Income Isn’t Everything

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Many business executives live by the creed of “What gets measured gets managed.” The metrics we use channel our attention and efforts. And when it comes to global economics, no indicator monopolizes our mindshare more than gross domestic product (“GDP”). While the measure is useful, it also has some serious shortcomings. Putting too much emphasis on GDP can distort our perceptions of the strengths and weaknesses of an economy.

GDP measures economic activity: in general, the value of final goods and services a country produces in a year. It provides a good picture of the size of the income pie. But focusing on headline GDP growth each quarter leads us to ignore important considerations not captured by income statistics.

For instance, the size of the pie says nothing about how income is distributed. And considering distribution, like overall income growth, is crucial for assessing an economy’s health. This is especially true since incremental dollars are not valued the same by each person. They are worth more to a poor person than to a wealthy one.

Imagine two countries with the same national income. In the first, 40% of the country’s income goes to the top 10%. In the second, 20% does. The latter country has much more income to go around to the vast majority of its citizens, and the aggregate wellbeing is likely to be higher.


The size of the pie says nothing about how income is distributed.


As Simon Kuznets, the architect of GDP, put it in 1934, “economic welfare can scarcely be adequately measured unless the personal distribution of income is known.” A broader metric like the Genuine Progress Indicator adjusts personal consumption for income inequality to fill out the picture.

Headline growth figures also exclude demographic considerations. If a country’s income is growing, but not as fast as its population, then living standards can actually decline. Nigeria’s population, for instance, is growing by 2.6% per year, meaning that its economy needs to expand at that same rate just to maintain per capita income levels.

Even if we made sure to qualify our headline growth figures with distribution and demographics, the discussion would still be limited to income. But there are many other factors worth highlighting to evaluate how we’re doing. Take wealth, for example, which GDP figures tell us nothing about.

Consider two people with equal salaries, but one has a million dollars in the bank and is adding to it, while the other has six thousand dollars in the bank and is spending more than he or she earns. Nations, too, can overspend from savings, but GDP tells us nothing about the size of the stock they have to draw from -- it merely measures the income flow.  High or fast-growing GDP figures might result from over-consumption, for instance, but this would not bode well for the long-run economic health of a country.

Moreover, in narrowly focusing on income, our national accounts leave out the value of leisure. This can distort our conception of the relative flourishing of countries. For instance, while the United States’ GDP per capita is roughly 15% higher than the Netherlands’, American workers work 26% more hours than their Dutch counterparts. Which country is better off?


Our national accounts leave out the value of leisure.


Some measures of national wellbeing incorporate the value of time explicitly. The OECD’s Better Life Index, for example, includes a work-life balance dimension. Unsurprisingly, the United States ranks near the bottom on this metric, while the Netherlands tops the list.

Another issue is GDP does not directly measure subjective wellbeing, and economistsdisagree about whether it is a decent proxy. The United Nations’ World Happiness Report, on the other hand, focuses explicitly on gauging people’s happiness. According to the report, GDP per capita only explains around a quarter of the difference in subjective happiness levels between the top 10 and bottom 10 countries. Other factors include healthy life expectancy, personal freedom, and social support networks.

These are just a few of the blind spots that an overly narrow focus on GDP figures can produce. As Robert F. Kennedy famously said, GNP—GDP’s close cousin—“does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.”

This doesn’t mean GDP is useless. Far from it. But analyzing the contours of GDP does force us to zoom out and understand its limitations. Relying on a single measure as a gauge of a country’s development can force us to overlook dimensions that matter.

By contrast, employing a diverse array of metrics gives us a better picture of how we’re doing, and what we should focus on improving. Using a “dashboard” of indicators, as the economist Diane Coyle describes in GDP: A Brief but Affectionate History, would help us break free from the tyranny of tunnel vision. As Coyle highlights, the OECD’s Better Life Index offers a broad set of measures, and even allows users to weight them as they see fit.

I spent an hour or so fiddling with the site myself. The mere act of considering the relative importance of civic engagement and community led me to see the world differently. I encourage you to give it a try as well -- it just might let you connect dots that a single metric never could.

Colombia: Kidnapping Capital to Economic Beacon

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In a world marked by widespread political and economic pessimism, Colombia remains a source of hope. This June, the government signed a ceasefire agreement with the left-wing FARC rebels, whose insurgency has lasted more than half a century. In the months ahead, the country’s people will vote on a peace deal that would end a conflict that has resulted in over 200,000 deaths and the displacement of 6 million people, over ten percent of Colombia’s population.

The epidemic of crime associated with rebel groups and drug cartels has also subsided. Around the turn of the millennium, Colombia was known as the kidnapping capital of the world, accounting for an estimated half of all abductions globally. Today, the country sees less than one kidnapping per day, down from eight in 2000, and accounts for only an estimated 4% of incidents worldwide. The murder rate has also dropped significantly, from over 70 per 100,000 people in 1996 to 25 in 2015.

Positive economic indicators accompany this progress. For example, even as foreign investment in the energy sector plunged in the first quarter of this year, “overall foreign investment has more than doubled during the same time frame,” an Ernst and Young executive told CNBC. The government also plans to spend $70 billion on infrastructure by 2035. Only 20% of Colombia’s roads are paved, so there is plenty of low-hanging fruit.


Only 20% of Colombia’s roads are paved


A peace deal could open up significant opportunities in tourism and mining. In part thanks to increased stability, analysts estimate the number of tourists visiting Colombia could rise by 50% by 2020. The appeal of a city like Medellín—which the New York Times profiled as an up-and-coming destination last year—foreshadows how peace and investment could attract tourists more broadly. An end to the conflict could also open up development of some of Colombia’s previously under-tapped gold and copper reserves.

In addition to opportunities in tourism and mining, the country has a wealth of agricultural land waiting to be put to use. Coffee and palm oil are two booming sectors, but there are other possibilities as well. One potential source of growth is marijuana, a crop that the country is geographically well suited for. The government has already granted licenses to produce and export marijuana derivatives, and more are expected soon.


One potential source of growth is marijuana, a crop that the country is geographically well suited for.


As noted in the Wall Street Journal, “Fourteen countries that have opened up to medicinal marijuana imports including the U.S., Canada, Germany, Spain and Holland are being looked at as prospective customers.” As one businessman put it, “It’s health; it’s science; it’s the opportunity to redeem the name of the country.” Growers are hoping to produce the plant at a tenth of the cost its Canadian and American peers manage.

Also related to trade, Colombia is a member of the promising Pacific Alliance trade bloc, along with Chile, Mexico, and Peru. Together, they represent over a third of Latin America’s GDP and are cooperating to implement reforms that could give an economic boost to them all. And let’s not forget that Colombia has both Caribbean and Pacific coasts, providing it unique access to both Eastern and Western markets.

The country’s leadership is also proving effective at handling crises as they arise. For instance, thanks in part to proactive public health efforts, the domestic spread of the Zika virus has been less devastating than originally feared. While Colombians have suffered 100,000 Zika infections—the second-most in Latin America—the country was able to declare the epidemic over in July—the first in the region to do so. Officials had originally expected the virus would affect 700,000 people.

If the Colombian story is looking positive from a bird’s eye view, it looks even better to its Venezuelan neighbors. Desperate for supplies as their own country suffers from widespread shortages, they have flocked across the Colombian border to secure necessities like food and medicine. Closed by Venezuelan President Maduro last year, the border is now being permanently re-opened.

Crowd

Despite the progress to peace—both domestically and with its eastern neighbor—not everything is positive about the Colombian economy. In particular, the oil price drop has hit Colombia hard. Oil historically accounts for around one-fifth of the country’s government revenue, and two-fifths of its exports. The downturn has driven a nearly 4% budget deficit and the loss of 40,000 jobs. Since August 2012, the value of the Colombian peso has dropped 60% against the dollar. Now, policymakers are scrambling to make up the lost revenue.

Moreover, as droughts associated with El Niño drove up food prices, the country’s inflation rate jumped to 8.6%. The sharp decline in the peso, thanks to the oil bust, has also raised costs for imported goods. To beat back rising prices, the central bank has had to hike interest rates eleven months in a row. As typically happens when rates rise dramatically, economic activity has slowed.

And peace, while looking likely, is far from certain. For one, it is not clear that the electorate will vote to accept the FARC peace deal. While recent polls suggest popular opinion turning in favor of the deal, a couple of prior surveys had signaled majority opposition to the measure, with conservative politicians arguing that it is too favorable to the rebels. There are also significant concerns about electoral fraud, and distrust of politicians on both sides is widespread.

Boat

A failure to cement the deal could hurt the country’s economic plans and credit ratings. And even if the settlement is finalized, mopping up the damage will be an imposing burden in itself: officials are already working hard on the complex task of restituting land that citizens fled during the conflict, and have hatched a plan to clear out landmines placed during the hostilities. The weak economy will constrain the government’s ability to fund a peace that could cost as much as $90 billion to implement.

Despite these challenges, many Colombians are optimistic, and for good reason. As the political scientist Alejo Vargas put it, “Even if it’s not the final deal, we can say without a doubt the process is irreversible now.” The progress is real. “This is a transcendent step,” he added.

Africa’s Great Hope Stumbles

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On June 15th, Nigeria’s central bank announced it would abandon its currency’s dollar peg. Since then, the naira has fallen 61% against the US dollar, generating difficulties for both foreign and domestic businesses in Africa’s most populous country. Nestle Nigeria, for instance, saw a 94% drop in profits as the currency depreciated. The currency’s move also led to Nigeria losing its title as Africa’s largest economy – a symbolic downgrade that succinctly summarizes the many challenges facing the country.

Perhaps the most disruptive development in the Nigerian economy over the past five years has been the drop in the price of oil, which accounts for 70% of government revenue and 95% of export income. As oil prices fell from over $100 a barrel in June, 2014 to under $50 today, government revenues plunged, leaving Nigeria with a $7 billion budget deficit.


The currency’s move also led to Nigeria losing its title as Africa’s largest economy.


Amidst the decline in oil revenue, the government’s prolonged peg of the currency to the dollar led to foreign exchange shortfalls and import barriers—on items including margarine, private jets, wooden doors, and even toothpicks—significantly hurting both local and multinational businesses.

These measures drove airlines including United and Iberia to cut off routes to Nigeria. They also left domestic operators with painful fuel shortages. Business in other industries suffered as well, with companies like Nestle’s Nigerian operation struggling to access foreign exchange and the Africa President of Unilever calling the maintenance of the policies “very insane.”

Meanwhile, militants known as the Niger Delta Avengers have blown up pipelines, helping strip Nigeria of its title as Africa’s largest oil producer. Sabotage has cost the country 700,000 barrels per day, sending the country’s output down to its lowest level in almost three decades. Shell’s production in Nigeria dropped 24% between the first and second quarters of this year alone. The government has engaged the militants in peace talks (as well as paying them stipends), but analysts are not optimistic that peace is imminent.

Islam

In the north, the military continues to battle Boko Haram terrorists, whose violence has displaced 2.2 million people. At the same time, regional tensions have erupted elsewhere in the country, including land disputes that have killed more people this year than Boko Haram.

Given this backdrop, it shouldn’t be a surprise that the economy is in tatters. Growth slowed from 6.3% in 2014 to 2.8% last year, and the IMF says the economy could shrink by 1.8% in 2016. In June, inflation rose to an 11-year high of 16.5%, while business confidence has hit all-time lows. The unemployment rate is over 12%, and major electricity companies are threatening to cut off power if the government does not pay them the hundreds of millions of dollars it owes.

If all that wasn’t enough, a moth ravaged the tomato crop in the northern Nigerian state of Kaduna, driving up the local price of a basket of tomatoes from as little as 300 naira to 42,000—a 14,000% increase (and, incidentally, sparking ill-will towards the decadent annual tomato-throwing festival in Spain on social media). Locals called it “Tomato Ebola,” and the regional government declared a state of emergency.

tomatoes

The slowing economy is particularly problematic for a country that is adding 13,000 new people to its population every day. By 2050, the country is expected to have roughly 400 million people, surpassing the US and only trailing the populations of India and China. By 2100, that figure could near 1 billion. Population density will skyrocket as well, given the country’s land area is roughly equivalent to that of Texas. With a population growing at 2.7% per year, the economy needs to maintain that level of growth just to tread water, let alone improve the incomes of its citizens.

One impediment to growth has been corruption. Nigeria lies in the bottom 20% of nations on Transparency International’s Corruption Perceptions Index. Muhammadu Buhari, who was elected president with a mandate to crack down, seems to have made some progress. In June, the government announced it had seized over $10 billion dollars worth of stolen wealth. But some are skeptical of this figure, noting only $600 million had actually been repatriated so far.

Despite the gloomy news, there are signs of hope for Nigeria’s economy. While painful, the plunge in the currency could be an opportunity for entrepreneurs and exporters who have costs in naira and revenues in foreign currencies. It might also help local industries as Nigerians substitute domestically produced goods for foreign imports.

leader

Another bright spot is the development of Nigeria’s petroleum refining infrastructure. Today, the country produces more crude oil than it can process. Ironically, this means that even as Nigeria exports crude oil, it is dependent upon imports to meet domestic gasoline consumption demands.

Aliko Dangote, Africa’s richest man, is constructing a refinery that could “satisfy Nigeria’s daily requirement of 445,000 to 550,000 barrels of fuel, with spare capacity to export,” according to CNN. This could improve the country’s trade balance while making shortages induced by currency fluctuations less likely.

An expansion in access to information technology could also be a boon for business. This year, the price of data for the country’s nearly 100 million mobile internet users has plunged dramatically as the market was deregulated and competition grew. According to Quartz, the price of 500 megabytes fell 50% in a single month this spring—but it still needs to fall much farther to enable mass consumption.


The price of data for the country’s nearly 100 million mobile internet users has plunged dramatically.


Infrastructure investment will also drive growth. This June, a US fund announced it would raise $2 billion to fund projects in the country—a drop in the bucket of Nigeria’s $300 billion infrastructure deficit, but nevertheless a positive sign of Nigeria’s potential to attract capital even amid turmoil. The state has also announced fiscal spending to offset the downturn.

So while pessimism abounds, it is crucial to keep our eyes on the bright spots in Nigeria’s economy. We write off and ignore the country at our own peril; it could very well become a 22nd century superpower.  As the Nigerian businessman Tony Elumelu said, “Today we may appear young and people may not believe in us, but we are going to compel them to believe in us through our achievement.”

 

 

Chile’s Economic Chill

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From Asia and Africa to Europe and the Americas, economic pessimism is running rampant. Chile has not been immune.

As the world’s largest producer of copper, the Latin American country has been hit hard by the dramatic slump in prices. And it's not just that Chile is a big player in the copper market; the copper industry is a big player in the Chilean economy. As noted by Stratfor, “49 percent of the country's exports are related to the copper industry, and mining activities account for about 14 percent of Chile's gross domestic product.”

The outlook for copper prices is not rosy: supply is expanding while demand slows. Analysts are warning that robust supply growth is likely to keep prices low for some time to come. Meanwhile, China, the world's largest consumer of copper, is enduring a rapid economic deceleration that has dampened its appetite for the metal.

Despite this slowdown, thanks to decades of economic progress, there is a large and growing middle class of consumers in the emerging markets that is demanding more and more protein. Chile is well positioned to capture some of this demand: it’s the world’s second largest producer of salmon, behind Norway. Unfortunately, an algal bloom has devastated the country’s salmon farms, killing 20 percent of their fish. Salmon exports were also hit by currency fluctuations and concerns about the use of antibiotics in fish farming.

Salmonfarms

If plunging copper prices and dead fish weren’t enough, a corruption scandal has hit the country’s political class. The public prosecutor has charged that SQM, a fertilizer and lithium producer, bribed politicians from all major parties. Amidst this political and economic turmoil, business confidence has dipped below levels seen in the global financial crisis, and unemployment is rising.

Despite the gloom, Chile has fundamental strengths.  For one, Chile has world-class institutions.  Despite the ongoing corruption scandal, the country ranks 23rd on Transparency International’s Corruption Perceptions Index, tied with France and close behind places like Ireland, Hong Kong, and the United States.  Moreover, the Heritage Foundation ranks Chile’s economy the 7th freest in the world, ahead of Ireland, the United Kingdom, and the United States.  The country’s central bank is a model for similar economies.  And a fiscal surplus rule has limited what it can spend from resource windfalls.


The Heritage Foundation ranks Chile’s economy as the 7th freest in the world, ahead of Ireland, the United Kingdom, and the United States.


And despite the short-term difficulties in major Chilean industries, its economic potential inspires hope. Chile’s copper mines may have a cloudy future, but the country has other commodities. Chile contains over half of the world’s lithium reserves and is the world's lowest-cost producer. And because lithium is a key ingredient in batteriesused in everything from smartphones to electric cars, demand is slated to explode—potentially tripling by 2025. Although the exploitation of these resources has seen significant hiccups, they can be a source of prosperity in the coming years.

Chile also has abundant renewable energy, with solar capacity quadrupling since 2013.  The country has 29 solar farms, with 15 more on the way.  According to Bloomberg, solar was so abundant that the price of energy fell to zero on 113 days this year through April.

And while the salmon industry may be suffering today, it would be imprudent to think it won't rebound. The industry has resolved to reduce its reliance on antibiotics, a move that could stoke demand from consumers conscious of the risks associated with the drugs.

Another bright spot in the nation’s culinary offerings is wine.  Chile’s geography is almost ideal for vineyards, whose cultivation area has grown 25 percent in the last five years.  The country supplies more wine to Japan than France, and its sales to China rose by 53 percent in 2015.

WINE

Chile has also made an admirable effort to spark a startup tech sector over the past five years. The government launched Start-Up Chile, a program that incentivizes entrepreneurs to run their young businesses in the country for at least six months. To date, the initiative has taken on over 1,000 companies, and some locals now even speak of a “Chilecon Valley." While most firms leave after the short required period, proponents say the program could be priming the pump for future dynamism, “[changing] Chileans’ attitudes and [providing] them with a global network of business contacts.”

Also promising is Chile’s membership in the Pacific Alliance, a trade bloc that also includes Colombia, Mexico, and Peru.  Labeled "the most important alliance you've never heard of" by the Atlantic Magazine, the group of countries represent 38 percent of the region’s GDP and are coordinating economic reforms, including slashing tariffs and easing travel between the countries.  The alliance might serve as a gateway for Asia to do business with Latin America.

So while the country’s economic mood is bleak, we shouldn’t miss the big picture: Chile is a stable, free country with promising opportunities for growth…and it’s only a matter of time before Chile’s economic chill thaws.

 

South African Blues

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South Africans went to the polls today to vote in municipal elections. Local politics may sound insignificant, but the world is watching.  That’s because the African National Congress is facing some of the toughest electoral challenges it’s seen since it won power in 1994, marking the end of the era of apartheid.

Urban voters in particular could help to erode the ruling party’s power. Onlookers think the ANC could lose Johannesburg—the nation’s largest city—and the municipality that includes Pretoria, one of its three capitals.  Large ANC losses could set it up for an even greater challenge in the 2019 general actions. Its rivals include the centrist Democratic Alliance and the radical Economic Freedom Fighters.

Political scandals and economic weakness have driven the party of Nelson Mandela to this moment of reckoning.

RED

For one, many voters are fed up with the perceived misconduct of ANC leader Jacob Zuma.  His most high-profile scandal involved the improper use of state money to make improvements to his private home.  As a result, he has been ordered to pay back hundreds of thousands of dollars. Rather than doing so quickly, he dragged his feet for quite a while.  In April, the National Assembly called a vote to impeach the president after a court ruling that Zuma had failed to uphold the constitution by keeping the funds.

Critics have also accused Zuma of granting too much influence to the wealthy Gupta brothers, a family of business magnates with stakes in industries ranging from mining and engineering to technology and media. For instance, a government official claimedone of the Guptas had offered him the position of finance minister in the president’s government. Two of the brothers have since left the country.  These are only a couple of the manifold scandals that have dotted Zuma’s career.

Disillusionment with politics isn’t the only reason voters may turn their backs on the ANC.  The weak economy is another important factor, driven in part by the slowdown in China, South Africa’s biggest trading partner since 2008.

The Middle Kingdom's economic deceleration has had a major impact on commodity prices, which play a big role in South Africa's economy.  Mining makes up 60% of the country's exports and contributes 8% of its GDP, with another 10% coming from related industries.  Key metals and minerals mined include gold, platinum, iron, and coal. China's slowing appetite for these and other commodities has hurt the sector.  Between 2012 and 2015, mining employment fell by 47,000.  And because commodities make up such a big percentage of the country’s exports, the price decline has hurt its currency: since August 2014, the rand has fallen 30% against the dollar.


Mining makes up 60% of South African exports and contributes 8% of the country’s GDP


The price of platinum, for instance, has fallen from its 2011 peak of over $1,850 per ounce to under $1,200 today.  As the world’s biggest producer, this decline hits South Africa the hardest: in 2015, 73% of platinum mining production came from South Africa, and the country is estimated to control 95% of the world’s platinum group metal reserves.

Low prices aren’t the only factor hurting the economy, though.  The country’s mining industry has also been plagued by labor unrest.  Meanwhile, a drought has inflated food prices, while electricity shortfalls have led to blackouts and stunted growth.  All things considered, the IMF predicts South Africa will grow just .1% this year.  Investors should take note, as the country makes up 7.31% of the MSCI Emerging Markets Index.

In addition to global price fluctuations, there are also long-term structural issues plaguing South Africa’s economy and society. The unemployment rate is 27%, and 48% for blacks between the ages of 20 and 24.  And there are huge disparities between blacks and whites: the overall unemployment rate for the former is 30%; for the latter, 7%.  More than 20 years after apartheid ended, racial tensions remain a part of everyday life in the country.  Further, South Africa is one of the most unequal countries in the world, with the top 10% controlling as much as 65% of the wealth.

Rally

Are there any bright spots on the horizon?  Thanks to rising global uncertainty, the price of gold has surged 26% since the start of the year. Unfortunately, South Africa is not the major player in the yellow metal it once was: it is the source of only 6% of the world’s gold, its production declining by 85% since 1980.  Still, the rising price could give the sector a welcome boost.

Even more encouraging has been the legal institutions' handling of the Zuma corruption probe.  The president’s agreement to pay back the misdirected funds is a testament to the independence of the country’s judiciary, an important asset for the flourishing of a country.

Further, a broader measure of South Africa’s institutions—The Heritage Foundation’s Index of Economic Freedom—puts it ahead of 85% of its African peers. Another bright spot in the economy is wine production. According to CNN, the country produces 4% of the world’s wine, and volume grew 20% over the past four years. On top of that, the industry’s contribution to GDP has grown at least 10% every year since 2003. So if you want to pitch in to South Africa’s recovery, maybe share a bottle from the Constantia Valley with friends this weekend.

Wine

Whatever happens in today’s election, much work remains to be done to heal South Africa’s economy and society. Despite the clouds over South Africa’s horizons, we should pause and reflect on its potential. As Nelson Mandela said in a documentary from 1994, the year of his election, “Do not judge me by my successes, judge me by how many times I fell down and got back up again.” Evaluating the country by Mandela’s criteria, the opportunity for South Africa is tremendous.

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