail, as if it is going to be the panacea for all economic ills, is simply incorrect. 

Krugman illustrates with a diagram that tells us how the Irish GDP has been steadily going up in 2011, but the GNP is not keeping pace. He says: "The slump has been deeper, and the recovery even less apparent, when you look at GNP -- which is what matters to the Irish -- rather than GDP. What's going on here? As I understand it, the recent rise in Irish exports is largely a matter of capital-intensive multinationals -- especially pharma -- ramping up Irish production. This is good for GDP, but generates very little income for Irish residents, so that GN doesn' gain." Thank you Krugman for explaining it so simply and clearly (for those who would like to look at the blog post, here is the link:

To know how does GDP compare with GNP, I tried searching on the net. Here is what I found: GDP vs GNP I will try to decipher the complex web in one of my future blog posts. 


Anonymous said...

very nice article sir, thank u

Sunil Aggarwal said...

Dear Devendra ji
I have been reading your blog for around last two years. I am happy about your distinguishing between gdp and gnp but i think that the most important fact about indian economy is that it is like an iceberg where only formal and organized sectors are visible. To put in marxist terms, the capitalist class in now venturing into pre-capitalist segement of the economy through multibrand retail, gm seeds and other methods. I still feel that this pre-capitalist unorganized and decentralized economy is still outside our theorization and hence control. Don't you feel that we need to have right kind of auto-immune defences for this sector? Do you really feel that our job is upto date on this front?

abraham said...

Don't know if this is of any significance, but GNP data is much more difficult to find that GDP data. (I tried a variety of sources, World Bank/ Gapminder/etc...) Don't know if that's because GNP data is more difficult to calculate, or of less use, or if there is another reason.

Anonymous said...

Dear Sharma ji,
we must weigh of the benefit of development to the community in terms of human development, against the economic development where there is an opulence of money accrued through individual profit. “Human development report, 1999” published by UNDP, crisply analysed the benefit accrued by various economic groups as a result of economic development. 86% shares of benefit from world GDP went to the richest twenty per cent, 13% to middle sixty per cent and 1% went to the poorest twenty per cent. Shares of benefit from exports of goods shared by rich, middle and poor groups were 82%, 17% and 1% respectively. Sixty eight per cent share of the benefit from foreign direct investments go to the 20% richest, 30% to the middle 60% and 1% to the poorest 20%. Access of Internet use to rich was 93%, to the middle was 6.5% and to the poor 0.2%. Economic development


samalochaka said...

@Shri Devinder.Sharma,

Are there any articles where you have stated your principled position on various matters?

Your note in "About This Blog" contains the following interesting points:

1. We need to change the the popular discourse, and the mainline economic thinking that has only added to global problems?

2. You are journeying towards equity, justice and sustainability, focusing on food, agriculture and hunger.

3. You dream a vision beyond, in the spirit of gaia and towards a gross happiness index.

These ideas seem lofty and grand. But the Devil lies in the Details! We would greatly appreciate if you elaborate on your points and detail your basic premises and principles using which, in your opinion, the world can attain such happiness.

In particular:

1. What in your opinion is "mainline economic thinking", how it leads to "global problems"; and what is your proposed alternative and how it avoids the pitfalls?

2. What are your ideas of equity, and happiness. And how you propose to arrive at them?

Thanks for your time.