The Truth about GDP Growth and GDP Bonus

Singapore has a unique way of rewarding ministers and top civil servants called the GDP bonus. Essentially, their bonus would be tied to the GDP growth. If the GDP growth falls below 2%, there would be no bonuses. Once the GDP is above 2%, they would be rewarded with bonuses linked to the growth rate. But, is GDP growth a true indicator of successful policies?

Let us examine what is GDP actually. GDP, or Gross Domestic Product, is a measurement of the economy developed by Simon Kuznets. GDP is a measurement of all the final goods and services produced in a country for a given period (in this case the given year). There are several ways to calculate the GDP but all of them would lead to the same result. Economics students would recall in their studies that GDP (Y) = C + I + G + (X – M)
Where

  • C is consumption by end consumers such as buying food, medication or paying for a movie ticket;
  • I is the overall investment such as buying new machineries for companies or buying a new house for end consumers;
  • G is total government spending such as salary, purchasing military weapons or investments;
  • X is value of total export and M is value of total input.

I am not about to begin a economic lecture but merely stating how the GDP is calculated and hence, explain why certain policies are put in place. I always believe that “what gets measured gets done”. Hence, GDP growth which is measured (a KPI), would be tracked and policies would be made to maximise GDP.

  1. Population Growth
  2. One may ask why is our government is so keen to increase the population of Singapore. Recently, Minister Mentor remarked that another 900, 000 foreign workers are required in Singapore. The sad truth is that population increase would lead to an increase of GDP. The C and I of the components of GDP are very much determined by the population size. More people would mean more consumption and the requirement for companies and residents alike to invest in equipments or houses to sustain the population.

    Population growth comes at an expense. The services and commodities available (resources) would become scarce and inflation would increase. Quality of life would suffer as a result. However, inflation is actually inflates the GDP as the value of goods and services would increase as a result of inflation and hence inflates the GDP. Remember that the performance bonuses of the policy makers are linked to actual GDP growth rate and not adjusted rate (adjusting for inflation), policy makers would rather allow the inflation rate be as high as what is tolerable.

  3. GDP Bonuses
  4. GDP bonus is also another negative feedback loop. If you look closely at the calculation of GDP, government spending is a component. Government spending includes the salary of public servants. Hence, the GDP bonuses paid out to public servants such as Ministers and top civil servants actually becomes components of the GDP. This inflates the GDP and justifies higher bonuses the following year and push up the GDP even more and so on. Though one may argue that the GDP bonus is only a tiny fraction of the total government expenditure (only a few char kuay tiao per resident as claimed), the negative feedback loop shows that this rewarding structure is flawed.

  5. Employer-Friendly Policies
  6. Many of us recalled that the employers used to match the CPF contribution for the employees. CPF is meant to replace pension and employers and employees have equal responsibility to make sure that we have sufficient savings when we are in our twilight years. However, during the time of recession, the government introduced measures to cut the employers’ contribution to retain foreign companies. Though our economy had rebounded, they are slow to reinstate the employers’ contribution. Sadly, this has a severe impact on us. In the past, it is the onus of the company to provide for pension for people who had loyally served them. With the cut in employers’ contribution, the burden is shifted back to the employee.

    The reason why the government introduced these employer-friendly policies is to increase the GDP growth of Singapore. With more companies, the total output would be greater and hence the growth would increase.

The above examples are just a few to illustrate how the GDP bonus affects the way our policies are formulated. If the GDP is a good measurement of the welfare, then it would make sense to reward the policy makers for improving our country and our lives. However, the GDP is not meant to be used as a measurement of welfare and using it alone is a flawed measurement of the success of our policies. Here are a few reasons why we cannot use GDP as an indication of our success.

  1. GDP Per Capita is not used
  2. As we discussed earlier, GDP is the total value of the goods and services produced in the country. This does not take into account the total number of inhabitants in the country. Hence, if the population growth is greater than the GDP growth, it could mean the total goods and services produced in the country is lower per person. Understanding this, GDP growth could be achieved by increasing foreigners even at the expense of GDP per capita.

  3. Gross National Product is not a KPI for GDP Bonus
  4. Gross National Product (GNP) is a different way of calculating the total goods and services taking into account of ownership of enterprises (Singapore owned or foreign owned). GDP growth could also be achieved at the expense of Singapore companies. Huge MNCs often drive local SMCs out of business and yet contribute massively to our GDP. Yet, the money earned belongs to foreigners and may not be retained in our economy and do not benefit Singaporeans.

  5. Real GDP is not used (Inflation adjusted)*
  6. As mentioned earlier, inflation can artificially inflate the GDP. For example, if the value of money is halved, the prices of all goods and services produced would be doubled. Even if no additional goods and services are produced, the GDP would have increased.
    Hence, I propose that the government look at other indicators for performance bonuses rather than using GDP growth. Other factors such as median household income, lower quartile income, welfare indicators should be used instead. The government is successful only if the lives of the citizens improved and not because the GDP has grown.

Disclaimers:
*Assumption as there is little information regarding the calculation of GDP bonus in the public domain.
The author is not an economist nor had any formal training in economics. If any of the mentioned points are inaccurate, please feel free to comment on them.

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Posted on May 13, 2011, in What's Happening?. Bookmark the permalink. 1 Comment.

  1. 14.5% growth in 2010 is inflation adjusted and hence using Real GDP. However, going to the argument of using GDP per capita,

    From Singstat:

    2007 58,243mil
    2010 59,813mil

    GDP per capita increment is only 2.7% for the past 3 years which is less than 1% growth on average.

    Moreover, our population grew by over 10% during the 3 years.

    The above result shows that 14.5% growth is not stunning at all as we are just recovering to previous level in 2007 (average output has not grown much) and we have a huge strain on our resources due to the increased population size.

    This is by no means extraordinary progress and do not deserve a 8 mth bonus.

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