In a recent voxeu post, Clara Capelli and Gianni Vaggi suggest another new measure – Gross National Disposable Income. This accounts for remittances in the GNP..
Traditionally, the Gross Domestic Product is the most widely accepted indicator of an economy’s size and performance, although in the last decades many contributions have suggested to adopt alternative tools to measure people’s wellbeing (see Stiglitz, Sen, and Fitoussi 2008).
The Gross National Income (GNI) is largely considered a better indicator to account for the income available to the dwellers of a country because it captures the incomes related to the mobility of factors of production (wages earned by cross-border workers, repatriated profits and dividends, etc.), the so-called Net Primary Incomes (NPI), in the Systems of National Accounts (see UN 2008 and IMF 2009).
However, GNI does not include unilateral transfers such as foreign aid and, most importantly, remittances: the so called Net Secondary Incomes (NSI). GNI accounts for the income of cross-border workers – the so called compensation of employees – but not for the money sent home by those who live and work abroad for more than one year, which are by far the largest share of remittances. Remittances have increased by approximately seven times between 1990 and 2010 (see the World Bank database); they now represent one of the largest types of monetary inflows for many developing countries and in some developing countries they can be as high as 20% of GDP.
Unilateral transfers are recorded by a third indicator, the Gross National Disposable Income (GNDI), which includes both primary and secondary distribution of income. GNDI provides a much better indicator than the GNI of the living standard of the people of a country and in many cases it should substitute for the latter measure.
The differences are huge. They rank the countries based on both absolute (table 10 and relative GNDI (table 2).
- First, the GDP and the GNI are not markedly different for either group of countries, but a striking difference arises with the GNDI, in particular for countries in Table 2: from 7% for Armenia to 75% for Liberia to 46% for Tajikistan. Most of the countries in Table 2 have both a small economy and a small population. This is not the case for Nepal, whose population exceeds 27 million and where GNDI is 25% higher than GNI. Some large countries in Table 1 have a GNDI around 10% larger than GNI. Pakistan and Bangladesh have a population of more than 150 million people and the Philippines almost 100 million. The net secondary income is clearly extremely important.
- Second, for all the countries in Table 2 the magnitude of net unilateral transfers is far higher than that of net primary income. The same is true for a number of countries in Table 1, namely Bangladesh, Egypt, India, Lebanon, Pakistan, and the Philippines.
- Third, the balances of primary and secondary incomes are quite different; due to a negative NPI in many countries, GNI is smaller than GDP, contrary to common perception. With the exception of the Philippines, the Net Primary Income is negative for all countries of Table 1. Such outflows of income are mainly due to dividends and distributed profits paid to foreign companies that have invested in the countries. In many developing countries a positive Net Secondary Balance compensates for the negative sign of the Primary Income one. India, Vietnam, Mexico, China represent in this sense very remarkable examples. In the case of Nigeria and Poland, the negative NPI is so large that the positive NSI cannot compensate for it and the GNDI is lower than the GDP.
The authors also point out the places where GNDI would be more useful as a measure..