The Intricacies of a Productive Economy

From the point of view of a national economy, what does it mean to be a successful company? Is it contribution to GDP?

GDP is an attempt at measuring the production of an economy. It is not an efficiency measure, but a measure of overall economic strength.

GDP is of course difficult to measure. First, how does one collect the necessary information? In most countries the tax authority can provide this information since all commercial transactions must be reported to the authority. In the UAE there is no such authority and this creates a challenge.

Second, what is included? A construction company that builds a building for AED 100 million needs to subtract out goods that have been imported, e.g. steel, and intermediate goods manufactured in the UAE, e.g. gypsum, from the final value of the product.

Continuing the example, the actual GDP contribution after deducting intermediate and imported goods might be AED 40 million. But is that the actual number? The machinery used by the construction company is extremely expensive and imported. The relevant portion of the import needs to be deducted.

The construction company is now down to AED 20 million contribution to GDP. Is this the final amount? The next issue is all the employees.

Consider a married couple in the UAE with four children. Feeling overwhelmed, they hire two foreign nannies, a cook and a driver for a total AED 10,000 per month. Just like that, this family has added AED 120,000 to the UAE’s annual GDP.

Is that really an increase to the economy’s productiveness? Maybe if that money is spent in the UAE, but if it is remitted to the workers’ homes, then it has no real impact on productivity, only on the life of leisure that the employers want.

To understand the absurdity that can result from such definitions, consider that if a man marries his maid then the marriage negatively impacts GDP since he no longer pays her for house work. Lest there is a rush to ban marrying the maid, consider this: as the wife of a man who can afford a maid, the newly minted wife now has far more spending power and the improvement to the consumer spending component of GDP more than likely compensates for the drop in the services portion. Perhaps there should be a rush to encourage people marrying the household staff?

For the UAE, a country rich in natural resources, extraction and sale of these resources are usually considered part of GDP. But in reality, how useful is such a GDP measure in understanding the economy? Natural resource revenue can overwhelm basic productivity of privately owned companies and unless an adjustment is made, the logical conclusion to this inclusion would be that privately held companies hold a secondary role in the economy. This conclusion is at odds with any basic understanding of the workings of an economy.

Aside from lack of consistency with common sense, the other main fault of GDP is that it does not measure efficiency, which is far more important than total production output. A simple adjustment to attempt and understand the efficiency of an economy is to look at GDP per capita.

The problem with looking at the economy in terms of individuals is that the UAE’s unique circumstances dictate a demographic that is different than anything that other countries might consider normal, and therefore comparisons are less than useful.

On the other hand, perhaps looking at corporate production is the way to go. Look at all products and services of private enterprises, sum those up and decide what to do based on that. To get to efficiency, divide the total by the total number of employees employed at these companies.

Challenges remain, notably the role of government in productivity. Government spending is a major factor in productivity measures for any country. Where the UAE differs is that a much more proactive approach is used to stimulate and grow the economy using not only direct central government spending but also a large variety of integrated, controlled, related and investee companies.

This government effect needs to be clearly understood for two related reasons. First to clearly understand the productivity, and therefore efficiency, of private companies independent of the government’s role. The second is to understand the most efficient way to deploy government resources.

Other features unique to the UAE include the high number of monopoly and oligopoly private companies. The monopolistic behaviour can be in terms of products, such as nearly every single agency, or it can be in terms of captive clients. This is inefficient behaviour, and should not be included in the GDP, but instead stripped. Left in it reinforces monopolistic behaviour and curtails the global competitiveness of UAE private companies, to the detriment of the long term health of the economy.

Understanding economic activity is part art and part statistics. Without it, we are all flying blind.

This article was originally published in The National.