GDP revisions and what has been said on growth numbers

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Published: June 20, 2019 1:32:48 AM

Revising GDP series isn't unusual. Nor should one ascribe a malignant motive to a continuous and evolving process.

In no other country that I know of has criticism of SNA 2008 been reduced to the fine art of questioning veracity of data and undermining credibility

I am going to take a different tack in this column. I will remain in the background and let quotes of others do the talking for me.

“Is there a problem of mis-estimation of GDP growth after 2011? What is the likely magnitude? What is its potential cause, and in particular, how might the revisions in methodology have contributed to the over-estimation?” This quote is from Arvind Subramanian’s working paper on India’s GDP mis-estimation. India’s GDP series underwent revisions in January 2015. As I mentioned in an earlier column (FE, 14 June 2019), revising GDP series isn’t unusual. Nor should one ascribe a malignant motive to a continuous and evolving process. (In fairness, the former CEA hasn’t ascribed malignant motives, but others have.) System of National Accounts (SNA) is an international statistical standard for national accounts, adopted by UN Statistical Commission and the latest version is SNA 2008. This is a 720 page long document and I will skip details of how SNA 2008 is an improvement over the earlier SNA 1993. A country’s statistical system doesn’t have to conform exactly with SNA, but most countries follow its template, more or less. First, note all OECD countries changed their systems of national accounts after SNA 2008 was adopted. Most did so by December 2014. Turkey followed in 2015, and Chile and Japan in 2016. I mentioned OECD countries; this doesn’t mean other countries didn’t change their systems of national accounts. So did they, but OECD sources document changes better. Therefore, India is no outlier. Had India not changed its system, it would have been an outlier and would no doubt have been crucified by critics.

Second, there have been criticisms in other countries too. Let me give you a quote from a February 2015 OECD “Statistics Brief”. “National accounts also increasingly have become the object of criticism in media and academic research, the most notable recent examples being the measurement of financial services and the treatment of illegal activities. Sometimes these critiques are justified and call for further investigation. In other instances the comments and remarks simply show a certain ignorance of the standards and what they intend to measure, and call for enhanced communication from the national accounts community.” Notice what it says about ignorance and the points made are equally valid for India. But yes, India is an outlier. In no other country that I know of has criticism of SNA 2008 been reduced to the fine art of questioning veracity of data and undermining credibility of the national income accounting system. Third, the switch led to increases in GDP in some OECD countries, reductions in others. On balance, more countries had increases than decreases. For example, on an average for OECD countries, there was increase in real GDP of 0.7%. If there has been an increase in a country, that doesn’t mean GDP numbers are false and untrustworthy. At least, that hasn’t been the logic followed in OECD. In the cause of being argumentative, we are of course entitled to our norms of logic.

Fourth, if methodology and sources change, it’s perfectly understandable that one won’t be able to construct a perfect back-series. Let me quote from a 2008 note by Inter-Secretariat Working Group on National Accounts (ISWGNA), part of UNSD (United Nations Statistics Division). “It is expected that as countries adopt the new SNA, they will make estimates on both the old and new bases for an overlap period, but it is unlikely that countries will continue to compile “old” and “new” estimates in parallel for subsequent periods. This means that there will be a reduction in comparability for a number of years.” Clearly, compared to comments by Indian columnists, UN makes less stringent demands of national statistical systems. UN does not think lack of a back-series undermines credibility. Just as large swathes of India identify with Bollywood, chunks of USA identify with Hollywood. I wonder how many Indian GDP critics know that in 2013, consequent to the SNA 2008 change, USA went through what has been called the Hollywood makeover and that this added anything between 2.5% and 3% to US GDP growth. The relevant entity in USA is Bureau of Economic Analysis (BEA). I will now quote from what BEA did in 2013. “Recognize expenditures by business, government, and non-profit institutions serving households (NPISH) on research and development as fixed investment; Recognize expenditures by business and NPISH on entertainment, literary, and other artistic originals as fixed investment.”

In case this isn’t clear, in 2009, USA made major changes by including computer software in GDP. In 2013 it went one step further and started to include royalties from television, movies, songs and revenues from scientific research and development, aspects of intellectual property rights (IPR). These may be difficult to value, but that doesn’t mean they aren’t value-adds in service segments of GDP. Hence, they should be included in GDP calculations, as SNA 2008 indicated. To quote again from the BEA explanation, “Investment in R&D will be presented along with investment in software and in entertainment, literary, and artistic originals in a new asset category entitled “intellectual property products,” beginning with 1929…Some entertainment, literary, and other artistic originals are designed to generate mass reproductions for sale to the general public and to have a useful lifespan of more than one year. For 1929 forward, BEA will capitalize these items, which include theatrical movies, long-lived television programs, books, music, and “other” miscellaneous entertainment. This change will expand BEA’s measures of intangible assets.” This needs to be read twice for comprehension to sink in. The revisions haven’t been done only prospectively, the series has been dragged back, all the way to 1929. All the economic historians who wrote papers on the basis of historical US GDP data will now have to revise their papers. Why not drag it even further back in history? I suspect because the reliable Simon Kuznets estimates were for 1929, not before that. I haven’t seen any papers questioning veracity of BEA’s measurements, though scepticism about intangibles like IPR is understandable. Nor have I seen anyone plot correlations, run regressions, and suggest nefarious plots and regressive practices.

“The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the centre of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification…The abuses of national income estimates arise largely from a failure to take into account the precise definition of income and the methods of its evaluation which the estimator assumes in arriving at his final figures.” No prizes for guessing where this quote is from. It is from the 1934 Simon Kuznets report on US national income for the period 1929 to 1932. To understand national income accounting, Simon Kuznets is a good place to start. I believe it was Elvis Presley who said, “Don’t criticise what you don’t understand, son.”

(Last of a multi-part series)

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