Measuring Economic Activity and Development in Africa

Lagos, Nigeria

Lagos, Nigeria

According to a report by Reuters, Nigeria’s gross domestic product will grow by 40 percent in the second quarter of 2012. If correct, Nigeria’s GDP would increase from $273 billion to $370 billion, and Nigeria would become Africa’s second largest economy in Africa. Growth forecasts suggest that Nigeria would surpass South Africa to become Africa’s largest economy within a few years.

The move has significant implications for Nigeria and the rest of the developing world. Symbolically, Nigeria’s newfound economic prowess could afford the country greater leadership and influence on the continent, particularly within West Africa.

Nigeria’s larger economy would also have important policy effects for international institutions. By increasing its GDP, Nigeria’s debt ratio (the size of the country’s national debt as a proportion of the total size of its economy) will nearly be cut in half. At the same time, the improved economic status of the country could affect its ability to secure concessionary loans. When Ghana’s GDP was increased by more than 60 percent in 2010, its debt-to-GDP ratio fell from 40% to 24% and the World Bank reclassified it from a low income to a lower-middle income country.

So how did Nigeria and Ghana grow their economies so dramatically? In truth, they didn’t. Gross domestic product is the total value of goods and services produced win a country in a given year. But in most countries in most years, economists don’t actually go out and add everything up. Instead, they start with a year in which a fairly accurate survey was conducted and adjust it annually based on other variables like population growth. In both Ghana and Nigeria, the dramatic increase in GDP was not the result of sudden and dramatic economic growth. Rather, in both cases, the upward shift in GDP was the result of how the number was calculated and which base year was used.

This methodology raises several important questions.

First, how accurate is the baseline year? If the baseline year is incorrect, then all subsequent calculations based on that initial estimate also be inaccurate. The exclusion of the informal sector, which can include everything from sales by unlicensed street vendors to prostitution to the sale and trafficking of illicit drugs, often leads GDP to be underestimated. A 2010 World Bank report estimated the size of the informal economy in the United States as 8.8 percent of the formal economy. The median figure for developing countries was 41 percent. In the countries with the largest informal economies (such as Azerbaijan, Bolivia, Georgia, and Panama), it exceeded 60 percent.

Second, how old is the baseline year? When Ghana’s GDP increased in 2010, it was because Ghana shifted its baseline year from 1993 to 2006. Similarly, Nigeria’s baseline year shift from 1990 to 2008 will likely account for a significant portion of the increase in its GDP. Think for a moment about the importance of the baseline year. In the early 1990s, the cell phones which are no so ubiquitous across Africa will still in their infancy, widely unavailable on the continent. This one example illustrates how dramatically the structure of an economy (and a society) can shift in a relatively short period of time.

This means that GDP figures for developing countries are best thought of as general estimates falling within a wide margin of error rather than concrete numbers that reflect real, on the ground economic activity. It teaches us that we should be critical consumers of data.

Those interested in learning more about this questions would be well advised to seek out Morten Jerven’s new book, Poor Numbers: Facts, Assumptions and Controversy in African Development Statistics, forthcoming from Cornell University Press.

What do you think? Should we continue to use GDP as a proxy measure for development? If so, how can we acknowledge the limits of that figure while making meaningful decisions? If not, what do we use instead? Leave a comment below and let us know what you think.

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One response to “Measuring Economic Activity and Development in Africa

  1. Thank you for this post, it is always a necesity to remind the inaccuracy of numbers and statistics as such (specially as you point out, taking into account the importance of popular economy).
    I have a question, are the GDP of developed countries calculated based on continuous updated baseline years, then? or are they as outdated as those from developing countries?

    Thank you!

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