It is to be noted too that the profits of a foreign company, counted in the current GDP, may only disappear from the economic scene the year after since this company may remit such profits to his mother company abroad. That is why the growth in GDP may only reflect the magnitude of how much may be remitted abroad eventually by foreign firms doing business in a country, like in the Philippines, where manufacturing and the service sectors are majority-controlled by foreign transnational companies.
The foregoing discussion has shown how the method of deriving GDP by neo-classical economists is not a measure of social-welfare, but is, instead, biased for the growth of business in the market. It is not a measure of the economic welfare for the majority of the people, and in fact may reflect the magnitude of the exploitation of the resources of a country, which increases poverty in that land. However, capitalist and capitalist-oriented nations, like in the Philippines, have continued to use the GDP and GNP (Gross National Product includes transfer payment from abroad) as their primary
As the determination of GDP is market-based, it ignores the social question of the equitable distribution of the benefits accruing from the accumulation of the wealth of a nation. In fact, the GDP method is biased towards the growth of incomes of the upper classes, since if the shares of incomes in a nation are in favor of the top classes, higher GDP may only show how the rich are getting richer and the poor getting poorer in a society. The World Bank’s primary criterion for the improvement of a people’s economic welfare based on the per-capita income of a country (dividing total GNP by total population) is an idealist measure of development since it assumes certeris paribus that everything is constant in the real world and that GNP is equally distributed among all the members of a population, which of course it is not. Such mathematical legerdemains, which neo-classical economists gleefully practice merely hides the gross inequalities prevailing in many countries, including those in the so-called developed nation. We have seen how a high GDP may even reveal how fast the rate of the deterioration of the natural resources of a country is occurring, which leads to more poverty among the lower classes
Admitting the market-orientation of the method of GDP accounting, which primarily manifests the activities of private business, Simon Kuznets has accepted that its fundamental principles are value-laden.(Kuznets, 1941:3-4) What to consider as intermediate goods and final goods are often a matter of subjective choice also, since work clothing and commuting expenses may be taken as intermediate expenses of production and not as final consumption to employees. A common criticism of GDP accounting is that it excludes household work and the satisfaction of enjoying free social services, like free concerts and park facilities provided by the government, since these are not priced in the market of the capitalists. Another is that it does not take into account the loss of natural wealth, which could have increased GDP for future generations if they were not depleted as fast as they were with their accompanying pollutions and other wastes to the environment. This is what is called opportunity cost to the society which allowed the rapid degradation of its resources, material and even human.
The succeeding section will present other measures of development which includes the improvement of the social welfare of a people vis-à-vis the capitalist oriented GDP.
Alternatives to the Method of GDP Accounting
An alternative to the GDP method to measure economic development is the poverty-weighted index of social welfare presented by the African professor Michael Todaro in his book “Economics for a Developing World”. This measure first divides the people in a society according to their percentage share of total income of a country, either by deciles or quintiles. Thus, using the quintile measure, we have the population divided into 20% of the population. Then, we have the following equation:
G=w1g1 + w2g2 + w3g3 + w4g4 + w5g5 (1)
G= a weighted index of growth of social welfare
g1 = the growth rate of income of the ith quintile(where the i quintile are ordered
1, 2, 3, 4 and 5)
w= the ‘welfare weight’ of the i quintile
Suppose a country really concerned about the social welfare of the bottom income classes of the population assigns a subjective value of 0.6 of welfare weight on w1 and 0.4 to w2(the two lowest 40%) and a value of 0 to w3, w4 and w5. Let say GDP for that country grew by a high 7.3 %, but this increase only reflects the rise in income by 10% of each of the upper 20%, that is for w4 and w5 in our example. The social welfare growth index for this country would then be:
G= 0.60g1 + 0.40g2 + 0g3 + 0g4 + 0g5 (2)
Which, when substituting g1 = g2 = g3 = 0 and g4 = g5 = .10 becomes
G= 0.6(0) + 0.4(0) + 0(0) + 0(0.1) + 0(0.1) = 0
The poverty weighted index therefore reveals no improvement in social welfare, though recorded GDP has grown by 7.3 %.
If we were to use the present GDP or GNP measure which takes the actual shares of the population, for instance again given in quintiles, of a country as the criteria for development, GDP or GNP may be growing but the rich may be only getting richer, and the gap between the lower and upper classes increasing. Say we have the following shares of the national income of the various quintiles in a population:
G = 0.05g1 + 0.09g2 + 0.13g3 + 0.22g4 + 0.51g5 (3)
Now suppose that GDP grew by 7.3% as in our previous example but the income shares of the bottom 60% did not change in that particular year(which is often the case in developing countries like the Philippines) while those of the upper 40% increased by 10% each. Then equation (3) becomes:
G = 0.05(0) + 0.09(0) + 0.13(0) + 0.22(0.10) + 0.51(0.10) = 0.073
Thus, the social welfare index (not poverty weighted) would have risen by 7.3%, which is the same as the rate of growth of GDP for that year, but the rich would have only become richer. Another striking aspect of a development index, which is not poverty weighted, is that granted in equation (3) the income of the bottom 20%(w1) also increased by 10%, then GDP growth would show that the rise of income by 10% of the upper 20%(w5) of society is ten times more important than that of the bottom income class! This only glaringly reveals the class bias of current national income accounting, in which GDP growth is based.
An equal weights index may be used instead of the poverty-weighted index, where 20% weight is given to each income quintile in our example. Taking our previous case where there is an equal 10% increase in the two top 20% but no change of incomes in the bottom 60%, we will have then:
G = 0.2(0) + 0.2(0) + 0.2(0) + 0.2(0.1) + 0.2(0.1) = 0.04
This shows that while GDP grew by 7.3% taking our previous example again, social welfare index only rose a much lower 4%. A country can adopt either a poverty-weighted index or an equal weighted index to compare the growth of social welfare to GDP growth. If it gives more importance to the lower 60% of the population, then a poverty-weighted index than an equal-weighted index is more appropriate to measure economic development.
While the poverty-weighted social welfare index for development shows the rise in the economic welfare of the bottom classes, it fails to capture the improvement of the social wellbeing of the populace, because it is merely concerned with family incomes. For instance, it does not show whether the people in a country are enjoying more social services, like greater access to education, health care, leisure, etc