Government uses GDP as a political tool

Published: June 19, 2017
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It should focus more on increasing the welfare of people through structural reforms. PHOTO: NNI

It should focus more on increasing the welfare of people through structural reforms. PHOTO: NNI

LAHORE: Although the gross domestic product (GDP) is a statistical measure, it is used and manipulated by politicians to gain maximum mileage.

By showing a high GDP reading, politicians can portray that the economy has significantly improved vis-a-vis the previous political dispensation and the previous year.

On this basis, they can impress a large pool of people that the economy is booming. This situation demands a natural question whether the GDP statistics are reliable or not.

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We have to carefully look at some significant steps taken by the government in this regard. As a first move, the government revised down the GDP growth of the previous government in 2014. What is the benefit of doing this?

By revising down the GDP of previous administration, one can easily show that the economy is much better during the tenure of this government. A layman will just look at the number and be impressed with the high number.

The government has provisionally projected that the current year’s GDP will grow by 5.28% on the basis of nine-month data. This figure is nicely exaggerated to show that the economy has experienced a higher growth in the last 10 years.

Time and again, this kind of headline is trumpeted for political point-scoring. Since final estimates will come out in 2019, those numbers will be at the mercy of the upcoming finance minister. However, the numbers will be slightly revised down regardless of the government.

Another important metric is the debt-to-GDP ratio which, according to a law passed by one of the previous parliaments, should be around 60%.

The magic number of 60 has important political ramifications. Whenever the number exceeds 60, the media starts to criticise the government that it is living beyond its means. These headlines are quite popular, but have less economic significance.

The usual reply of the government is that debt has been accumulated by previous administrations and it is not only successfully managing it, but also reducing it. Sometimes criticism compels the government to invent a new definition since necessity is the mother of invention.

Apple and orange comparison

In Pakistan’s case, the government redefined the federal debt in the light of international best practices. This invention brought a new name – the net debt-to-GDP ratio.

One has to ask a simple question. The numerator is in net while the denominator is in gross. In economics, it can be called apple and orange comparison.

Another traditional metric is the GDP per capita ie the GDP/population, which is an important measure of welfare. If the GDP per capita increases every passing year, it will be considered that the economy is performing well and catering to the requirements of population.

In the community of nations, this old metric is, sometimes, used for comparison purpose and even enhances the prestige of a country.

After doing all these revisions and window dressing, the finance minister has pondered to re-evaluate the GDP. It is hoped that the re-evaluation exercise will increase the GDP to around $350 billion.

Why is this so? The answer is 2017 census. Since census has been held after 1998, there are guestimates that the population figure will be higher than the expected one.

In order to maintain and even increase the GDP per capita, a higher numerator will be a better option. Moreover, the higher GDP will create a reasonable cushion for borrowing.

In a nutshell, the government should give less attention to accounting exercises and focus more on increasing the welfare of masses through meaningful structural reforms.

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For instance, if the government tries to reduce the growing informality in the economy, the GDP will increase. Such reforms will bring reliability in the statistics which are necessary for development.

The writer is Assistant Professor of Economics at SDSB, Lahore University of Management Sciences (Lums)

Published in The Express Tribune, June 19th, 2017.

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Reader Comments (4)

  • Sami
    Jun 19, 2017 - 9:09AM

    The GDP figures, growth rate etc are independently assessed by international financial and rating agencies. Their estimates have been close to the government figures. So please stop spreading gloom and casting doubts, The economy has improved; give credit where it’s due.Recommend

  • amk
    Jun 19, 2017 - 9:25AM

    First the GoP should try to find a proper full time economist in position of finance minister. Secondly, we have many PhDs in economics who don’t bother to try and criticize the govt. false claims. We need these researchers working economics and economy to work on this problem and come up with their perspective of Pakistan Economy challenge the govt. claims with parallel data. Recommend

  • Waseem
    Jun 19, 2017 - 1:53PM

    @ sami, You will see the performance of this government in the next one year as the borrowing has increased and the reserves are depleting at a massive rate. Read the new IMF report. The reserves have gone down 4.5 billion dollars in the last 7 months even after massive borrowing. By the end of this government the reserves will be again at 13 billion dollars and the foreign debt will increase from 60 billion dollars to 90 billion dollars plus. While if you see the influx of dollars you will find out that the influx has not increased in the last 5 years as exports have come down from 25 billion dollars to 20 billion dollars while remittances have gone up from 13-14 billion dollars to 19 billion dollars. So the influx has remained same while imports and debt repayments and other outflows has increased massively. Recommend

  • gp65
    Jun 20, 2017 - 11:56PM

    “After doing all these revisions and window dressing, the finance minister has pondered to re-evaluate the GDP. It is hoped that the re-evaluation exercise will increase the GDP to around $350 billion…In order to maintain and even increase the GDP per capita, a higher numerator will be a better option. Moreover, the higher GDP will create a reasonable cushion for borrowing”

    Well artificially inflating GDP may make the per capita GDP look better but it will make the tax to GDP ratio worse. This will make donor countries Pakistan’s own efforts to raise revenue internally before asking for aid.
    Separately foreign lenders to Pakistan will not look at GDP figures but rather your forex reserves and exports which are both low.
    @Sami: “The GDP figures, growth rate etc are independently assessed by international financial and rating agencies. ”
    No, they are not. They rely on numbers provided by your government. They have no access to underlying raw economic data.Recommend

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