A Conversation About GDP

While I was in Morocco, Beibit Alibekov and I got into a conversation about GDP and about how the state can best support entrepreneurs in order to grow it.

First, I explained what GDP actually is: the sum of value added plus net taxes on consumption. In essence, value added is the sum of profit and the wage bill. So to assess how much each company contributes to a country's GDP, it is enough to look at the share of the wage bill and profit in its revenue. It follows that the largest contributions to GDP come from labor-intensive companies (services, tourism, agriculture and so on), from high-margin producers, who are typically innovative and unique (any technology producers, makers of branded goods, producers in the creative economy), and from subsoil users (oil and mining companies).

The problem with labor-intensive production is that it struggles to compete with economies of scale. For example, a garment factory somewhere in Bangladesh producing millions of items will always be cheaper than ours, and it will be extremely hard for us to compete with it. So for countries with a small market and difficult export conditions, there is no point in trying to compete with large producers. Economically, this type of business offers very limited scope for raising prosperity: labor-intensive enterprises depend on cheap labor, which means there is no room for growth in these industries, since once wages rise, the enterprises become uncompetitive.

Incidentally, one of our main state programs is the "Economy of Simple Things," which mostly supports labor-intensive industries. Once state support ends, these companies will find themselves in a precarious position. That is why, in my opinion, the enterprises that it makes more sense to support are those in innovative and unique industries.

Take, for example, Beibit Alibekov's business, which consists of an advertising business and a line of clothing sold under the ALLOFF brand. Both are high-value-added businesses: advertising is purely a matter of human services, and in ALLOFF the share of physical production is no more than 25%. All ALLOFF products are sewn in line with the brand's own ethical standards, and for quality control, at a local garment factory in Talgar, even though it would be possible to cut costs further by ordering everything from China. But since the brand competes in the premium price segment, garment production is not a large share of Beibit's costs. So if we look at the share of value added for the country in Beibit's goods and services, it comes to 75–90% overall, whereas in the actual garment production at the Talgar factory it would not exceed 40%, because the main costs are the purchase of materials, and there is no way to compete on price.

When I asked whether Beibit receives any state support, the answer was "no," since none of his lines of business qualifies for it. For example, ALLOFF clothing is already sold in small volumes in the UAE and the United States, but this is not yet systematic and has been achieved largely through personal contacts. Yet good design, sound marketing and a strong brand make it possible to export to a large number of countries. To enter foreign markets, however, one needs legal support and funds for promotion, and our state programs offer neither, just as they offer no cheap loans for companies that outsource their production. As I wrote above, supporting this type of entrepreneur will bring the country many times more value added than supporting low-value-added production, because the foundation of developed economies is precisely the export of brainpower through well-designed goods, works and services. Nike and Adidas do not sew their clothes in the United States or Germany; they have them made in countries with low wages, while most of the value added from sales stays in the country where these products are conceived and marketed. That is why it is important to support the creators of products.