Tag Archives: gross domestic product

Collecting Economic Data

The US Capitol, Washington, DC

The US Capitol, Washington, DC

It seems that House’s war on (political) science is not yet over. House Resolution 1638, The Census Reform Act of 2013, was introduced yesterday. If passed, the legislation would prohibit the U.S. Census from collecting any information beyond the Constitutionally-mandated decennial population count. Specifically, it would end collection of the U.S. agricultural census, the government census, the mid-decade census, and the American Community Survey. The United States, in other words, would lack basic economic data, such as the unemployment rate and the gross domestic product measures which are calculated using data collected by the Census Bureau.

There are many countries which lack regular reporting of basic economic data. In many African countries, for example, annual GDP reports are calculated using base year estimates and an annual multiplier adjustment calculated from a few key indicators. The problem is that the further we move from the base year, the mess accurate the economic measures become. Indeed, the problem was so pronounced in Nigeria that a 2012 revision added nearly $100 billion to the national economy overnight, increasing the size of the economy by 40%. The revision was not based on any real change in the country’s economic output—it was certainly not a function of a dramatic level of economic growth. Rather, it was simply a recalculation of the figure based on more up-to-date (and arguably more accurate) data. In 2010, Ghana similarly experienced a 60 percent increase in its GDP.

So does all this matter? Should we worry about the accuracy of GDP figures in the United States? Or unemployment figures, which would be similarly affected by the proposal? Leave a comment below and let us know what you think.

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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.

A Look Forward in the Global Economy

Beijing, the World's 10th Most Polluted City.

Beijing, the World’s 10th Most Polluted City.

The Organization for Economic Cooperation and Development released some interesting data yesterday, which was picked up on by the Guardian’s Datablog.

First, have a look at the three minute video produced by the OECD highlighting its findings.

Then have a look at the Guardian’s Datablog graphics, which provide a side-by-side comparison of the composition of the global economy in 2011 and the projected figures for 2060.

The key takeaway point here is that the United States’ and OECD’s share of global economic activity is in decline. In 2011, the United States alone accounted for 22.7 percent of all global economic activity, and the OECD countries collectively accounted for about two-thirds (64.7%) of the world’s economy.

China (17%) and India’s proportion of the global economy respectively will increase from 17 percent and 6.6 percent today to 27.8 percent and 18.2 percent of the global economy by 2060. Economic growth in the developing world will outpace that of the developed world, such that by 2060 the United States’ share of the global economy will have declined to 16.3 percent, and the OECD’s collective share will have declined to 42.3 percent.

The data are interesting, but we need to pause and think about what they actually mean. A couple of issues emerge.

First, as liberal political economy tells us, economic growth is not a zero-sum game. The developing world’s rising share of the global economy has not been at the expense of the developed world’s economy over the past forty years. Rather, as the “economic pie” has grown larger, countries like China and India have been able to capture a larger portion of the economic growth.

But the changing structure of the global economy does raise other issues which are more zero-sum.

Economic growth in the developing world raises concerns over access to non-renewable resources like coal, oil, and rare earth minerals. Already competition over minerals between the United States and China has led China to restrict exports. Further, competition between China and the United States for access to non-renewable resources has escalated. As other countries enter the fray, demand for such resources is likely to intensify.

Additionally, the nature of economic growth may give reason for pause. Historically, economic growth has been a highly polluting affair. The environmental Kuznet’s curve suggests that pollution increases with economic growth until a country reaches a particular level of development, after which protective regulations are imposed and the environment begins to improve. In this respect, China’s pattern of economic growth echoes the pattern established by Great Britain, the United States, Germany, and other developed nations as they industrialized. But the prospect of expanded pollution, dramatic growth in carbon emissions, widespread deforestation, and so on raise concerns about the sustainability of economic growth that are not addressed in the OECD report.

What do you think? Does the OECD forecast give reason for concern? Or is it merely part of a continuing trend of economic growth in the world? Take the poll or leave a comment below and let us know.

What Makes the World’s Happiest Country Happy?

Once again, Norway was named the World's Happiest Country.

Once again, Norway was named the World's Happiest Country.

Forbes magazine has released its annual ranking of the world’s happiest countries, using data compiled from the Legatum Institute’s annual prosperity index. The prosperity index is an effort to rank countries based on wealth, freedom, security, life satisfaction, and so on. As in years past, Norway topped the list.

While interesting in their own right, these sorts of indices also provide some interesting insights into broader questions of economic and political development.  In most studies, gross domestic product (GDP) per capita [glossary] is the proxy measure of development. The higher the GDP per capita, in other words, the more developed a country is. With its 2010 GDP per capita of approximately $47,000, the United States is relatively more developed than South Korea, with a GDP per capita of approximately $20,000. South Korea, in turn, is considerably more developed than Haiti, which has a GDP per capita of approximately $650. Indeed, the World Bank and other international institutions regularly categorize countries using GDP per capita. Thus, for World Bank lending purposes, maintains four categories of countries: low income countries, with GDPs per capita of less than $996, lower-middle income countries, with GDPs per capita between $996 and $3,945, upper-middle-income countries, with GDPs per capita between $3,946 and $12,195, and high income countries, with GDPs per capita of more than $12,195.

But while we use GDP per capita as a proxy for “development,” the figures often tell us very little about what is actually going on in a specific country. Further, while we generally operationalize development as an increase in GDP per capita, an increase in GDP per capita may or may not actually result in an improvement in the quality of life or life chances in a given country. This is where other figures and indices come in. The Human Development Index, the Gender Empowerment Measure, and Happy Planet Index, even more specific measures like life expectancy, child mortality, or literacy rates can tell us a great deal about what is going on within a specific country.

One interesting comparison is to look at the top ten countries in the various measurements. Let’s take GDP per capita and human development.

According to the IMF, the ten wealthiest countries in the word in 2010 were:

  1. Luxembourg $104,390
  2. Norway $84,543
  3. Qatar $74,422
  4. Switzerland $67,074
  5. Denmark $55,113
  6. Australia $54,869
  7. Sweden $47,667
  8. The United Arab Emirates $47,406
  9. The United States $47,132
  10. The Netherlands $46,418

If we compare this to the top ten countries in the UNDP’s 2010 Human Development Index, which is a composite index which incorporates health, education, and wealth, we see some interesting shifts. The top ten rankings for the HDI are:

  1. Norway
  2. Australia
  3. New Zealand
  4. The United States
  5. Ireland
  6. Liechtenstein
  7. The Netherlands
  8. Canada
  9. Sweden
  10. Germany

Some countries, in other words, overperform relative to the size of their economies, while others tend to underform. Ireland, for example, moves up 7 spaces (from 12th largest economy to 5th best ranking in the HDI), while Germany improves 9 positions (from 19th to 10th). At the other end of the scale, Qatar and the United Arab Emirates experience a sharp drop in their rankings, falling from 3rd and 8th to 38th and 32nd respectively.

And where things get really interesting is when the various measures diverge greatly. When we’re looking at measures which incorporate concrete variables, such as infant mortality rates, literacy rates, or access to education, explanations can be relatively straightforward. One could make a strong case, I think, that the reason that Qatar and the UAE fall so sharply in their standings is because they have not been successful in converting the oil wealth both countries enjoy into social and health benefits for the country’s population as a whole.

But when we get into the fuzzy area of happiness and life satisfaction, things become much murkier. According to the Legatum Institute’s study, the world’s ten happiest countries are:

  1.  Norway
  2. Denmark
  3. Finland
  4. Australia
  5. New Zealand
  6. Sweden
  7. Canada
  8. Switzerland
  9. The Netherlands
  10. The United States

Money, in other words, helps but it doesn’t buy happiness. Wealth is certainly part of the picture—we don’t see very poor countries cracking the top of the charts. But size, trust and social cohesion, and extensive redistribution of wealth, also appear to play a role. Food for thought in development studies.

Measuring Development

ChildrenAttend a Rural School.

ChildrenAttend a Rural School.

I’ve blogged before on the limits of gross domestic product [glossary] as a measure of development, commenting on the absurdity of the BP oil spill being good for America’s GDP.

As a measure of development, GDP per capita offers at best a rough proxy. A country like Oman or Saudi Arabia may have a relatively high GDP per capita, but may be less able to translate that wealth into improvements in quality of life (measured in terms of life expectancy, literacy, infant mortality, or other similar measures). By contrast, a country like Costa Rica may be able to make good progress in addressing social development, reducing infant mortality, increasing life expectancy, and reducing levels of malnutrition, despite having a comparatively lower GDP per capita.

As a proxy for development, then, GDP may tell us little about human development in a particular country. Indeed, GDP per capita suffers from several shortcomings:

First, it tells us nothing about the distribution of income within a particular country. Take, for example, Kuwait. While the country as a whole has a relatively high GDP per capita, that income is unevenly distributed, with some Kuwaitis having significant wealth while others (mostly migrant laborers) having very little indeed. GDP per capita does not address inequality, hiding such disparities.

Second, GDP hides externalities—those costs associated with an economic transaction that are not incorporated into the price of a good. See my post on the BP oil spill for more information on externalities.

Third, GDP generally does not include activities taking place n the informal sector, including unrecorded economic activities, illegal activities, or unpaid work contributing to the social welfare. This exclusion has a particular gendered dynamic as well, with much of the work associated with social reproduction excluded from the formal sector. 

There are alternatives. The Human Development Index has been around for nearly twenty years. and the differences in country rankings between the HDI and GDP per capita makes for an interesting comparison. France has proposed using something like the genuine progress indicator to measure development.  Chad Jones and Pete Klenow  (ht to Chris Blattman)  offer an alternative measure based on consumption, leisure, inequality, and mortality. Feminist economist Marilyn Waring has long campaigned for a more radical measure based on time use. And as James Hammock blogged at Triple Crisis, the Oxford Poverty and Human Development Initiative (OPHDI) has proposed to use an new index that incorporates income, access to health care, education, and nutrition.

What differences does the measurement make? Plenty. While the Jones/Klenow index correlates highly with GDP per capita, there are important variations, most significantly, 

Western Europe looks considerably closer to U.S. living standards, emerging Asia has not caught up as much, and many African and Latin American countries are farther behind due to lower levels of life expectancy and higher levels of inequality. In recent decades, rising life expectancy boosts annual growth in welfare by more than a full percentage point throughout much of the world. The notable exception is sub-Saharan Africa, where life expectancy actually declines.

In defining and measuring development, we need to remember what the purpose of development actually is. Growing GDP is best seen as a means to an end. The goal is not necessarily to expand the economy, but to expand the economy in order to achieve the ultimate goal of improving the human condition. The problem is that using GDP per capita as a proxy for development obscures the means for the ends.

Is BP’s Oil Spill Good for the Economy?

BP Deepwater Horizon

BP Deepwater Horizon

In a fascinating story in the Wall Street Journal yesterday, Luca Di Leo suggests that the BP Deepwater Horizons oil spill may wind up facilitating economic growth in the Gulf region. Citing chief U.S. economist Michael Feroli, who said that “The spill clearly implies a lot of economic hardship in some locations, but given what we know today, the magnitude of these setbacks looks dwarfed by the scale of the U.S. macroeconomy,” Di Leo argued that the U.S. economy may wind up growing as a result of the crisis. According to Di Leo, the six-month moratorium on deep water drilling may cut U.S. oil output by 3 percent and may result in the loss of approximately 3,000 jobs (numbers derived from JP Morgan’s energy analysis unit).  Commercial fishing will also suffer, but it represents a relatively small portion of the U.S. economy (approximately 0.005 percent of GDP). Tourism is the wildcard, but it’s likely that many employees in the tourism sector may face cuts.

Offsetting this, the cost of cleaning up the spill will likely be high. Already, JP Morgan estimates that some 4,000 people have been hired to assist in cleanup efforts, estimated to be worth between $3 and $6 billion. If cleanup costs are higher than this (certainly a possibility), and the U.S. government moves forward with plans to mandate that BP establish a $20 billion trust fund to pay for compensation and cleanup, it is likely that the net impact on the U.S. economy will be positive. Or, in the words of Feroli, “If realized, this would likely mean a near- to medium-term boost to activity that might offset the drags.”

ExxonValdez

ExxonValdez

All of this reminds us of a similar analysis conducted of the 1989 Exxon Valdez oil spill in Alaska, when an oil tanker ran aground, spilling some 250,000 barrels of crude oil into Prince William Sound. The Exxon Valdez was the most significant spill in U.S. history until the current BP Deepwater Horizon spill in the Gulf of Mexico. The Exxon Valdez spill had devastating economic and environmental consequences for some. Local fishers lost income, and the natural environment in Prince William Sound took decades to recover. But the net impact on gross domestic product [glossary] was likely positive, as the cleanup costs likely exceeded the economic cost of the spill itself.

The economics of the crisis reflect the challenge of externalities, costs associated with the production or consumption of a good, but which are not factored into the price of that good. Gross domestic product counts all economic activity as positive. Cleaning the oil spill is additive. There is no negative cost withdrawn from GDP. Car accidents, hurricane or earthquake damage, and expensive medical treatments for preventable diseases or conditions similarly add to the GDP rather than detract from it. In simple economic terms, if we wanted economic growth, more car accidents, oil spills, or earthquakes would be good for the economy!  This is clearly a counterintuitive position, as few rational people would suggest that what we really need are more oil spills.

To develop a more accurate measure of economic activity, some have argued for a rethinking of gross domestic product as a measure of progress. Already, France has moved away from using GDP alone. Some economists argue that we should use something like the genuine progress indicator, which would only include goods and services which improve the public welfare. Such a system would certainly help us think more rationally about the real costs of environmental crises like Deepwater Horizons.

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.