Does count­ing GDP count when it comes to de­vel­op­ment?

The Star Malaysia - StarBiz - - Viewpoint - Comment

THE re­cent de­bate on whether it makes more sense to mea­sure gross do­mes­tic prod­uct (GDP) in ring­git or US dol­lar is a healthy one.

It re­flects sound in­ter­est by many seg­ments of Malaysian so­ci­ety in sta­tis­tics that mea­sure eco­nomic de­vel­op­ment and how it changes peo­ple’s liv­ing stan­dards. This is the fun­da­men­tal ques­tion: what does GDP re­ally mean in the daily life of Malaysians. There are sound ar­gu­ments on both sides and, in a way, both are right, de­pend­ing on what per­spec­tive is taken.

In the World Bank, we use dif­fer­ent ways of mea­sur­ing GDP de­pend­ing on what kind of com­par­i­son we would like to make. For the most part, and when it comes to mea­sur­ing how the liv­ing stan­dards of Malaysians are chang­ing over time it makes sense to cal­cu­late in­comes, pro­duc­tion or spend- ing in ring­git terms.

In do­ing so, we cor­rect for the ef­fects of in­fla­tion by ad­just­ing nom­i­nal changes into real terms, to cap­ture real change over time – be it quar­ter by quar­ter, or year by year. In other words, we de­velop a real GDP estimate that is linked to con­stant prices from a base year, and there­fore cap­ture real growth in in­come over time, re­mov­ing the im­pact of in­fla­tion.

In this case, it does not mat­ter if this is done in ring­git, dol­lars, bushels of wheat or any other unit of ac­count. This al­lows us to have a clear pic­ture of real changes over time.

How­ever, it is im­por­tant that we not lose sight of the fact that in prac­tice, prices are con­stantly chang­ing across the econ­omy for fun­da­men­tal rea­sons other than in­fla­tion. For in­stance, this could be a change in the sup­ply of a Malaysian ex­port or the de­mand for it, which pushes real prices up and down. These are im­por­tant changes to look at, and re­flect real changes in the coun­try. It is the same with look­ing at the ex­change rate, which is just an­other price.

Now, Malaysian com­pa­nies and man­u­fac­tur­ers who trade in­ter­na­tion­ally will rightly worry about how their costs (es­pe­cially the costs of in­puts they must im­port) and sales (es­pe­cially their ex­ports) change due to move­ments in the ex­change rate. If their profit mar­gins drop be­cause their dol­lar-de­nom­i­nated im­ported in­puts are more ex­pen­sive with the higher ex­change rate to the dol­lar, they may feel that the coun­try’s strong GDP growth sta­tis­tics mean lit­tle.

Le­git­i­mate con­cerns

The same thing ap­plies to Malaysian par­ents whose chil­dren study abroad, and who must spend more ring­git to meet the same ed­u­ca­tional ex­penses they had last year.

These are le­git­i­mate con­cerns, but not ones that can be re­solved by chang­ing the way we mea­sure GDP. Rather, we should fo­cus not on chang­ing the estimate, but rather by look­ing at the large num­ber of fac­tors im­pact­ing the ex­change rate – many of which are out­side of the con­trol of pol­i­cy­mak­ers.

At this point, it should be noted that in some cases, it does make sense to mea­sure GDP in US dol­lars. This ap­plies in cases where we need to com­pare Malaysia with other coun­tries, say for ex­am­ple ei­ther the size of the econ­omy, or the share of the pop­u­la­tion liv­ing be­low the lo­cal poverty line. To do this we need to con­vert into a com­mon mea­sure­ment. This could be any cur­rency, but in prac­tice it is usu­ally the US dol­lar.

How­ever, the real ques­tion is whether GDP is a use­ful mea­sure of de­vel­op­ment, ir­re­spec­tive of whether it is de­nom­i­nated in ring­git or in US dol­lar. Malaysia has set it­self the goal of be­com­ing a high-in­come econ­omy within a gen­er­a­tion.

In purely math­e­mat­i­cal terms, this means reach­ing a spe­cific thresh­old. In the World Bank, we con­sider coun­tries to be “high in­come” if they have a GNI (gross na­tional in­come, a mea­sure close to GDP) of at least US$12,235 per capita in 2018. We use the “At­las method” which means we take a three-year av­er­age ex­change rate ad­justed for in­fla­tion to lessen the ef­fect of fluc­tu­a­tions and abrupt changes.

How­ever, this is just one in­di­ca­tor of progress. The true na­ture of a suc­cess­ful and pros­per­ous na­tion can­not be dis­tilled into one num­ber, whether GDP, GNI or what­ever. Malaysia’s true pros­per­ity is to be re­flected in the pro­duc­tiv­ity of its hu­man cap­i­tal, in the op­por­tu­ni­ties fac­ing small and medium en­ter­prises to grow, flour­ish and even fail, and in an econ­omy where en­trepreneurs and risk-tak­ers face level play­ing fields and equal chances to suc­ceed, and to fail.

Fi­nally, and per­haps most im­por­tantly, mea­sur­ing growth in GDP or GNI in per capita terms – no mat­ter what the cur­rency – is just an av­er­age. It’s a use­ful tool, but one that tells us very lit­tle about who is ben­e­fit­ting from growth and how wealth and pros­per­ity is shared across the pop­u­la­tion. Is GDP growth be­ing shared by all?

Are the in­comes of the high­est and low­est earn­ers con­verg­ing or mov­ing apart? This is of equal im­por­tance for pol­i­cy­mak­ers, who con­cern them­selves not only with trig­ger­ing growth, but also its dis­per­sion across re­gions and seg­ments of the pop­u­la­tion.

Cap­tur­ing this type of de­vel­op­ment re­quires count­ing a lot more than just one num­ber. So, the real ques­tion should be: Is GDP growth enough?

FARIS HADAD-ZERVOS

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