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How to Increase your Country’s GDP

Easily, Cheaply and Legitimately
World Economics
15 October 2019
                        

There are three ways to increase the real Gross Domestic Product (GDP) of any country. First, by producing more goods and services in a given time frame. This is not easy. Second, by fiddling the figures, a method often adopted by politicians of all kinds. As the economist John Kay illustrated in an article in the Financial Times titled: “Politicians will always succumb to the need to bend data“, and this in relation to the UK! There are many ways to do this, and it’s the easiest, cheapest and quickest method.

There are only two downsides. First you may be found out. Second, “bending “or otherwise fiddling GDP data may lead to the adoption of seriously erroneous policy decisions. It’s all too easy to believe your own lies...

A third method, and the one on which this paper will focus is to measure the output already produced more accurately. Usually but not universally this produces a significant increase in GDP, with many beneficial effects. This method is also relatively easy (no rocket science involved), and cheap (and can easily pay for itself in reduced debt servicing charges). Furthermore, unlike actually producing more goods and services, it doesn’t contribute to global warming...

A particularly spectacular illustration of the possibilities of producing better data was illustrated by Ghana in 2010 where an increase in GDP of about 60% was recorded, overnight! The World Bank stoutly maintained that the increase had been done using method 3 rather than 2…under its auspices.

Politicians spend much time debating ways to stimulate economic activity, but little attention is concentrated on policies to increase the resources and improve the methodologies devoted to measurement. On the contrary, National Statistics Offices are often banished to faraway places (like the fabled move of the UK’s Office of National Statistics (ONS) to a small town in Wales, causing 90% of its staff to abandon ship), or sent underfunded to unsuitable premises in back streets.

National income accounting is not a sexy subject from Economics 101 courses through to Cabinet room tables. This doesn’t stop expensive management consultants and others, recommending growth strategies based on GDP data as if the data reflected reality. It frequently doesn’t.

 

Why it Matters

GDP is a measurement of the money value of all the goods and services produced in an economy, and has an importance way beyond its role as a proxy for a country’s income. It is, as one book called it, “the most important number in the world “.

A country’s measured official GDP estimated by national statistics offices plays a significant role in a country’s ability to attract external capital. Portfolio investment, for example, is allocated to some extent by GDP weights as in the Morgan Stanley Country Index (MSCI) which first used relative GDP nearly three decades ago. Foreign Direct Investment (FDI) decisions are based partly on recent and forecast rates of growth of growth of GDP and a government’s cost of borrowing is determined by its country rating which is partly based on the debt to GDP ratio and interest payments as a proportion of GDP. The ranking of African economies according to wealth forms the basis for the targeting of development assistance. And so on...

 

How to Do It

The quality of economic data across the world varies enormously and the World Economics Data Quality Rating (DQR) methodology has identified various ways that countries can improve the quality of economic statistics, potentially increasing measured GDP, raising the sustainability and lowering the interest cost of servicing sovereign debt and attracting investment.

The way to do it involves improving the technical capacity of national statistics offices usually via better funding and accepting specialist advice; updating base years used to produce data; adopting as far as is possible the most recent UN advised national accounting systems; and bringing a greater proportion of informal and shadow activities within the official taxed economy. These issues are discussed below.

Devote More Resources to Measurement
In order for measurements to be reasonably accurate, it is necessary to devote resources to the task. As already noted, Governments tend not to see the production of economic statistics as a priority, and indeed to put national statistics offices in ramshackle buildings in out of the way places.

In order to measure economic activity correctly it is vital to hire experienced people and accept advice on the best methods of developing data resources. Given the importance of good economic data, the penalties for not devoting sufficient resources are severe, including significantly greater national debt burdens than would otherwise be the case.

Use a Recent Base Year
Base years define the structure of an economy at the time of measurement. For example, using a Base Year before the advent of the mobile telephone ensures that all the elements of economic activity related to the now ubiquitous mobile will be excluded from GDP, which will then be lower than reality. To measure GDP accurately the World Bank recommends that base years are regularly updated, or more advanced chaining methods are used.

Out of date base years can distort GDP measurements in rapidly growing economies by under or over representing the contribution of sectors. For example, when the National Bureau of Statistics (NBS) in Nigeria last updated the base year from 1990 to 2010 its GDP estimates rose upwards by 89 per cent overnight.

Research by World Economics shows that out of a sample of 154 countries, 74 had a base year more than 5 years out of date and one country had a base year 32 years out of date. This leaves great scope for raising individual GDP levels , relatively easily and cheaply (the changes can pay for themselves in a reduced debt burden), and best of all legitimately (the IMF , World Bank and UN , not to mention financial institutions everywhere all encourage and welcome better economic data – it’s the right thing to do from everyone’s perspective).

Use Latest System of National Accounts
As much as possible countries should graduate to using the most up to date version of the United Nations System of National Accounts (SNA 2008) to estimate GDP. The latest version provides statisticians with superior methods of estimating GDP and checking calculations through the creation of Supply-and-Use Tables, but it also mandates that attempts be made to monitor illegal activities such as drug consumption and prostitution. The DQR sample of countries found that 60 or 39 percent will still using the previous 1993 SNA and seven employed SNA 1968. Employing the latest SNA 2008 could significantly raise GDP for many countries.

Add in more of the Informal Economy
In many economies, particularly in emerging markets, GDP is potentially appreciably larger than is recorded in the official statistics because of a neglect of informal, illicit or illegal economic activities by national statistics organisations. There have been a number of attempts to estimate the size of the informal economy across economies particularly by Professor Friedrich Schneider who surveys the different methodologies. The DQR employs estimates of the size of the shadow economy for 2015 provided by the IMF which show that if these activities were fully accounted for in official figures they could raise recorded GDP by between 67 per cent in Zimbabwe and 9 per cent in New Zealand with a median for 154 countries of 28.0 per cent. In the case of Nigeria, with an estimated level of 52.5 per cent of measured GDP, considerably more than the median score of 36.6 per cent for all of Africa, including the shadow economy would have effect of significantly reducing its debt to GDP ratio. Any emerging market country with a high level of debt and a large shadow economy would find a major statistical survey well worth its cost in terms of a lower cost of borrowing and enhanced tax revenues.

 

The Benefits of Producing Better GDP Data

Several important benefits accrue to a country from better measurement of GDP. As already noted a rise in perceived wealth will usually improve a country’s ability to attract external capital, both private, institutional and Governmental.

The ratio of sovereign debt-to-GDP is a commonly used, although imperfect measure, used by rating agencies and lenders to assess country risk, provides one simple way of appreciating the benefits. Generally, the higher the level of the ratio the more costly the cost of borrowing, although there are a number of anomalies such as Japan and the United States.

World Economics analyses suggests that the main flaw in the debt to GDP ratio is the accuracy of measurement of the denominator. The top twenty countries by population size with data quality grades B to D are listed in the Table below along with 2018 gross sovereign debt to GDP ratios as calculated by the IMF. The Table also lists each countries DQR international rank and the DQR rating. On the basis of the World Economics model of a series of historic base year changes and the assumption that better surveys and measurement efforts by statistical agencies could raise the proportion of the informal economy accounted for by half its current estimated level, GDP uplifts are estimated and current gross debt to GDP figures are revised downwards.

Twenty Largest Countries, Debt to GDP and Data Quality 2018

Source: World Economics, IMF

Notes: * Brazil data is for illustration only pending clarification of IMF data showing the Brazilian base year as being 25 years out of date, which we suspect is not the case.

 

The results are striking and imply that many countries may be paying far more to borrow money than is necessary or are facing currency pressures based on mistaken estimates of the likelihood of default. The average reduction in debt to GDP ratios across the sample of countries is 12.4 per cent and a standard deviation of 8.8 per cent with a range of downward adjustment from 3.6 per cent in Turkey to 40.4 per cent in Brazil. The calculations (not intended to be definitive, simply illustrate the potential scope) show the problem of using poor GDP data in analysis of a country’s ability to sustain debt. Counting GDP more accurately could transform the economics of development and the study of the impact of debt on growth.

 

Summary

All countries, but particularly those classed as category B, C and D in the World Economics Data Quality Ratings would almost certainly benefit from devoting more resources to measuring GDP.