GNI And Outward FDI

etheorist is calling for a shift from measuring economic growth in terms of GDP to measuring it in terms of Gross National Income (GNI):

Some Theoretical Issues in the Malaysian Economy

…With the focus on the livelihood of Malaysia, the correct approach to measuring the improvement in the economy is the GNI or GNP, and not GDP. When the focus is on GDP, the focus tends to concentrate on foreign investors. With GNP, the focus will the opportunities that are being offered or made available to Malaysians, whether those opportunities are at home or abroad. GNP should be an integral part of the 1Malaysia concept, for it counts Malaysians whether they may be.

This makes a lot of sense, and he's absolutely right - and it also plays into what's been happening with capital outflows from Malaysia. Because GDP measures domestic output and expenditure irrespective of ownership, greater foreign investment gives the illusion that returns to Malaysians is greater than it actually is. GNI (and the similar GNP) on the other hand excludes foreign owned domestic output, but captures Malaysian owned foreign output.

Hence the PM’s projection yesterday that we need to almost triple GNI while only doubling GDP, to achieve high income status by 2020. As of 2009, GNI still trails GDP by a small but decreasing margin, testament to the level of foreign investment stock in Malaysia.

But this shift means the past decade of outward Malaysian corporate investment into China, India, Cambodia, Vietnam and especially Indonesia, will be increasingly counted in. If you think this is bad (why not invest locally?), I’m reminded of the fact that Malaysia’s domestic market is still relatively small compared to our much bigger neighbours.

A new report from the Asian Development Bank illustrates the potentialities:

The Rise of Asia’s Middle Class

...The focus on the middle class and policies for promoting it is rooted in the belief that the middle class is an important prerequisite for stronger, more sustainable economic growth and development. Economic historians such as Adelman and Morris (1967) and Landes (1998), among others, have argued that the middle class was a driving force in the faster pace of economic development in the United Kingdom and continental Europe in the 19th century. According to the “political economy” argument, societies with a small middle class are generally extremely polarized, and find it difficult to reach consensus on economic issues; they are overly focused on the redistribution of resources between the elite and the impoverished masses, each of which alternates in controlling political power. Societies with a larger middle class are much less polarized and can more easily reach consensus on a broad range of issues and decisions relevant to economic development (Alesina 1994)...

...Besides helping to reach consensus, Banerjee and Duflo (2008) have discussed three mechanisms through which a large middle class could promote development. First, the middle class may provide the entrepreneurs who create employment and productivity growth in a society. Second, “middle-class values”—that is, the values of accumulation of human capital and savings—are critical to economic growth. And third, with its willingness and ability to pay extra for higher-quality products, the middle class drives demand for high-quality consumer goods, the production of which typically presents increasing returns to scale. This encourages firms to invest in production and marketing, raising income levels for everyone.5

Another reason often cited for the importance of a large middle class is that the poor are too liquidity-constrained to accumulate human capital, a key ingredient in sustained economic development (Galor and Zeira 1993, Alesina and Rodrik 1994). As the middle class grows it raises investment in human capital and, in turn, drives national economic growth. But the causality can also go the other way, with human capital accumulation (typically education) pulling more of the poor into the middle class…

…Developing Asia’s middle class ($2–$20) has grown dramatically relative to other world regions in the last couple decades (Tables 2.1 and 2.2). While it made up only 21% of the population of the developing Asian countries in 1990 (using survey data), it more than doubled to 56% by 2008; up more than three-fold from 565 million in 1990 to 1.9 billion in 2008 in absolute terms. During the same period, developing Asia’s aggregate annual expenditure/income increased more than four-fold, from $721 billion to $3.3 trillion, about three-quarters of the region’s total. Figure 2.1 presents the global trends more vividly, showing the growth in the relative and absolute size of the middle class, as well as the growth in middle-class spending, over 1990–2008 for different world regions...

In other words, there’s a huge, rapidly growing potential market out there, and we’d better take advantage of it while we can.

A couple of cautionary notes I would add is that this outward investment will really only be a boost for corporate incomes, and not necessarily bring higher returns to domestic labour. For the latter to improve, we’ll need quite a few structural changes – but then, that’s what the NEM is supposed to be for.

Also, the level of income ADB uses to define the middle class (US$2-$20) is debatable, and its low level also means that this “middle-class” will be vulnerable to negative shocks to the Asian economy. That suggests that volatility of incomes might be higher than a purely domestic oriented development strategy.