Five points for understanding Africa’s GDP revisions – By Matt Mossman

MossmanTanzania was expected to announced new economic growth figures Friday, becoming the latest African country to “˜rebase’ its gross domestic product (GDP). Now those numbers are expected in mid-November, but, whenever they come, Tanzania will join a growing list of African states that have completed this statistical catch-up exercise — a backward-looking revision of GDP figures that moves them  closer to observable reality. Kenya and Nigeria have done it this year, and found that their economies were respectively 25% and 89% larger than previously thought. The size of Tanzania’s is expected to jump 20%.

I recently explained in Bloomberg Businessweek magazine why rebasings are important:  They provide a clearer look at an economy, and in particular they capture where the most growth is coming from. But they also highlight the problem with GDP as a statistic – it’s never accurate, and often in developing countries it’s not even close. Whilst GDP’s comprehensiveness makes it the world’s most watched economic statistic, this same quality also makes it a very flawed one.

The only way to fix this would be to count up every single bit of economic activity every year, and that’s impossible. In Africa, America, or anywhere else, population and economic censuses of that detail and frequency would take too long and cost too much.

Instead, GDP is calculated according to a “˜base year’ – a year in which a good amount of those surveys are available, which becomes a starting point. In the following years statisticians use surveys to extrapolate growth from that base. Some of these estimates are rougher than others, and to avoid them devolving into sheer guesswork the African Development Bank recommends that rebasings occur every five years.

In Tanzania’s case, the base year is expected to be moved up from 2001 to 2007. With Nigeria, it went from 1990 to 2010. That larger gap helps in part to explain the larger rise in post-rebasing GDP.

With so much noise in the numbers, economists use some other measures as well to understand broad economic growth trends in countries. A common option in Africa is per-capita consumption of fossil fuels, because one of the first things people do when incomes rise in a developing economy is to buy a car or motorcycle.

But the problems with GDP do not mean GDP rebasings in Africa aren’t a useful exercise or should be ignored. Below the headline numbers are plenty of useful nuggets. The recent round of rebasings in Africa started in Ghana in 2010, and that means there’s been enough time past to learn some lessons. Here are five important ones:

Staffing and Budgets are a Factor: The capacity of national statistics office is typically hurt by low budgets argues Morten Jerven, an economic historian at Vancouver’s Simon Fraser University. Jerven published a book in 2012 called Poor Numbers: How We Are Misled by African Development Statistics and What to Do About It, and has argued on African Arguments that the problems with GDP make it unsuitable to really understand growth rates in African economies. Sometimes money for data collection materialises only when a leader desires a specific report, which might be aimed at a specific foreign investor or aid provider. It’s better for the economy when stats are driven by supply rather than by demand, Jerven said, because a reliable data set is an invitation to entrepreneurs to study it, spot opportunities, and add to the economy. “Good GDP stats are a public good, and it’s in the interest of government to provide them.”

Jerven has also found that it matters which government agency produced the statistics. Statistics offices are often responsible for this, but with economic figures a central bank or ministry of finance might produce numbers too. “The ministry of finance or the central bank also make projections, so there’s an incentive later to prove those estimates right,” Jerven said.

The Numbers are Improving in Some Areas:  Jerven’s scholarship has helped draw attention to the problem of statistics specifically in Africa, but it’s an issue that is prevalent across developing countries, according to the measurements of the World Bank’s Bulletin Board on Statistical Capacity. The African Development Bank’s push for better statistics has helped: according to President Donald Kaberuka, more population surveys have been completed in the last two years than in any other period in African history.

Statisticians are increasingly adopting global standards, and the numbers are more and more comparable across countries. “We acknowledge a challenge on social statistics,” he told me. “But on national accounts and the balance of payments we are much more confident.”

The Bad News: As a rule economic growth should mean more tax revenue, but that’s not necessarily happening. One of the ways that growth presents a problem for governments is that additional economic activity implies more demand for roads, power plants and other infrastructure – already a problem in most African countries. Governments are struggling to pay for it because they aren’t getting enough tax revenue to keep up, said Raymond Baker, president of Global Financial Integrity, the Washington, D.C.-based non-profit group that tracks illicit financial flows. “No country can adequately support its infrastructure needs and social services with tax-to-GDP ratios of just 10 to 15 percent, which is the case now.”

Borrowing is an Alternative…One way around that is to borrow money, build the roads and bridges, and hope that the tax collectors can do a better job in the future, before it’s time to pay back the national debts. African countries have been tapping the international bond market at a record pace in recent years, and rebasing helps make this possible. A bigger economy makes existing debts loom smaller when compared with GDP, and the rebasing process builds trust in the numbers, said Aly-Khan Satchu, the CEO of Nairobi-based investment and advisory firm Rich Management.

…But Don’t go Overboard: When Ghana rebased its economy in 2010, it helped its case in using borrowing as a way to speed up development, but the country is now a cautionary tale. “Everyone started looking at rebasings more carefully after Ghana did it in 2010”, said Brett Rowley, an emerging-markets sovereign debt analyst for the Los Angeles-based TCW Group. “Government officials took advantage of their improved debt ratios and started spending excessively and borrowing aggressively. The Ghana example is a useful reminder that sometimes GDP rebasing can give a government a false sense of security.”

In Ghana’s case the revenue boost it was counting on didn’t show up. It became an oil producer in 2010 but production hasn’t measured up to expectations. Adding to the problem were drops in prices for gold and volatility in those for cocoa, traditionally the main sources of export income.

The government is now struggling to cut costs as well as borrowing more. In September it sold $1bn in dollar-denominated bonds to investors. The cash is welcome now, but revenues must rise in the future in order to pay back the debt.

This bond sale happened at a particularly strange point in time – while the country was at the same time planning on a bailout from the International Monetary Fund. Negotiations are ongoing, which is tantamount to an admission that Ghana cannot handle its existing debt load. Still, investors were willing to buy the bonds. That’s a sign that in the current global economic climate it’s up to African governments themselves to make sure they don’t follow up a rebasing by taking on more debt than they can handle – the market won’t provide that discipline for them.

Matt Mossman is a Washington, D.C.-based writer and consultant specializing on Africa, political risk and natural resources.

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