Thursday, November 17, 2005

A reply to Worstall

There has been a wee flurry of comment over some of my points on free trade. I'll reply at greater length soon but I would like to take issue with one of Mr Worstall's assertions.

I doubt that there is actually a developing country with a multi-national with turnover twice GDP actually in its territory.

If by 'in its territory' he means 'has its headquarters' is probably right. If he simply means operating in (as I did) then he is sadly quite wrong, as this depressing account shows.

It also illustrates my point perfectly. Sao Tome has been hit by a wall of prosperity, leaving an inexperienced government ill-equipped to deal with this amount of money - chiefly due to underdeveloped institutions. Too much money, too little power in the face of it. Corruption is inevitable.


Tim Worstall said...

I meant something between the two meanings you have here.

The turnover of company x in territory y is twice the total GDP of territory y?

As I said, it’s possible but I doubt....

Dave Heasman said...

"The turnover of company x in territory y is twice the total GDP of territory y?"

But shurely the turnover would sum into the GDP? WOuldn't it? GDP isn't a net profit figure, it's a turnover figure, isn't it?

Tim Worstall said...

GDP is value added. Not the same thing as turnover at all.

For example, when shares are bought and sold, only the commission and spread go into GDP figures, not the actual amount of the transaction.

Anonymous said...

GDP and turnover (revenue) are incomparable. Trying to derive lessons about anything from that ratio is an elementary error, a howler.

Angry Economist said...

Theoretically it could happen. Of course. Turnover can relate to the total sales revenue of a business. But as the anonymous person said, they are not comparable indicators.

A common measure of GDP is value added. As Tim alluded to, value added is equivalent to the costs (or expenditure)incurred in the domestic economy on producing the goods or services plus the profits retained after selling them. The costs/expenditure of acquiring stuff from overseas does not accrue to domestic GDP.

You could have a company which imports goods that are almost finished, and merely puts them in boxes and sells them in the UK market. That way their turnover or sales revenue would be big, but their contribution to GDP would be small.

I wouldn't be surprised if this happened in places like Singapore and other small states with open economies too.

But as anonymous said, this isn't so useful in analysing what you were discussing anyway!

Corporate turnover or revenue is not GDP, and its complicated by accounting centres, transfer payments and various wheezes for corporates to keep their tax burden down.

Another problem as I see it is not so much trade controls, but corporates themselves distorting free trade by trying to break into or monopolise markets. e.g. getting folks addicted to cigarettes.

Trade controls were applied for some countries in their time - Japan for example. But these are specific examples and its hard to disentangle the effects from other policies. Trade controls per se may not guarantee modernization/industrialisation.

But (as you might have guessed!) I am an amateur in trade economics and am currently reading Bhagwati's book on Globalisation which might prove interesting.

I think there's interest in looking into the effects of restrictions on currency exchange too, out of interest, and the distortions that makes to a domestic economy.

dearieme said...

Typical bloody al-Quardian whinging: why do those fuckers never offer a sensible solution? Here's mine: Exxon-Mobil should take over Sao Tome. Buy it out: de-list it from the UN. Use the Sao Tome division as a spot to train the up-and-coming senior executives. The country would be infinitely better run, the people could be educated and protected, and so on. If the experiment didn't work very well, there's little lost because the alternative is so grim. I don't know how much experience Exxon has of this sort of thing, but they could buy some in: Shell used to run little country-ettes for its expats in hellhole countries and the system worked very well.

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