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UK Gross Domestic Product (GDP)

‘If UK GDP increases over time, this implies the welfare of its residents improves’. Discuss.
“Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country during a given time period- usually a year” (Parkin et al, 2008). This means that everything made within the country, as long as it is a final good, contributes towards the GDP. Wealth is defined as “the value of all the things that people own” (Parkin et al 2008). Welfare of residents refers to the overall living standards and income a household or individual receives, this is similar to GDP but is individual rather than referring to the whole nation. This is important as the wealth of a nation is not divided equally between all the residents. This inequality is depicted using the Lorenz Curve, which shows the cumulative percentage of income against the cumulative percentage of households (Parkin et al, 2008). The same curve can be drawn for the distribution of wealth; this curved will be bowed further as wealth is even more unevenly distributed than income.
Fig20 The positive link between the welfare of residents and GDP can be seen on the assumption that “our living standards (welfare of residents) rises when our income rise and we can afford to buy more goods and services” (Parkin et al, 2008). When incomes increase then the total output of the country must also increase because in order for individuals to earn more money the economy must be growing, if the nation is producing more goods and services then there is more for the consumer to buy and also more choice in the market. This increases welfare because an increase in selection of goods and services improves quality of life. Increasing the total number of goods and services also decreases unemployment, firstly because in order to create more goods we need a bigger workforce, but in doing so, the newly employed also increase their income, meaning they have more disposable income to spend on goods and services, increasing demand further. Okun says “that for every 3% GDP falls relative to potential GDP, that unemployment of the total workforce rises 1%. When the economy operates at productive capacity, it will experience the natural rate of unemployment” (Anderton, 2006). So when there are unemployed resources in the economy then GDP is below potential GDP which means the economy is losing on potential GDP, as illustrated using the Lucas Wedge (Figure 2).
However, although there is a correlation between GDP and Welfare it’s not as clean cut as all that. As a general rule and for the majority of people the welfare does increase with an increase in GDP but in some cases when GDP for a country increases the welfare of its inhabitants can remain the same (or become relatively worse by comparison). “Social welfare cannot be the “sum” of all individuals’ welfare (or “utility”) because such an addition is meaningless” (Lemieux, 2006). Here Summer simply states that GDP cannot equal social welfare, this is because GDP is an average index which is a total of all services and goods sold, but welfare is referring to the people as individuals, and although we may have produced more goods and services we are not sure what has happened in comparison with the welfare of a person. If the country is producing more the supply will be trying to meet demand, this will change the equilibrium point and the price level will change (i.e. Inflation). However, if the wages of the residents do not change to make way for this rise in inflation then there welfare has decreased and they become worse off, this contradicts the statement that an increase in GDP will increase welfare of residents.
If the GDP increases then the average welfare increases, but the average does not mean everyone has gained. If the UK national wealth increases, this can be in small areas, for instance the South is a more prosperous area than the North. With this in mind we must realise that if there was a sudden increase in production in the South of England that the wealth of those who live there will increase along with GDP but the people living in the North will not be affected by this. This is because there will be no direct involvement with new increase in production, i.e. wages and new labour demands are tied to location, and although an individual may move down to the south in order to get the job, the vast majority will remain in the north, and therefore even though GDP increases it is area specific, it will discount the rest of countries population and wealth, and therefore in comparison to GDP, actual wealth will decrease although there has been no actual change.
The Lorenz Curve (Figure 2) shows the distribution of wealth as well as income. Wealth is distributed even less equally than income; therefore the curve will be even more bowed. The distribution of wealth is very important when considering the affects GDP has on welfare, when GDP is increasing. If GDP is increasing by 5% then let’s assume that wealth is also increasing by 5% too. However, this is not fairly distributed between all people, so the lower 20% of the population may only share 5% of the overall wealth. Therefore an increase of 5% would only result in the lower 20% gaining a 0.25% increase in wealth. GDP only provides an estimate as to what would happen to the residents’ welfare, not providing an accurate account of what is going on. The distribution of wealth is not considered in the GDP calculation making this method seriously flawed, this links back to the Lorenz Curve.
“NNP (Net National Product) is an even better measure of welfare because it captures the level of net income created by and available to the individuals living in a country” (Spant, 2003). Gross Domestic Product calculates the total products and services created in a country. The problem occurs because some countries have a large Foreign Investment; therefore the figures calculated in the Gross Domestic Product are an inaccurate measure of the welfare of the people living in the country, as the GDP may not reflect the residents’ income or wealth, but show the wealth of a country from contributions made by other nations. Gross measures are aimed at showing the production a country has as compared to Net figures which concentrate on the welfare of citizens. GDP does this because of the inclusion of FDI (Foreign Direct Investment), although including this shows that the output of a country is rising it does not mean to say that the welfare has increased too.
“Using GDP overestimates the real rate of economic growth” (Spant, 2003). GDP also ignores depreciation and therefore is not a reliable source of information for the UK economy (in terms of wealth, at least), because of this we have to ignore the assumption that when GDP increases so does welfare. Using a different measure would be a more accurate source if ones intentions were to find the residents’ welfare.
Green Net National Product (GNNP) is a proposed new measure that should be considered as a new measure to go alongside GDP, the advantages of using GNNP is that as well as removing depreciation is also considers what services and goods are being produced. For example if military material is being produced then this does not really increase the welfare of residents, for example, if the tanks that are being produced to fight a war outside of the country then this does not increase the welfare of the citizens, however, if instead houses are being built then this does increase the welfare of residents as this directly is improving living conditions within the country (Stiglitz, 2006). This would provide a much more accurate measure for welfare; however it would also require much more calculation as you would need to work out what services and products were providing benefit to the welfare of people.
Another difference between GDP and GNNP is that the latter takes into account the depletion of Natural Resources. Therefore in the UK when the coal mines where closed although this produced a decrease in GDP and welfare of those employed, it would have caused the GNNP either to decrease slightly or possibly rise as the side effects of mining are massive towards the environment, therefore we can argue that welfare increased, although income decreased as people were living in a healthier environment.
Human Development Index (HDI) is a collection of measures that can provide a better insight into the welfare; the index is compiled using data such as the mortality rates and birth rates, literacy levels and income using real GDP. This is more beneficial in terms of a measure of welfare as it takes into account more than just GDP; it takes in educational and health factors which heavily contribute towards the welfare of a person. This would be better than relying on just GDP alone, because at the end of the day we need to have more information that just average income. Using the Green Net National Product we see the a country has actually improved welfare standards, because the services and products included in the total to calculate GNNP only include ones that help increase the welfare and services that affect the welfare of residents, as to when we use Gross Domestic Product all we see is that the total of goods and services produced has risen for the country yet it does not specify what goods and services they were.
Perhaps a combination of GNNP and HDI would give an even better evaluation of an economy, i.e. swapping GDP out of the Human Development Index and replacing it with Green Net National Product. This would not only then look at the Human Development factors, that are already covered in the HDI, but would also portray a more detailed income-to-welfare ratio as GNNP is a more accurate measure of a countries self investment. Using a combination of these factors would surely be the most logical choice as it will give a much better picture as to what extent human welfare is actually increasing by (Stiglitz, 2006). Therefore we can say that with an increase in Green Net National Product in the UK will increase the welfare of residents’.
Anderton, A (2006). Economics. 4th ed. Cambridge: Causeway Press.
Lemieux, P. (2006). Social Welfare, State Intervention, and Value Judgments. The Independent Review. 11 (1), 19-36.
Lorenz, M. (2009). Lorenz Curve. Available: Last accessed 04 Dec 2009.
Parkin et al (2008). Economics. 7th ed. Harlow: Pearson Education Limited. 412-471.
Spant, R. (2003). Why Net Domestic Product Should Replace Gross Domestic Product as a Measure of Economic Growth. Confederation of Professional Employees (TCO). 7 (3), 40.
Stiglitz, J. (2006). Good Numbers Gone Bad. Available: Last accessed 04 Dec 2009.

Challenges Faced By Social Entrepreneurs In India

India achieved an average growth rate of 7.7% from 2002-07; however the dividends of this growth have not trickled down to the bottom of the pyramid (Planning Commission of India 2007). According to UNICEF, 42% of India’s population is below the international poverty line of US$1.25 per day (UNICEF 2005). [1] India’s Eleventh Five Year Plan (2007-12) aims to reduce the head-count ratio of consumption poverty by 10 percentage points. However, to solve complex problems such as poverty the government, business and citizen sector need to work together and create innovative solution to pressing problems. In fact, Indian government has recognized the positive impact of citizen sector and has provided increasing levels of funding, under the five-year plans. It is estimated that India has 1.2 million to 1.5 million Non-Governmental Organizations (NGOs) operating currently. The purpose of this paper is to highlight the legal, tax and regulatory challenges faced by social enterprises and recommends policy action. The paper is organized as follows: Section II puts forward a definition for social entrepreneur; Section III features two pioneering social entrepreneurs; Section IV focuses on the challenges faced by social entrepreneurs in India; and Section V provides recommendations to counter these challenges.
II. DEFINITION OF SOCIAL ENTREPRENEUR Social entrepreneurs are not the creation of the modern society. Historically, individuals and groups have combined the concept of entrepreneurship with social value creation to transform a current state of ‘unjust equilibrium’ for a targeted group of society (Roger and Osberg 2007). For example, Florence Nightingale built the foundation for the modern nursing profession at a time when nursing was not considered a respectable profession and lacked any codes, ethics and formal training. Further, this phenomenon was not limited to the developed world even the developing world had its share of social innovators. In 1920s, Jamnalal Bajal, founding father of a successful Indian enterprise Bajaj Group [2] , popularized the importance of business ethics and launched social initiatives to eradicate the malice against ‘untouchables’ in Indian society. While social entrepreneurs have existed throughout history, the concept of social entrepreneurship is a relatively recent one. Drawing from social entrepreneurship literature, following are five key components of the concept: (1) creating social value that transforms the lives of those who lack the capacity to change the social and economic ecosystem (2) recognizing and capitalizing on the opportunity embedded in the current state of affairs (3) innovating and dislodging the present system of doing things (4) willing to take risk in this process and undeterred by scarcity of resources (5) forging a new, stable equilibrium that uplifts the lives of the targeted group and expanding this cycle to other geographical locations (Peredo and McLean 2006) (Roger and Osberg 2007) (Bolton and Thompson 2004). Having emphasized the social entrepreneurs of the past, it is fitting to draw attention to their modern counterparts.
III. SUCCESS STORIES OF INDIAN SOCIAL ENTREPRENEURS Vikram Akula, SKS Microfinance In 2006, Vikram was named by TIME Magazine as one of the world’s 100 most influential people and was awarded Social Entrepreneur of the Year by Schwab Foundation. Vikram recognized that the traditional banking institutions in India failed to reach out to millions of poor due to lack of collateral and high transaction cost; forcing the poor to be trapped in the vicious cycle of small debt-heavy interest by exploitative money lenders.
Vikram launched SKS Microfinance in 1997. SKS Microfinance applies global business best practices to the field of microfinance. It was launched to address a fundamental flaw in microfinance, namely, the inability to scale to large numbers. SKS has overcome this challenge by applying three innovative principles: using a profit-oriented model to overcome capital constraints; leveraging best practices for scaling from the business world to overcome capacity constraint; and using technology to automate processes and lower costs. SKS’ commercial model has led to sustained growth rates of more than 128% and as of November 2009, SKS had US$ 641 million worth of outstanding loans to more than 5.3 million poor women. SKS Microfinance is a recipient of the Grameen Foundation USA Excellence Award, CGAP Pro-Poor Innovation Award, and Digital Partners SEL Award (SKS Microfinance 2008).
Harish Hande, SELCO Dr. Harish Hande is widely recognized as an international expert in the field of renewable energy. He is also a recipient of the Social Entrepreneur of the Year 2007 by Schwab Foundation. For him the fact- that 57% of India’s population did not have electricity was an opportunity to create affordable solar light system for the poor. To do so, he formed SELCO and pioneered linkages between technology, financing, energy services, income generation and quality of life. With the help of innovative financing, poor can get access to solar light system and are empowered to improve their quality of life by better education outcomes and additional income through the new found resource. SELCO has reached 80,000 clients across Karnataka and Kerala, and has recently moved into Gujarat (Schwab Foundation 2007).
These enterprises were, and remain, lucky to attract premier venture capitalists (including Vinod Khosla, founder of Sun Microsystems, and Sequoia Capital) to invest in their ventures. Most of the social enterprises face multiple barriers to entry – access to finance, bureaucratic delays, taxation and so on. The subsequent section elaborates on the challenges faced by Indian social entrepreneurs.
IV. CHALLENGES FACING SOCIAL ENTREPRENEURS IN INDIA This section draws heavily on the study conducted by Schwab Foundation in 2005; the report “Fostering Social Entrepreneurship” is based on surveys and interviews of social entrepreneurs in India and other jurisdictions (Schwab Foundation 2007). There are many factors which may potentially enhance or inhibit the development of a social enterprise in a country. These include social attitudes, religious beliefs and prevailing cultural factors. In addition, legal, regulatory and taxation rules will also play an important role. However, this paper focuses on the legal, tax and regulatory barriers as these fall under the direct policy realm and thus can be transformed. Below is a brief description of the key challenges highlighted in this paper:
(a) Forms of establishment and Access to finance: Firstly, lack of standardized legal model for social enterprise is a common flaw in most countries. Secondly, access to finance is often a major issue given the weak business model and the associated risks.
(b) Taxation: While non-profit organizations are exempt from taxes, tax authorities have not come to terms with social enterprises with profit motive.
(c) Bureaucracy/Regulation: Burden of regulation and bureaucracy is often regarded as excessive especially for small and medium scale social enterprises.
Forms of establishment and Access to finance Indian legal system offers a vast range of legal frameworks to organize economic and social activity. However, there is a lack of a specific coherent legal model for social enterprises. Social enterprises created for charitable or religious purposes or for the promotion of science, literature, education, sports, or fine arts can be registered as charitable and educational societies; trusts; or as companies licensed under section 25 of the Companies Act (1956). On the other hand, the informal institutions that undertake microfinance services as their main activity are generally referred to as micro Finance Institutions (“mFIs”). (Schwab Foundation 2006)
Any entity can choose a mix of equity, debt and grants (or donations) to further its goals. However, finding venture capitalists and shareholders willing to take on the higher risks involved in a social enterprise is difficult. Further, banks and other financial institutions are averse to granting loans to social enterprises given their low asset base and profit margins. Despite, the above challenges it is the regulation controlling foreign contributions which has been regarded as the biggest hindrance by social entrepreneurs in the survey conducted by Schwab Foundation. Under the Foreign Contribution Regulation Act (1976) (“FCRA”), no association which has a definite cultural, economic, educational, religious or social programme can accept foreign contributions unless such an association is registered with the Central Government. Further, Central Government registers an entity only after three years of entity’s existence. This makes the struggle for survival in the crucial initial years steeper. Lastly, if an entity is not registered with the Central Government, it may accept foreign contribution only after obtaining the prior permission of the Central Government. The association has to furnish information to the Central Government with regard to the amount, source and manner, in which the foreign contribution is received, and the purpose for which and the manner in which such foreign contribution will be utilized (ibid.).
Taxation The Indian Tax Act (1961), states that entities set up for “charitable purpose” are exempt from tax, provided their activities fall under any of these four heads: (i) relief of the poor; (ii) education; (iii) medical relief; and (iv) advancement of any object of general public utility. In addition, upon fulfillment of certain conditions, the income from property held for charitable or religious purposes is also exempt from tax. Further, fiscal incentives and concessions may be granted to entities set up for certain purposes such as charitable or educational purposes, infrastructure services and to induce relocation of industries to developing areas. However, by law charitable or educational societies are not-for-profit entities and any profits earned must be deployed back in the organization and not distributed amongst members. This creates tax consequences for entities that are able to generate profits through their operations (Schwab Foundation 2006).
Moreover, the tax reforms in 2001 (Finance Act 2001 and 2002) reduced the percentage of accumulated profits that could be carried forward as well as the timeframe for such appropriations (Ministry of Home Affairs, India 2002). [3] This reduction in the time has an important impact in the ability of social enterprises to expand. The Act also provided that the accumulated endowment money can only be invested in government securities (which yield a very low rate of return). It is therefore not surprising that taxation issue is highlighted in the social entrepreneur interviews conducted by Schwab Foundation.
Bureaucracy/Regulation Currently, there are several pieces of legislation concerning incorporation, compliance and monitoring of social enterprises and these are overseen by different departments in various government ministries. Further, due to limited use of e-government platforms and lack of communication between various government ministries the entrepreneurs struggle to obtain simple clearances and exemptions. In the survey conducted by the Schwab foundation, [the] “extensive reporting requirements if an organisation receives grants from the Indian government or from external organisations” is cited as a hindrance to promotion of social entrepreneurship (Schwab Foundation 2006). [4]
V. RECOMMENDATIONS Consolidation of legislation and creation of mega-regulator As elaborated earlier in the paper, Indian social entrepreneurs have to deal with government departments at national, state and local level to obtain various clearances. For instance, a social enterprise operating in a cluster of villages has to be registered with Central government body to obtain foreign donations. Therefore, simplifying and consolidating the legislation and reducing red-tape are the crucial first steps. In order to simplify matters, existing legislation for the incorporation and governance of social enterprises should be reviewed, consolidated and amended on a national level so that the regulations governing social enterprises can be standardized and more easily understood by those who want to become involved in this sector (Schwab Foundation 2006). Further, to ensure transparency and accountability in the operations of a social enterprise widely accepted systems, procedures and standards must also be set. Next, a mega-regulatory body must be created that acts as a single window for incorporation, approval, monitoring and compliance. This body should have state-level centres to reach out to remote parts of the country. These measures would reduce the transaction cost for entrepreneurs and the information asymmetry between regulators and entrepreneurs (regarding various rules enterprises have to abide by).
Taxation and Restriction under the FCRA The narrow classification of charitable and educational societies and requirement to operate as non-profit to obtain tax exemption stifles innovation in this sector. Further, bureaucratic delays in issuing tax-exemption certificates lead to a cycle of excess-taxation followed by slow refunds. The tax law should be based on the understanding and appreciation of the business model a social enterprise. Research and international case studies must be the basis for tax reforms in the social enterprise sector. The objective is to have a set of simple and standardized rules and initiate the use of e-government tools government wide.
The Home Ministry, which is currently in charge of the FCRA regulation, prohibits entities with less than three years of existence and unregistered, with the Ministry, from obtaining foreign contributions. Access to finance is critical in the start up phase therefore this regulation should remove the three year requirement. Further, the responsibility this portfolio should fall under Finance Ministry as it is in the interests of the Finance Ministry to encourage the growth of social enterprise (Schwab Foundation 2007).
Capacity building and information technology To initiate dialogue between social entrepreneurs and government an enterprise developmental agency should be established. The goal of such an agency is to create partnership (between entrepreneurs and government), help enterprises in financing, capabilities and management development, technology and innovation, and access to markets. The agency should place leading social and corporate entrepreneurs, academicians, lawyers and other professionals on its board to attain credibility and direction. SPRING Singapore is one such example; the agency focuses on growing innovative companies and fostering a competitive SME sector in Singapore (SPRING Singapore 2009). Lastly, E-government tools can improve productivity, inform entrepreneurs of the regulatory issues, reduce rent-seeking (bribes) by officials and open communication line between entrepreneurs and government.
VI. CONCLUSION Indian social enterprise sector has witnessed growth despite the odds against it. To promote the growth of this sector it is critical to understand the economics and value-creation model of social enterprises. The legal, tax and regulatory ecosystem must be consistent with business models of social enterprises. Further, adoption of information technology and e-governance are important to facilitate engagement, capacity building and monitoring of social enterprises. (Word Count: 2,312)