Prudent investors are correcting in wondering why the emerging markets need stimulus packages when they are growing at impressive rates. Either the Gross Domestic Product (GDP) numbers do not represent the true state of affairs within these economies, or GDP declarations by governments are largely deliberate misrepresentations.
In reality, there is truth to both concerns, and those seeking to buy emerging market ETFs (EEM, GMM, VWO) on further price declines are well-advised to check what they are buying into. Because as available statistics stand today, there is no way of knowing. Firstly, is the GDP model a fair reflection of the well-being of a nation? And, secondly, if it is not, are the components of the forecasted GDP growth (e.g. India 8%, Brazil 3%, China 9%, Turkey 6% and Russia 6.2%) simply telling us that official growth rates are no indicators of real unemployment, inherent underemployment, consumer demand, credit delinquencies, income inequalities and poverty levels?
It may be useful to know that the creator of the Gross National Product (GNP) concept, the precursor to GDP, was primarily concerned with establishing a degree of precision only in measurements of the value of goods and services produced by American nationals in a highly fluid post-Depression environment. “The welfare of a nation can scarcely be inferred from a measurement of national income,” Simon Kuznets warned in 1934, as US authorities began using the GNP for policy-making purposes. The reasons for the cautionary statement are well-grounded, particularly in non-industrialized nations.
One reason is the powerful influence of the parallel (underground) economies on consumer, land and housing transactions on emerging market GDPs, ranging from 20% in China to nearly 35% in India. The other reason is the role played by defense expenditures on GDP computations; in India, the budgets for police and paramilitary organizations have also been rising in recent years, to counter separatist and Maoist insurgencies spread across 8-10 Indian states.
Then there are the huge investments in infrastructure projects which are either ill-conceived or corruption-ridden, or in work-in-progress mode well beyond targeted timelines. And, since few plans to upgrade crop yields and reorganize outmoded distribution channels have ever been implemented, the agricultural component of GDP is usually a direct consequence of either a bumper harvest (determined by rainfall) or commodity prices.
In brief, it is possible for emerging markets to show GDP growth in conditions where the prerequisites for sustainable equity valuations are being eroded. Moreover, despotic and politically corrupt governments are also claiming relatively impressive growth rates: e.g. Myanmar (4%), Khazakstan (10.5%), Iran (4.3%) and Uzbekistan (7.2%). For that matter, Iraq and Afghanistan are both predicting GDP growth of 8% in 2009!!
But of greater relevance for mutual investors are the startling facts emanating from the heavily favoured emerging market countries; only a few highlight examples can be provided in this forum, and investors are encouraged to dig deeper for a clearer picture.
Twenty-five percent of the Russian workforce is now experiencing serious delays in wage payments, and no-wage warnings having issued to another 15% of Russian workers. About 2 million workers in southern and central coastal China have been engaged in protests against factory downsizings and shutdowns. In Brazil, 130,000 landless families, living in camps and waiting land for land allocations from the government for 4-plus years, are now threatening to take their fight to the areas occupied by the critical biofuels sector. In India, election officials recently monitoring applications in the mineral-rich state of Chattisgarh, found that 12% of the candidates were self-declared billionaires (in Indian rupee terms) but failed to render tax returns, another 15% who were publicly known to be billionaires said that they did not operate any bank accounts and paid no taxes at all, 4% were convicted criminals and 10% were facing criminal charges for murder, people-smuggling and extortion; for the record, human rights activists report that 58% of Chattisgarh’s population lives in poverty, including 37% in extreme poverty.
Tags: China GDP, flawed GDP, India GDP, misleading GDP
