Philosophy over coffee

7.3 or 7-3?

In Interesting, Size: Venti on June 25, 2008 at 9:23 am

Following is an article by Dr. Cielito Habito, former NEDA Director (and professor) published in the Philippine Daily Inquirer 3 months ago regarding some concerns expressed over the reported 7.3% GDP increase for the year 2007, which was one of the highest in the Asia Pacific region. This is a bit long but it’s worth a read.

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Is our GDP growth overstated?

First Posted 03/16/2008

A GOOD NUMBER OF ECONOMISTS AND financial analysts I know continue to scratch their heads over the reported 7.3-percent GDP growth of our economy in 2007, which made us the fastest growing economy in our neighborhood last year. Have we Filipinos become so unaccustomed to success that we find it hard to believe it when it comes? Or is it that we Filipinos have become so accustomed to deceit and lies from the government that it’s hard to believe information coming from their direction anymore—statistical data included?

Well, in the case of the recent data on the growth of the Philippine economy, there appear to be compelling reasons to question the reliability of the numbers we have been getting lately. I have mentioned in past columns the continuing work being done by former Neda chief Felipe Medalla to analyze data on our gross domestic product (GDP) over time. A key finding he makes is that the trends in these data have been in direct contradiction to the data that actually feed into it. I will cite just two instances here.

Overstated consumption?

Personal consumption expenditures (PCE) make up the bulk (70 percent) of the spending side of the GDP accounts. The most reliable data on this comes from the Family Income and Expenditures Survey (FIES), which surveys about 50,000 households all over the country every three years, since 1985. This would obviously be a key source for the PCE estimates in the GDP accounts. The problem is, GDP is reported every quarter, forcing government statisticians to find other ways to estimate PCE at that frequency (exactly how they do it has never been fully explained to the data users). Still, trends in the PCE estimates from the GDP accounts and those from the FIES should be consistent. And in fact, they have been—until after 2001.

Medalla finds that something strange happened after 2001. When he graphed the growth rates of PCE from both sources against each other, he found that the two trends had a clear systematic relationship from the 1980s up to 2000. But from 2001 onwards, PCE growth based on GDP data inexplicably got jacked up much higher than PCE growth implied by the FIES data–so the data points for 2001 onward end up in the wrong place (“outliers”) in the graph. The jump was so drastic that PCE based on GDP data grew fastest in the Arroyo years, and yet PCE from the FIES grew the slowest in that same period! Most analysts who know the data would tend to believe the FIES more. If this indicates PCE to be overstated in the GDP accounts, therein lies strong reason to suspect that GDP growth has been overstated lately.

Understated imports?

An equally compelling point from Medalla’s analysis concerns how the recent growth rate of GDP is made higher by slower import growth compared to the past. On the demand side, the economy’s output is measured as the sum of personal consumption expenditures (C), government consumption expenditures (G), investment expenditures (I), and net exports (exports X minus imports M). Domestic output (GDP) is thus measured as C+I+G+X minus M. A lower M thus makes measured GDP higher.

C+I+G+X grew much faster in the Ramos years (around 5 percent) than in the Arroyo years (less than 4 percent). And yet, GDP growth comes out higher lately simply because growth in imports, the item subtracted out, has been much slower. From more than 10-percent annual import growth in the 1990s, we see low single-digit growth rates under Arroyo, even turning negative (-5.4 percent) last year. If the data are reliable, this suggests that our economy has become less reliant on imports both inputs and finished products—and this would be good news. But is this really the case? Or are we simply increasingly unable to keep track of our true imports?

Smuggling: growing industry

I was recently informed that while our data record about $7 billion in imports from China, the Chinese government records about $30 billion in exports to us! With such huge discrepancy in our trade data with China alone, the likely value of smuggling into our country—the part of M that has gone unmeasured—is mind-boggling. And herein lies another answer to the apparent overestimation of our GDP growth—and I must point out that this is no fault of our dedicated professionals in the statistical system, who can only rely on the Bureau of Customs for official import data. If smuggling has indeed become the country’s fastest-growing industry in recent years, as many people have come to perceive, then that also explains why the reported growth in GDP has been so uncharacteristically high.

Peter Wallace, who has watched the Philippine economy closely for decades, simulated how GDP would have fared if imports had grown at a more “normal” rate of about 5 percent annually. He finds that 2007 GDP growth would have been only 4.8 percent under that scenario—and he believes that is much closer to the truth than the 7.3-percent growth reported by government. And he hasn’t even yet considered the likely overestimation of consumption explained above.

Fastest-growing economy in Southeast Asia? Think again.

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