“Good” and “bad” GDP: Output fall in transition economies and the dead rat effect

Among the many explanations of the deep transformational recession in the post-communist economies during the transition from a centrally planned economy to market economy in the 1990s there is one that considers this recession as a statistical fiction: the elimination of “unneeded under a less wasteful economic system” output, such as defense goods and statues of Lenin, did not lead to the reduction of welfare. If adjustment is made for this kind of “redundant output”, there was probably no recession at all or it was very mild. This paper argues that the attempts to exclude some economic activities from a country’s GDP are counterproductive – the mere principle of statistical registration in this case is undermined. Unfortunately, we cannot agree on what type of economic activity is good for welfare and what type is bad. Slave trade and weapons for colonial wars, statues of Lenin and Egyptian pyramids, cannot be regarded as value subtraction, but should be included into GDP creation activities. The economic rationale for counting all activities as productive is that GDP is a measurement of production capacity, or economic potential of the country; it evaluates the ability of a nation to produce a particular amount of goods and services, no matter what is the exact nomenclature of these goods and services.