Let statistics not fool you; rebasing GDP doesn’t improve the economy

Mark Twain couldn’t have expressed it more succinctly. There are three types of lies, he said. These are lies, damned lies and statistics. Two events in the last fortnight woke me up to the truism of this statement.

The first one occurred in Nigeria. The Nigeria National Bureau of Statistics let us know that contrary to the facts we had all long held to be true, Nigeria had for some time been a much larger economy than South Africa — and by a good distance!

Think about it, in 2012 World Bank figures placed Nigeria’s GDP at $262.2 billion (Sh22.5 trillion) against a South African total of $384.3 billion (Sh33 trillion).

Turns out, those numbers were slightly off the mark. The 2013 figures show that the Nigerian economy expanded, on paper at least, to an estimated $488 billion (Sh41 trillion).

In fact, thanks to the new statistics, it had not only become the largest economy in Africa, it was also an enviable 26th largest in the world — now that is a feat!

Positive

The second event occurred closer home. I woke up on Monday this week to headlines screaming that Kenya will become a middle-income state in September.

The sub-headline in the Business Daily was even more intriguing, “Country to realise Vision 2030 development blueprint’s goal 16 years ahead of time.”

I should be happy, as a Kenyan, for this development. But my heart and mind find it hard to interpret the news as a positive development.

Maybe it is because the news elicited more questions than answers. To understand my discomfort, a quick lesson on what rebasing GDP means is important.

Gross Domestic Product (GDP) is the market value of all officially recognised goods and services produced within a country in given period of time.

One of the ways economists use to get this value is the consumption or expenditure approach. The assumption is that most things are produced for sale, and old. Therefore, measuring the total amount of money used to buy things is a way of measuring production and hence GDP.

In this regard, GDP becomes the sum total of household consumption expenditure, investments, total government expenditure and net exports.

Hence the popular formula is GDP= Consumption (C) + Investments (I) + Government spending + (Exports (X)-Imports (M).

To measure this the gross economy is subdivided into sectors, also referred to as national accounts. For example, the national farm would represent the whole agricultural economy of a country.

All these national accounts are calculated based on a particular year which is referred to as the base year. For instance, if we have a country named X in the year 2000, it may decide that its economy has three national accounts namely agriculture, manufacturing and marine services.

The year 2000 becomes the base year of this country’s GDP. Now, assume that this country has been calculating its GDP growth based on these three accounts for the last 10 years.

This is despite the fact that over the period a few more sectors of the economy have sprung up, for instance mobile telecommunications and air transport services.

Realising that a substantial part of the economy is unaccounted for, the government decides to review the economy and add two new accounts into the GDP in the year 2010.

Assuming each of the original accounts was of equal value, say $1000 (Sh86,000) as at the year 2010, then the value of GDP before rebasing will be $3000 (Sh258,000).

And assuming the value of the two new accounts has grown to $500 (Sh43,000) each, after rebasing to include the two extra national accounts the total GDP for 2010 will change from $3000 (Sh258,000) to $4000 (Sh344,000).

Does this mean that residents of country X created wealth worth $1000 (Sh86,000) in a year? Not really.

What this simply implies is that $1000 (Sh86,000) worth of the economy that was previously unaccounted for is now brought within the economic loop. Going forward, the economic growth will be based on this new figure of $4000 (Sh344,000).

Rebasing basically means reviewing national accounts and replacing the old base year with a new one. In the case of both Nigeria and Kenya, it should be noted that the change is simply psychological and is not an actual reflection of growth on the ground.

It’s misleading to use the Bretton Woods institutions’ definition of middle income status as a yardstick for our economic growth.

As for Nigeria, despite her emerging as Africa’s largest economy, she cannot hold a candle to South Africa in terms of economic efficiency and the quality of living since its per capita numbers remain dismal.

Concessions

As far as Kenya is concerned, rebasing does not make us achieve Vision 2030. It basically gives us a larger base upon which we can use to spring the country to growth.

The only positive aspect of this exercise is that it weans us from the poverty mentality of expecting donor-funded concessions and trading privileges since, it informs us, we are mature enough to walk unaided.

Having to live independent of AGOA and other such lopsided trade partnerships will hurt in the short run.

However, it is a good thing in the long run. This will wake us up to engaging our production comparative advantages as an economy or else our inefficiencies will expose us to the vagaries of world trade.

Maybe the biggest lie we have ever been told is that numbers don’t lie. Numbers, even if they are national statistics, can lie just as much.

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