The Prime Minister signed the plan on which the Russian economy needs to take fifth place in the world, ahead of Germany. Will it succeed? And will we live better than the Germans?
Who has more?
In 1987 Italy overtook the United Kingdom: Italian GDP for the year has added 18%, which allowed the country to become the sixth economy in the world. An amazing breakthrough, however, happened only on paper, the statistics service has decided to add to the GDP data on the shadow economy, which, as you know, in Italy is very extensive. This event went down in history under its original name — Il sorpasso (“overtaking”).
Of course, Russia is also involved in global GDP race. Prime Minister Dmitry Medvedev signed a plan to achieve national goals, according to which Russia has until 2024 to become the fifth economy in the world. In fact, this plan is a fixation of the may decrees of President Vladimir Putin from 2018. While the fifth highest GDP is Germany. In this regard, two questions arise. 1) How real is the problem? 2) Ahead of Germany in terms of GDP, if we start living better than the Germans?
Than bad GDP
To measure GDP, there is no sense in advocacy: comparing economies by the size says little about their condition and even less about the welfare of residents, the GDP running.
Gross domestic product — the traditional way of measuring the economy. It is a useful tool to keep track of how and where to move the national economy, economists are convinced, however, use it to compare countries among themselves can be a very big caveat.
“First, countries with the same size of GDP may be a different structure of economy, — says head of Department of stock markets and financial engineering of the faculty of Finance and banking, Ranepa Konstantin Korischenko. — Because by itself, the GDP does not give a deep understanding of the economy: whether it is based on selling raw materials and sable skins, for the development of high technologies or to bet on to become a global call center as you did earlier India.”
Secondly, the size of GDP and its dynamics are not reliable indicators of the situation in the economy. A typical example: in 2015, Russia’s GDP decreased by one third — from 2.06 trillion to 1.36 trillion (GDP in international statistics is taken into account in United States dollars). However, the reason for this was the collapse of the ruble in late 2014, and not a reduction of a third physical release. Or another example: GDP growth in Ireland in 2015.
“In 2015, the GDP of the country grew by 26.3%, and later growth was revised back in a big way to 34.4%, says Professor RUSH Valery black-Eyed. — However, no economic miracle did not happen: all this growth was due to the use of schemes to avoid taxation.” “Low Corporation tax in Ireland (12.5 percent) has led to the fact that since 2003, there was a significant inflow of funds into the country,” adds senior analyst QBF Oleg Bogdanov. Ireland has become the European Silicon valley, luring to themselves as technology startups and major companies like Apple, Google, PayPal, Facebook and so on. “Only Apple from 2004 to 2014 pumped through his Irish daughter 147 billion dollars, — said Bogdanov. — It is clear that these processes have seriously been restated Irish GDP and created significant distortions”. In this case, the welfare of ordinary Irish people the arrival of their country’s tech giants are almost not affected. Nobel laureate in Economics Paul Krugman even gave the name for this phenomenon — “Leprikonsy” economy.
It turns out, the size of GDP itself tells us very little about the lives of ordinary people. But we actually want to overtake Germany in terms of GDP, we want to live better than in Germany. Or at least not worse. What to do now?
The art of counting
After the may decrees Vladimir Putin said: we must enter the five largest economies in the world by purchasing power parity (PPP), that is, given the relative “weight” of money. Because we know well that for one dollar you can buy different amount of goods in Switzerland and Thailand.
The use of PPP significantly changes the balance of things. Suffice it to say that if in nominal dollars, the largest economy in the world remain the US, in terms of GDP at PPP in 2013, China is in the lead.
For Russia this figure also changes things for the better, because it allows you to jump several notches up. If in nominal dollars, we took the 11th place in the world, the PPP is already the sixth. And the fifth is Germany. So in theory the task ahead of Germany does not seem so fantastic.
But the question about the meaning of this competition is still relevant. The goal of any policy should ideally be growth of welfare of citizens, not of abstract economic growth. PPP GDP, although it looks more sensible, it seems, does not bring us to happiness. So, in terms of GDP at PPP we have already surpassed the UK, France and Italy.
To collect and share
“If we want the indicator to the wellbeing of citizens, it is not just GDP and GDP per capita at PPP — the Director of Institute of strategic analysis of company FBK Igor Nikolaev. — Yes, also not a perfect indicator, but the leaders on this indicator will actually be countries with a high standard of living of the population.” The very act of dividing by the number of residents — from Russia rejects many steps back — in terms of GDP per capita at PPP we are on 62-m a place. About to catch up with Germany in this scenario, it is possible to forget, although it is, on this indicator retraces to the 20-th place.
“But even this indicator is better to use only for internal use, to see how the economy grows for a particular period of time taking into account changes in price level and exchange rate, — says Konstantin Korischenko. — Use it for cross-country comparisons of level of well-being is not very correct, because we don’t know, it feels like the average citizen of Switzerland is happier than the average inhabitant of Africa.”
Sometimes this figure may give a distorted picture. “In terms of GDP per capita (in terms of PPP) in Luxembourg is one of the leading positions in the world (in 2017 this figure amounted to 103.7 thousand dollars) — gives the example of Valery Chernookiy. — However, almost a third of this income went into the hands of foreign workers who come every day to Luxembourg from Germany, France and Belgium, as well as foreign companies registered in this country.”
In this case, a more accurate picture gives an indicator such as gross national product (GNP): it is calculated by the statistical services less efficiently, but more accurately shows the income received by the residents and businesses of the country. Typically, GDP and GNP are similar in size, but in the case of Luxembourg they showed a big gap. In 2017, the GNP per capita was in Luxembourg is significantly lower sum of 72,6 thousand dollars.
The example of Luxembourg are quite rare, but for most other countries the GDP per capita at PPP is not a good indicator of well-being. And here’s why. “This figure does not reflect the inequality of income and wealth, life expectancy and health status of the population, the balance of free and working time and satisfaction with working conditions does not take into account the negative impact on the environment, — said Valery Chernookiy. — GDP does not measure (and is not intended to measure), such non-economic factors of welfare as the level of crime, perception of corruption and respect for human rights, as well as subjective indicators of happiness, such as those associated with the welfare of the family or a favorable climate.”
So economists trying to assess well-being based on purely economic indicators, encourage, in addition to GDP per capita at PPP to look at other indicators.
“It is important not only the size of GDP — overall or per capita, but the level of inequality, — says Konstantin Korischenko. — Take two countries. One has a GDP of $ 10 billion dollars and the second in the amount of 100 billion dollars. The number of inhabitants in both countries comparable. It seems that the second is ten times richer. But imagine that the first country divided its 10 billion among all the inhabitants, and the second gave 95% of its income five oligarchs. It turns out that in the second country, the level of dissatisfaction of the majority of the population will be higher. We know that in countries where inequality is growing faster than the economy, people may feel less and less comfortable, despite the growth of the economy.”
However, the Russian economist, staff member of the RAS Vladimir Popov came up with an alternative point of view. He stated that in rich countries the rise in inequality is really bad for the self-perception of the population, but in poor opposite: rising inequality makes people happier. This amazing paradox Popov explains, for example, the number of self-made billionaires: ordinary people try on the opportunity to get rich, and this idea of warm. However, the expert working at the research Institute “Dialogue of civilizations” based eks-the head of Russian Railways Vladimir Yakunin, for some reason did not realize that the growth of inequality, usually associated with a broken social Elevator and disappearing opportunity to rise in the next property and social class.
Can I opt-out of GDP?
As of now, there are about ten key metrics that are evaluated primarily, but for the full picture you need much more, says the analyst of investment financial company “solid” Vadim Kravchuk.
But it requires so many additional indicators may make sense to opt out of GDP and use the indicator that “alone” will be able to show how life changes people?
Bhutan, for example, as is already done. “The main purpose of the government according to its Constitution, is the growth of the gross national happiness (GNH), says Valery Chernookiy. — According to its creators, this indicator should reflect not only the level of socio-economic development of this country and its traditional values — family, culture, nature, Buddhist religion”.
However, adds the Professor, “according to critics of this approach, this figure includes everything but ultimately nothing”. Also critical economists and to many other “indices of happiness”, which in recent years has come to real fashion.
Where is happiness?
There are many indicators that in one way or another trying to Supplement or replace GDP as a measure of welfare or happiness. Here are some of them:
The human development index (Human Development Index) United Nations development Programme. In the first place Norway. Russia occupies the 49th place.
The better life index (Better Life Index) of OECD. In the first place Norway. Russia in the rating is missing.
— Quality of life index (Quality-of-Life Index) of the Economist Intelligence Unit. In the first place, Ireland. Russia occupies the 105th place.
— World report on happiness (World Happiness Report) of the United Nations. In the first place Finland. Russia occupies 59-e a place.
International index of happiness (Happy Planet Index) New Economics Foundation. In the first place Vanuatu. Russia is on the 116th place.
But the ratio of these indices economists are cautious. “Do not stand up to scrutiny many so-called alternative indexes of happiness, — says a leading analyst QBF Oleg Bogdanov. The most famous is the index (World Happiness Report), which is calculated Columbia University, the center of the “earth Institute” under the auspices of the UN. According to this index, the happiest countries — Finland, Denmark and Norway. But even in that indicator there is a component of GDP per capita. Other indices of happiness derive in the first place countries such as Costa Rica and Vanuatu. What do the economists and financiers of these indices is unclear. To buy bonds, and currency or sell them? Especially how to behave, for example, the ECB from the fact that Finland — the most happy rate increase?”
The ideal indicator, which one figure would reflect the diversity of factors affecting the welfare of the population, and could directly compare countries on the quality of life and there never will be, said Black. The question always arises, and the objectivity of the indicators and in the final calculation (for example, what weights they are included in the calculation of the final index).
Despite all the criticism in relation to GDP, no attempt to offer a working alternative has not come to fruition. All the interviewed Banks.ru experts clearly acknowledged that a more accurate indicator to reflect the economic picture, no. “The replacement of GDP by another indicator in the near future is not visible, — says Igor Nikolaev. Naturally, because GDP is a fundamentally strong economic development is the creation of new value, the new value is the GDP”. Another thing is that the methodology and mechanisms of calculation of GDP can and should change as the economy itself changes — a brand new industry.
“Nobody thinks about how to abandon the use of GDP. We are talking about is to more accurately be considered, — says Konstantin Korischenko. — The United States, for example, adjust the method of calculation every three to four years. Last time they managed so to increase GDP by nearly 1 trillion dollars.”
The US probably learned better than other countries to consider the added value that has no physical embodiment, and the number and efficiency of intellectual work. “All digital services “Yandex. Taxi“ Booking and others create value-added, no doubt, but how to measure? continues Korischenko. — And Russia, and other countries now solve this problem. In Russia the methodology of calculating GDP is also continuously reviewed. Perhaps Americans are better at, therefore we see that their GDP is growing so well”.
“Indeed, many economists noted the fact that the digitalization of the economy and development of Internet technologies are not always adequately reflected in GDP growth, — said Valery Chernookiy. For example, many digital services (open source software, Internet search, social media, VoIP telephony or online booking service) are either free or funded by advertising, and almost nothing for the end user. In GDP, they should be recorded at the market price, but given their free nature, the contribution of these services in GDP will be very small. This is despite the fact that such services have an increasingly important role in our lives.”
Equally important is the question of the ancient types of business, which does not always fall under the statistics. “For example, prostitution must be considered? — asks Igor Nikolaev. — Services are paid, the new added value is created. Somewhere prostitution is legal, so it is necessary to take into account. Where it is not legalized, and raises the question of the lawfulness of view of the illegal activities.”
And yet there is a country that, not giving up completely of GDP, chose another major indicator of the state of the economy. In 2017 Ireland had to abandon the standards of GDP due to a significant distortion which occurred due to the aforementioned coming into the world’s largest companies, attracted by the opportunity to save on taxes. “The Central Bank of Ireland has solved this problem to understand, and in 2017, announced a new scoring system Modified Gross National Income, where desantirovanie foreign assets and foreign intellectual property, — says Oleg Bogdanov. — As a result, in 2017, it turned out that the official Irish GDP to 147% above the new index GNI”.
What is the welfare of the population? His assessment, according to the interviewed experts, should undertake the following: to strive for a more accurate calculation of GDP, use GDP at PPP per capita, necessarily complemented by other indicators — economic, social, environmental. From thoughts someone to overtake will have to give and track the internal dynamics of the index. In our case, at least enough to return to the state of the economy, which was in Russia a few years ago, with a stronger ruble, not falling incomes, and stronger economic growth.
Milena BAKHVALOVA, Banki.ru
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