Growth rate: What it means and what it does not?

23 January 2014 06:25 am - 0 - {{hitsCtrl.values.hits}}

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By Dunstan Perera
Growth rate figures are often highlighted in the media by Central Bankers and others especially when they are estimated at say 6 to 7 per cent; Some say we are experiencing an economic boom, while other say we are on the verge of “taking off”; what does the growth rate at 7 per cent mean to the common man?
Does such a growth rate improve his income and also bring down living his costs. If I ask a few hypothetical individuals say John a government pensioner,   Joyce, a company secretary, and Jean, a housewife “what does a growth rate of 7 per cent mean to you?” The typical answer of everyone will be ‘I do not know what the growth rate really means.

When growth rates are high some people are saying that the economy is booming, but my situation is becoming worse; I am struggling to make ends meet due to high living costs”. It is mainly this notion that has prompted people to say that growth rate figures are cooked up.
Figures of growth rate have been debunked by politicians and others almost daily in the last few weeks; that they are exaggerated and cooked up to show a rosy picture of the Sri Lankan economy to attract foreign Investors. In discussing this issue an appropriate starting point is providing   an explanation of the meaning of growth rate and how it is calculated.

Growth rate is a basic economic indicator derived from what is called Gross Domestic Product (GDP), at constant prices which in turn is derived from GDP at current prices.

GDP at current & constant prices
GDP at current prices is the total value (usually at producers’ price) of goods and services produced in a country during a given period: (a) agricultural produce, tea, rubber, coconut , paddy and others, (b) industrial produce, garments, electricity, construction and others, and (c) Services,    trade, transport, banking , government and other productive service#. Figures of GDP at constant prices, also called the real value of goods and services produced, are important and necessary. They are obtained   by deflating or dividing figures of GDP at current prices by a suitable price index.

Growth rate
Growth rate is the year-to-year change in the figures of GDP at constant prices mentioned above. Growth rate data are useful for a number of purposes. They are used for comparison with growth rate in other countries. The most important use of data is to indicate one important aspect of a country’s economic performance viz the increase in the real value of goods and services produced from time to time as indicated by figures of GDP at constant prices. It is important to note that an enhanced growth rate reflects an improvement in the country’s productive capacity given the demand for the good in question, the availability of infrastructure facilities and related services. In this light, growth rate data provide a good perspective of the current economic situation which is often highlighted in many current economic reviews.
Does a growth rate at 7 percent result in an increase of the income of the community at large? Let us look at the growth in output of any component item in the growth rate for example tea, see Central Bank Annual Report for 2012, Statistical Appendix Table 2 for a complete list of items in the growth rate; an increase in the production of tea is associated with firstly in an increase in the raw materials produced and secondly with an increase in the output of secondary products such as packing materials and paper products and also of services mainly trade and transport, and thirdly with a possible increase in the employment .

The real benefit arising from a high growth rate is the income in rupees and cents derived from the sale of the increased output. In the case of tea, the additional income received from an increase in output accrues largely to the company directors and shareholders. Same with the raw materials produced to the extent they are produced or processed locally; same with secondary products and also with distributors, in trade and transport; the additional income from the output of these goods and services accrues mainly to the directors or owners. Finally, in the case of an increase in employment,   the additional workers employed in the trade receive part of the income accruing to the directors or owners.

In the case of construction, the benefits from an increase in output are more widespread. An increase in construction requires a large amount of raw materials, electrical goods, plastics some of which creates a demand for secondary and tertiary products, in addition to the demand for trade and transport and employment. Except in the case of extra employment in which the   additional workers receive part of increase of income received by the directors and owners, in all other cases the additional income arising from an increase in output accrues   to the directors or owners of the enterprises.

Thus an enhanced growth rate results an increase in income of mainly the directors or owners of the enterprises contributing to the high growth rate. It does not mean an increase in the economic wellbeing of the community at large. In other words the benefits from high growth rates do not fall equally on the population.

According to the latest available data on household incomes, based on Household Incomes and Expenditure Surveys 2006/07 and 2009/10 (see) Statistical Appendix of the Central Bank annual report for 2012, the richest 20 percent of the households got 54.1 percent of the total income, the middle 60 percent got 41.4 percent of the total income and the poorest 20% got only 4.1 per cent of the total income. Further evidence of the same phenomenon is that when the growth rate in 2012 was 6.4 per cent almost a third of the population was below the poverty line of Rs.3545, again based on data in the Central Bank annual report for 2012.

In Sri Lanka, there is no mechanism by which the increased incomes initially accruing to the directors and owners of the enterprises get distributed to the rest of the community directly or indirectly. One possibility is for the government to use part of tax collected from the directors and owners to reduce indirect taxes; government being burdened with mounting budget deficits, the trend in Indirect taxes is upward and not the other way round and this possibility can be ruled out.

Growth rate and inflation
There is the notion that growth rate figures are cooked up because the prevailing living costs affecting people in middle and lower income groups are high. High growth rate can bring down living costs only if growth rate results in the production of a large quantity of consumer goods thereby having a downward pressure on prices. There is however a host of factors that influence living costs, such as a rise in import prices, sales taxes and so on. The possibility of a high growth rate reducing and living costs in Sri Lanka is remote.

In sum, the income derived from a high growth rate accrues to the shareholders, directors and owners of the enterprises and to extra workers contributing to the high growth rate, and not necessarily to the rest of the population. Also it was seen that high growth rate do not necessarily reduce living costs.

Reliability of current figures
As stated at the beginning, the growth rate and GDP figures have been debunked almost daily by politicians and others ;that they are exaggerated and cooked up order to show a rosy picture of the Sri Lankan economy.

The Governor of the Central Bank has stated that the figures are correct   because they are accepted by the IMF and other international agencies. It is usually not the object of these agencies to verify the accuracy of growth rate and an other data which are accepted by them without question, on the assumption that the figures are prepared objectively and with utmost care.

However, in the case of the current figures, the IMF has reportedly found time to take a close look at the calculation of GDP; in the May 2013 report it has stated that “national accounts suffer from insufficient data sources and undeveloped statistical techniques and the method for deriving gross domestic product at constant prices was not satisfactory”, which is a direct contradiction of Cabral’s assertion. In view of such a scathing criticism by the IMF just 6 months earlier, It is surprising and difficult to understand why Cabral says the figures are correct because they are accepted by the IMF.

The criticism of the GDP and growth rate data that the figures are massaged and cooked up is not based on a study carried out by the critics on the validity of the figures but on certain assumptions which as indicated above are not valid as well; nevertheless the repetition of such criticism in parliament and elsewhere over several weeks is sufficient to cast doubts on the validity of the figures in the minds of the public.

More serious is the criticism from the another quarter viz the IMF which as stated above is apparently based on a study made by them in which they point out the areas they find unsatisfactory. Such criticism   cannot be ignored; the government should take note of the IMF remarks and establish a better system of preparing figures of GDP and growth rate.

Ideally the preparation of national accounts should be the responsibility of a team of perhaps three statisticians from three different government agencies who will be jointly responsible for the validity of the data; a report detailing the methods of calculation used and the data sources should be included in an appendix. New series of GDP and growth rate should be prepared, including revised figures from 2008 to 2012.

(The writer is a Former United Nations Advisor on National Accounts)

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Growth rate: What it means and what it does not?

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