OpEd: GDP or GNP to measure Puerto Rico’s economy?
A few days ago, the U.S. Bureau of Economic Analysis (BEA) announced its estimated gross domestic product (GDP) growth for Puerto Rico in 2021. It drew attention that GDP was used instead of gross national product (GNP), the measure traditionally used for Puerto Rico.
The former exceeds the latter by around $35 billion, a gap that has been widening since the early 1970s.
This implies, among other things, a significant dependence on external resources for domestic investment, as most of this gap consists of profits and interest sent to foreign companies and creditors. It is also a reflection of distortions caused by the operations of multinational corporations through the well-known “transfer pricing” scheme.
The GDP, which includes the total value of goods and services produced in Puerto Rico, is greater than the GNP, which represents the value of that production that stays locally. As the gap between the two expands, it means that an increasing portion of the production of goods and services in Puerto Rico (such as profits) leaves the local economy.
Profits from foreign investors are repatriated, as expected, unlike those from investors residing in Puerto Rico. There is also a component of interest payments to creditors outside of Puerto Rico due to public and private debt.
As a GNP percentage, the gap between these two concepts broadened significantly from fiscal year 1970 to fiscal year 2022, reaching 45.5% of GNP in fiscal year 2022, averaging 49% in the period from 2010 to 2022. In fiscal year 2022, this gap amounted to $35.481 billion, up from $26.566 billion in fiscal year 2002. What does it mean for the GDP/GNP gap to be so high? Most importantly, GDP cannot be used to determine the benefit for the island’s residents.
It’s important to emphasize that this gap is not unique to Puerto Rico, as countries like Ireland, Singapore, and some others operating as “export platforms” have it, although not at the same level as Puerto Rico. In an economy like that of the United States, payments to foreign entities are offset by payments received from abroad, which means that GDP and GNP don’t materially differ.
Furthermore, the U.S. economy is relatively closed compared to ours and those of the other mentioned countries.
In the case of Puerto Rico, it is more appropriate and accurate to use GNP rather than GDP as the relevant indicator for measuring the behavior of the local economy, as it provides a better idea of the total production that impacts the local economic and social system.
The efficacy of GDP lies in its ability to identify payments to foreign entities and the contribution of each sector to that aggregate. The reduction of the GDP/GNP gap is seldom mentioned as an economic policy objective, but it should be, not by restricting foreign investment, but by increasing the endogenous capacity of production.
Though it’s not the main topic of this article, it would be interesting to compare how revenue that turns to profit leaving Puerto Rico is taxed compared to revenue that turns to profit that stays.