Tag Archives: economic growth

An Uncertain Global Economic Outlook

Citing concerns over China and other emerging market economies, volatility in global markets, and an uncertain global economic outlook led the US Federal Reserve Chair, Janet Yellen, to announce that the Federal Reserve would not increase interest rates following its current Board meeting. Interestingly, the Board noted that it could increase interest rates given the current global economic outlook, but noted that it was “waiting further evidence “ and “an improvement in the labor market” before increasing interest rates.

The announcement came as a bit of surprise, as global markets had been bracing for an increase in rates. By not increasing rates, the Federal Reserve will help to keep the value of the US dollar low, making US exports more competitive on global markets. But also limits the ability of the Fed to use monetary policy to stimulate the US economy should the economy continue to exhibit an ongoing pattern of slow growth.

What do you think? Did the Federal Reserve make the right decision in keeping interest rates near zero? What would you have advised the Fed to do?


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.

Taxes, Big Government, and Economic Growth

It’s often taken as a truism that lower taxes lead to higher levels of economic growth. The National Center for Policy Analysis, an anti-tax think tank, goes so far as to assert that if the United States had lowered its marginal tax rate to the “optimal tax rate,” growth in the United States would have increased from 3.4 percent per year to 4.6 percent per year between 1950 and 1995. They argue that lowering taxes will encourage people to work more, thus increasing the total revenue collected by the government through taxes. It’s a restatement of the Laffer Curve. It’s also the argument advanced in every introductory economics textbook. And according to most studies, it’s also wrong.

Baseline Scenario has a great analysis of the relationship between tax rates and growth in gross domestic product in the United States since the end of World War II. Their finding? There is no relationship. An analysis of the data comparing unemployment rates and tax rates in OECD countries suggests that there is no direct relationship there either. Baseline Scenario’s conclusion is a good one:

I don’t think these pictures prove anything. Well, maybe they prove one thing: that the real world is more complicated than the first-year economics textbook…If there’s one thing I’d like people to take away, it’s that any theoretical economic argument that can be stated in a sentence is as likely to be untrue as true in the real world, no matter how clever or intuitive it is.

Is the U.S. Economy Now in Recovery?

On Friday the Bureau of Economic Analysis released its fourth quarter 2009 estimates of economic performance in the United States. The figures were surprisingly positive, with gross domestic product [glossary] growing at an annualized rate of 5.7 percent. According to the BEA, the increase was driven primarily by an expansion in business inventories. Consumer spending increased at a much slower pace (2.0 percent in the fourth quarter, down from 2.8 percent in the third quarter).

Analysts were surprised by the growth in GDP, which had been forecast to increase at a much slower rate. The Obama Administration expressed cautious optimism regarding the figure, with Christine Romer, chair of Obama’s Council of Economic Advisors describing it as the “most positive news to date on the economy” and concluding that, “There will surely be bumps in the road ahead, and we will need to continue to take responsible actions to ensure that the recovery is as smooth and robust as possible. Nonetheless, today’s report is a welcome piece of encouraging news.”

Most observers now agree that we are unlikely to experience a “double-dip” recession. But the nature of the recovery still remains uncertain. Job figures released last week suggest that unemployment remains high and that employers remain hesitant to add jobs—thus Obama’s proposal to offer a $5,000 tax credit to employers who create new jobs. The concern—and one that seems entirely plausible given recent economic reports—is that the recovery of the U.S. economy will resemble the performance of the Japanese economy over the past decade, a “jobless recovery”  in which economic growth continues at a slow pace but unemployment remains high.

Government Spending and Economic Growth: The Role of Political Culture

Baseline Scenario has a great discussion of the relationship between government spending, inequality, and economic growth. At issue is a central debate in political economy; namely, does increasing government spending lead to slower rates of economic growth? This seems to be a popular question these days, with both Paul Krugman and Clive Cook chiming in on the topic.

This is hardly a new debate. Adam Smith and Karl Marx both raised similar questions more than 100 years ago. Today, the debate is usually framed as the U.S. vs. the European model, with each side pointing out the flaws in the other. Yes, Europe has slower rates of economic growth than the United States. Yes, the United States has lower rates of taxation (at least over the past twenty years) than Europe. Yes, social services are generally better in Europe. Yes, the United States has better health care system, if you can afford it. The argument goes on and on.

What both sides of the debate seem to be missing is the cultural element. The proposition that  smaller government leads to higher rates of economic growth and prosperity—a point, at best, impossible to prove in the real world due to differences in factor allocations, political histories, and other facts which don’t often fit neatly into our theoretical models—has come to be accepted as common sense. But even conceding the point that smaller government lead to higher rates of economic growth doesn’t tell us what the ideal size of government should be. That question, it seems to me, is largely the outcome of specific national political cultures [glossary] which conceive of differing roles for the state. Higher taxes may indeed mean slower rates of economic growth. But they also may mean the provision of better services by the state. The expectation that the state provide at least some fundamental services to its citizens—ranging from national defense and policing to providing a minimum level of social safety to more expansive services like health care and education—is largely a function of political socialization [glossary] and political culture. And political cultures often prove incredibly resilient. Americans are unlikely to wake up tomorrow and demand a host of new services from the state (The Democrats are learning this the hard way as they try to reform the U.S. health care system). Similarly, most Europeans are unlikely to embrace the night watchman state [glossary] that seems to inform American political culture. Any debate that misses this is likely to have little effect in the real world.