Salaam
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Originally Posted by Khuram
Adil Bhai, please do not mind of my contentions. I only consider any critical debate as excellent way of learning. This is a good learning forum and we should use it in the best possible way.
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As I have cleared in my PM, I do not mind logical and intellectual disagreements.
My most favourite activity on the forum is arguing with YOU. Now I suppose you take my words lightly. hahaha!!
Now I come to discussion points:
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GDP calculations do not include counting the currency notes. It only include what has been 'produced' by the economy. 'Production' includes capital goods, consumer goods plus any kind of services. Money is not included in production. Availability of extra money however enable us to exchage it for various 'capital' goods due to which future production and therefore GDP can be increased.
In this case we do have temporary increase in the amount of money available to us. Problem is that we are not going to exchange it for capital goods. We are just going to discharge some burden of debt servicing. Lessening of debt burden is equivlent to lessening the burden on the current account only of the government. It has little to do with the over-all GDP of economy as a whole.
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Taking the context of the definition of GDP in economics, I say you're 100% correct. For my answer, you can read the second line of your above quoted paragraph 1. That's what I exactly meant. [I skipped the middle story expecting that you'll catch the general idea. However it wasn't intentional, but mistakenly.]
For your second paragraph, while formulating a response to your feedback, two golden terms of 'positive' and 'normative' come to my mind. I thought that if the privatization money is properly channelled into production sectors, it will suplement production. Also, it's highly unlikely that the total privatization money will be siphoned to foreign debt-servicing. So the differences between us here revolve round those two golden terms.
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Yes previously that money was lying with the foreign investors. But very soon, again this money shall go in the pockets of our foreign creditors. So this temporary availability of extra money only can reduce the burden of current account of government. With this money, no new mill or factory is going to be installed in the country. It means that production level of economy shall remain the same even in the future period.
In this way government budget figures can be improved but over-all economy shall remain at the same level. And this is what is really happening in our country. We have 'improved' budget, foreign exchange and foreign debt 'facts' and 'figures' but the over-all economy is just stagnant. There is no improvement in employment, poverty reduction etc. etc.
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Bhai - your statements deserve 100% approval only if the total amount of privatization money is being utilized in debt-servicing. And if the case is even a little bit opposite, and the government puts a stone on its heart and set up some production units - the result will be opposite. I don't know about the present state of the privatization money. So I just hoped for the best. Again the 'positive' - 'normative' issue.
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It has impact but only on government budget figures. Government Budget is NOT equivalent to the over-all GDP of Economy as a whole. If Pakistan's GDP is 70 billion USD, then government budget is just about 11 or 12 billion USD. The ideal situation is that government should meet all its yearly expenditure out of current years GDP only. By selling capital assets, government is not meeting its current expenditure out of current GDP.
I try to explain it with simple example. I should meet my monthly expenditure out of my salary only. If my salary is lets say Rs.25000, and my monthly expenditure (i.e. total budget figure) is Rs.35000 and I have to meet the extra expenditure by selling my mobile phone set. Here I 'successfully' have met the extra expenditure of Rs.10000. But in real terms, this is no success. I cannot count this Rs.10000 in my 'income'. This amount was not my 'income'. This was just replacement of my old asset with some money.
In this way, we are 'successfully' meeting our current liabilities.
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Firstly, I did not say that GDP and Budget are the same thing. But they are related, that has even been accepted by you.
It would be easier for me to take the second paragraph and answer in a similiar story manner. I earn Rs. 25000, spend Rs. 35000 (budget) and I meet the extra expenditure by taking credit (foreign debt). When the debt is Rs. 10000, I pay larger interest rates and larger installments. But suppose, if I sell my mobile worth Rs. 10000 and assign Rs. 5000 to debt servicing and the rest to some side-business which gets me Rs. 2500, situation wouldn't be as worse as it previously was. I will have to pay less interest, smaller installments and will have some side-business for extra earning. Within due course of time, I will achieve self-sustainability.
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Government's current account refers to "account of one years (fiscal year) income and expenditures OF GOVERNMENT"
lets say in one year government earns total $10 billion through taxation and non-taxation sources. Non-taxation sources include profits of government owned enterprises such as Railways, post offices; then various types of registration fee etc.
In the same year, government has to meet expenditures of $12 billion. Here $2 billion would be referred to as 'current account deficit'.
How to fill this gap .... i.e. what is known as 'deficit financing'.
To fill this gap government can resort to internal and external debt. Lets say government manages to collect $1.5 in this way but still there is a gap of $0.5 billion. Now obviously government shall sale out its old mobile phone and in this way 'successfully' meet the total current expenditure of $12 billion.
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Thanks for the explanation. I understood the story now.
No Comments.
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Foreign investment in new capital assets shall obviously improve GDP because it would result in 'new' production of goods and services. But foreign investment in our own 'old' capital asset will have no direct impact on GDP. Only in case where we sell our old asset to some foreigner for money and then invest that money in 'new' capital asset, only here there can be any positive impact on GDP. But if we sell our 'old' capital asset to a foreigner for money and then we make payment to another foreigner using that money, here there is no any impact on GDP.
Foreign remittences has different and POSITIVE implication. Foreign remittence is not equivalent to 'privatization' strategy. In the case of foreign remittences, we are not selling our old mobile phone for meeting our current expenditure. Foreign remittence is our valid INCOME using which we can import new mobile phone. Mobile phone is a 'good'. There is an 'intake' of a new 'good' in this case. So foreign remittences do have positive impact on GDP. But this 'foreign remittence' is a separate issue and it has no link with the current discussion topic.
So if amount of money has come from selling old mobile phone and this amount of money is not properly used in any productive asset, then there is no positive impact of this money on the GDP.
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Totally agreed. Increasing circulation of money raises demand and ultimately must affect supply. Demand induces production. My previous statement was totally incorrect. I accept that.
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Yes huge amount was coming to exchequer but it was all artificial. Responsibility of government is not to just look after its exchequer. Government has to provide its people efficient and economical infrastructure, including communication infrastructure as well. Previously our communication infrastructure was artificially much high than many other countries. So our cost of production was also high etc. etc.
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As you have already said, efficiency and transparency.
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I gave this suggestion with the condition that there should be complete transparency in the utilization of that lended money. If there is no transparency, then I also agree with corresponding results which you have pointed out.
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If so, I retreat from my offensive position.
Brother, it has been an informative interaction once again. Thanks a lot. I am sure we'll have some good discussions on economic topics in future. As soon as I read stuff, I will discuss them here with you.
Regards,
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Saturday, April 15, 2006
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