Calculating GDP growth: A sorry attempt by some to mislead people with ‘alternate facts’

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The ‘professional’ buildup minus the baggage

logoMonday, 17 April 2017

It is bad when small-time politicians make up stories to mislead village folk. It is far worse when those with professional qualifications fabricate stories to mislead a gullible nation. This short piece is to shed light and present the facts on a recent incident, actually two incidents, of the latter kind that received significant airtime particularly on social media.

Recently, a former chairman of the Securities and Exchange Commission Dr. Nalaka Godahewa, currently on bail for corruption charges related to alleged fraudulent misappropriation of SEC funds, speaking at an event in Colombo had levelled a series of allegations against the Government. While glorifying himself as a doer who claims to have been handpicked, not by one, but all three first brothers of the previous regime to turn around many an SOE; Sri Lanka Insurance, ala Mahinda Rajapaksa; UDA ala Gotabhaya Rajapaksa for whom the favour was returned with Lanka Hospital; Sri Lanka Tourism and SriLankan Catering, ala Basil Rajapaksa, has mocked the current Government in rather inglorious language and by and large endorsed the deceitful way of doing things as in the past.

The ‘stupid’ Government of Sirisena and Wickremesinghe?

Replete with fabrications and falsehoods and an unusually cockeyed economic analysis the learned former public official, now full blown politician seen and heard at the Viyathamaga events sponsored by his favourite three brothers, has accused the present members of the Government as being ‘stupid’ and deceitful. To call someone names is easy, but at a professional level one would assume that before saying so, relevant research would have been done to establish the facts.

Of the many allegations, I wish to focus on only one in this piece. It is about the growth rate of the economy. The accusation is that the present Government revised the growth rates of the economy to show that the Gross Domestic Product or what is commonly referred to as GDP grew slower than what the then Government actually achieved. This, it is alleged, was done for purely political reasons. The result is, as argued, that the credibility of the country has been destroyed.

Perhaps he was building on the same allegation made a few weeks prior to that by his political ally and a former Governor of the Central Bank Nivard Cabraal. As reported in local dailies he had criticised what he had termed ‘recalculation’ of the GDP. He says thus: “It is not only the physical change (the difference in the GDP figures); the reason was that we lost our credibility. By recalculating (the GDP) we disturbed the serenity of the Central Bank and the Census and Statistic Department. In retrospect, I think we made a huge mistake.”

Godahewa, unlike Cabraal, is brutal in his attack. This is what he says: “I want to explain to you how the Government committed hara-kiri by challenging its own credibility. They started this by challenging the information provided by the Central Bank. To show that 2014 growth was not as high as what the previous administration claimed, the new Government changed the base year from which the GDP growth rate is calculated. By doing so they were able to bring down the reported GDP growth rate of 2014 from 7.4% to 4.9%. Can anyone be stupider than this? You show the world that yours is not a high growth economy and yet expect foreign investors to get excited about it? On the other hand, will foreign investors trust the information provided by Sri Lankans when the Government itself challenges the statistics reported by the Central Bank? So, this short-sighted politically motivated behaviour did a lot of damage to the credibility of our country.”

There are two points in the above statement I wish to highlight: One, that the changing of the base year was a political decision of the new Government to show that the economy did not grow as fast as claimed by the previous Government during their time; and two, even if the data is wrong and is known to be wrong you should continue to pretend they are correct to impress foreign investors.

The entire speech was somewhat of a viral phenomenon on social media with many an arm chair critic forwarding the ‘alternate truth’ to multiple databases. Let me now provide the facts behind the so-called adjustment of the GDP calculation.

GDP, its calculation and role of the Department of Census and Statistics

GDP is one of the most important macroeconomic indicators of any country. It is the most widely used measure of the size of a country’s economy. Simply defined GDP is the monetary value of the goods and services produced in a year by the residents of that country. It is essential that the GDP is calculated accurately as it is used to express various important ratios; revenue, expenditure, deficit, debt etc. which are indicators of the general health of an economy.

Sri Lanka, until year 2007, compiled the country’s GDP in three approaches; production, expenditure and income. This was done by both the Department of Census and Statistics (DCS) and the Central Bank of Sri Lanka (CBSL). However, since 2007, the national accounts estimate for Sri Lanka has been compiled only by the DCS. Currently led by Dr. Amara Satharasinghe, the department employees a large number of professional statisticians and experts in survey research and produce all statistical data necessary for policy makers, businesspeople, academics and students interested in the movement of socio economic variables of the nation.

It is the DCS that conducts the population census every decade as well as the national household income and expenditure survey every four to five years as well as quarterly labour force surveys, industry and other surveys. It also conducts monthly cost of living and poverty surveys that directly impacts salary adjustments and subsidy payments. Thus, it is the most capable agency of the Government to undertake the annual survey to calculate GDP.

International comparability of GDP figures:

The role of the UN

International best practice is where GDP is calculated by respective central statistical offices of countries (not Central Banks) based 04on methodologies adopted by the United Nations (UN). The reason for this is because GDP growth is the most widely used indicator of comparative measurement of economic performance of countries.

Recommendations of UN on compiling national accounts are given in the System of National Accounts (SNA) and are adopted by almost all countries in compiling their National Accounts. This has been revised from time to time to incorporate changes in structures of economies.

Base year for calculating GDP: Why change,

or why not change?

What is a base year? In the simplest of definitions, base year is a year used as an index for some phenomenon measured in other years. How is it used in GDP calculations? In Sri Lanka, in recent times, that is until the year 2014, GDP was estimated taking the base year as 2002 by following guidelines and recommendations of SNA of 1968 and 1993.

But, since 2002, the structure of the economy and relative prices went through significant variations. These changes must be captured to reflect the most accurate assessment of the economy. For instance, usage of mobile phones and number of outlets selling phone cards or the number of three wheelers on the streets or the number of tuition houses or the amount of ‘beauty salons’ down a typical urban street changed dramatically during this period. So did relative prices; for instance to take a simple example, between a cost of one-minute call vs a kilogram of rice, were vastly different in 2010 as opposed to 2002. The list is long.

Therefore, to account for the wide structural changes and changes in relative prices that took place in the Sri Lanka economy since 2002, the national statistical office took steps to change the base year from 2002 to a more recent year. The DCS decided on 2010 as the base year after comprehensive analysis along with technical assistance from international specialised agencies such as World Bank, ADB and the IMF.  At that time, that is in 2011, not 2015, as accused by the disruptive elements, DCS submitted the following as reasons why the rebasing exercise was necessary.

Base year 2002 was no longer correct to measure national accounts as many structural changes had taken place in the economy. Many new types of services had entered the market in that decade and many others had disappeared. The objective is to reflect the reality of the structure of the economy as close as possible when calculating the GDP.

International recommendation is to revise the base year at least at five-year intervals. That is because, when the base year is outdated, the estimates calculated based on that base year for the years that follow, are not accurate and does not show the reality of the economy. Sri Lanka had not revised the base year for almost twice that amount of time.

By the year 2010, the UN had released its latest version of SNA, that is SNA 2008 by giving due consideration to the changes in structures of economies in countries and introducing new compilation methodologies etc. Therefore by 2011 Sri Lanka was ready to make the adjustment.

The work began on moving the base year from 2002 to 2010 during the previous Government. In fact, the work was very much completed before the change of government in January 2015. As senior officials of the then administration as Chairman SEC and Governor CBSL, Godahewa and Cabraal were fully aware of this fact. However, Godahewa’s assertion that it should have been hidden so that false figures, that are higher than the actuals could be presented to international investors as true figures, perhaps gives a clue why the truth was hidden until the election was lost by the dishonest government. It was not just the true GDP figures that were hidden this way, but also debt figures. Almost Rs. 1,000 billion of borrowing was not accounted for in the Treasury, but hidden away in loss making SOEs even though ultimately serviced by the Treasury.

GDP: DCS accomplishments

in the rebasing exercise

Moving the base year from 2002 to 2010 was not the first rebasing of National Accounts in Sri Lanka. Rebasing had been done previously; in 1958, 1963, 1975, 1990 and 2002 but under the most recent rebasing exercise, a number of other improvements were also carried out besides changing the base year from 2002 to 2010. Some such improvements, according to DCS are (a) expansion of the production boundary by covering new economic activities, (b) use of the new and advanced techniques in compilation procedures, (c) use of more accurate data sources (d) adoption of United Nations System of national accounts 2008 and (e) improving international comparability of our GDP estimates. Another important point to note is that some of the previously uncaptured informal economic activity, particularly in the services sector, has been brought in to the calculation of GDP.

Comparison of GDP compiled under Old (2002) and New (2010) base years: Stupid?

The following table presents annual GDP growth rates compiled with respect to base year 2002 and 2010 for the period of 2011 to 2015. It can be seen that GDP growth rates with respect to base year 2002 is lower for the years 2011 and 2012 compared to the growth rates with respect to base year 2010, While it is other way round for the years 2013, 2014 and 2015.

Analysing the reasons why the then Government was unable to sustain the post-war growth spurt even after large geographical areas were added to the formal economy particularly in agriculture and why the politically driven debt financed bubble burst at the end of 2012 and the economy tanked in 2013 and grew only sluggishly in 2014 resulting in a massive challenge for the new government in 2015 is for another day, but the fact is that the picture that professionals of the ilk of Godahewa and Cabraal attempted to paint that the ‘economy was racing ahead only next to China’ was an absolute falsehood.

Be that as it may, having gone through a brief yet technically sufficient discussion on the rebasing of the GDP series from 2002 to 2010, let us go back to the ‘stupid’ comment by the learned doctor; “To show that 2014 growth was not as high as what the previous administration claimed, the new Government changed the base year from which the GDP growth rate is calculated. By doing so they were able to bring down the reported GDP growth rate of 2014 from 7.4% to 4.9%. Can anyone be stupider than this?”

I leave it to the educated public of this country to decide for themselves whether it was justified to mislead the public the way they did. It is also noteworthy that many other countries also rebased their GDP around the same time including almost all EU countries (with much less lag), and some large economies such as India and Nigeria.

05GDP calculations:

The truth

The professional and technical decision to revise the base year from 2002 to 2010 was taken in the year 2011 by the DCS by following best practices and international guidelines and in consultation with all relevant stakeholders including Central Bank of Sri Lanka. It was not a political decision of the new government elected in 2015. The only difference between the two governments was that the previous government decided to hide the truth and continue to mislead the people of this country, international investors and multilateral development partners.

The new Government, true to its word of transparency has presented the truth. If the base year is not revised regularly and the international guidelines are not followed, it will affect the credibility of the national accounts as the National Accounts so compiled will not reflect the accurate picture of the economy. The base year will need to be changed again quite soon. That is the truth.

(Harsha de Silva is currently Deputy Minister of Foreign Affairs and MP for Colombo district. A development banker, international consultant, successful entrepreneur, and lately a grassroots politician, he has a PhD in Economics from the University of Missouri and executive training at MIT. Harsha has taught financial economics at universities both in Sri Lanka and the US. He has several publications, focusing particularly on technology and economic development, in peer reviewed international journals. He is a Global Eisenhower Fellow).0203

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