The size of Kenya’s economy has always been underestimated given that gross domestic product (GDP) data excludes some valuable economic activities, including the informal sector, which is quite vibrant.
Surprisingly though, the newly acquired status as middle-income country has not been met with overwhelming euphoria as one would have expected.
Rather the rebasing of the economy in conjunction with incorporation of other activities that has increased the size of the economy by 25 per cent has been met with some scepticism locally.
Such cynicism is consistent with declining confidence in the performance of the economy.
This is contrary to the increasing global confidence in the future prospect of Kenya’s economy as evidenced by a surge in foreign direct investment and oversubscription of the recent Euro bond, among others.
The cynicism raises public concern on the credibility of economic data and how it reports.
Therefore this article seeks to fulfil this expectation by explaining the calculus of rebasing of the economy. Rebasing is not a new practice. Its credibility and acceptability both locally, regionally and internationally are well documented facts.
In a nutshell, it is the process of replacing an old base year to compile volume measures of GDP with a new and more recent base year or price structure.
It is predicated on dynamism of the economies. Ideally the value of goods and services, which GDP attempts to measure, should be based on instantaneous prices.
However, to implement such calculus would be impractical because we don’t have the capability of capturing prices data instantaneously.
The economic dynamism emanates from the capricious nature of business cycles that reflect the structure of the economy.
During an economic expansion, the business cycle takes a upward trajectory that embodies new sectors, products and technologies as well as changes of consumer tastes. On the other hand, the business cycle takes a downward trajectory if the economy contracts.
The rebasing practice forms part of the revision process that encompasses three steps. The first step involves inventory taking and suitability assessment followed by data collection strategy.
In step two, various surveys are undertaken and complemented by other information from administrative sources. The data collected is analysed and validated to inform choice of the base year. In step three, rebased estimates are subjected to a credible peer review.
Unfortunately, commentaries that have been critical about the exercise have focused on the utility of the exercise to the common citizen from the perspective of equity.
While equity issues are relevant given our historical inequalities, I find it distortive in the context of debasing. Equity issues are distributive in nature and hence cannot be equitably resolved through market structures. Rather, equity issues are better resolved through politics.
The policy question that is of immediate relevance is the acceptability of the rebasing statistics by global financial markets. Fortunately, the numbers have been affirmed by international financial organisations.
In conclusion, periodical rebasing is recognised as an international best practice. Its rationale of capturing the dynamism of the economy makes intuitive sense. But the sophistication of data collection and its source may differ from country to country.
And that way rebasing does not necessary imply positive growth as it can also reflect negative growth.
In a nutshell, rebasing has everything to do with the determination of the size of the national pie but not with its sharing. In Kenya’s case it means we are much richer relative to our contemporaries. That is good news.
Prof Kieyah is a principal policy analyst at KIPPRA.Views expressed are personal.
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