Ja­pan shake-up casts doubts over how GDP is mea­sured

The Myanmar Times - - International Business -

JA­PAN is eye­ing an over­haul of how it mea­sures growth in its econ­omy, and that is stir­ring fresh ques­tions about the re­li­a­bil­ity of the world’s goto in­di­ca­tor – gross do­mes­tic prod­uct (GDP) – in the dig­i­tal age.

Re­searchers at Ja­pan’s cen­tral bank crunched some num­bers re­cently and con­cluded that the boom­ing econ­omy, turned peren­nial lag­gard, ac­tu­ally grew 2.4 per­cent in fis­cal 2014 rather than shrink­ing an of­fi­cial 0.9pc.

If those num­bers are cor­rect, it might mean a re­ces­sion that year never hap­pened.

Tokyo’s re­view could have broader im­pli­ca­tions as other coun­tries also ques­tion a mea­sure­ment that was born out of the US Great De­pres­sion.

“The Bank of Ja­pan study is just the lat­est in a se­ries of new ques­tions raised about GDP num­bers,” Erik Nielsen, chief economist at UniCredit Re­search, said in a com­men­tary.

“If we are fly­ing blind, then how can we ex­pect good pol­i­cy­mak­ing?”

Whether it is the steel pro­duced to make your car, that tomato from the su­per­mar­ket, or your last den­tist ap­point­ment, GDP adds up the value of goods and ser­vices in an econ­omy over a cer­tain pe­riod – of­fer­ing a snap­shot of a coun­try’s pro­duc­tiv­ity.

In the old days, you might have booked a trip to Paris through a travel agent, bought a map to get your­self around the city and called the kids back home with a call­ing card. All those pur­chases go to­ward GDP.

Nowa­days, many con­sumers turn to on­line book­ing apps such as Ex­pe­dia and Airbnb, tap on free-to-use on­line maps, and phone home through no-cost sites like Skype or What­sApp – and it’s not eas­ily ac­counted for.

“All that eco­nomic ac­tiv­ity that used to be in GDP is now be­ing gen­er­ated by ser­vices that are ei­ther free or are paid for by ad­ver­tis­ing rather than the con­sumer,” pro­fes­sor Charles Bean, a for­mer deputy gov­er­nor at the Bank of Eng­land, said.

Mr Bean, tapped by Lon­don to study the prob­lem, con­cluded in a re­port this year that Bri­tain’s eco­nomic ac­tiv­ity is be­ing un­der­stated.

“Iron­i­cally, GDP may ac­tu­ally fall even though the quan­tity and qual­ity of ser­vices is in­creas­ing,” he said.

“Mea­sur­ing the econ­omy has never been harder.”

Lux­em­bourg-based EU sta­tis­tics agency Euro­stat has re­vised the way it mea­sured GDP to get in line with rec­om­men­da­tions from the United Na­tions Sta­tis­ti­cal Com­mis­sion.

Ac­cord­ing to the Bruegel think tank in Brus­sels, the im­pact on base GDP num­bers from the change in method­ol­ogy var­ied hugely across the EU, from 0.3 per­cent­age points in Lux­em­bourg to 9.3 per­cent­age points in Cyprus.

Many EU coun­tries have also in­tro­duced new sources of GDP and up­dated meth­ods, in­clud­ing a new, EU-wide way of mea­sur­ing il­le­gal or un­der­ground ac­tiv­i­ties such as the drug trade and pros­ti­tu­tion.

Other coun­tries face dif­fer­ent mea­sure­ment chal­lenges.

With in­fla­tion run­ning at an es­ti­mated 475pc an­nu­ally, Venezuela’s cen­tral bank has stopped pub­lish­ing key eco­nomic data on a reg­u­lar ba­sis, while China, the world’s num­ber-two econ­omy, has been ac­cused of tweak­ing its num­bers – in both di­rec­tions.

“The Chi­nese govern­ment likes to make the GDP trend to look smoother than it re­ally is,” said Claire Huang, a So­ci­ete Gen­erale China economist based in Hong Kong.

“It’s not al­ways mak­ing it higher. It ac­tu­ally low­ered it when the econ­omy was grow­ing very fast back in 2010. It wants to down­play the level of fluc­tu­a­tions in its econ­omy.”

For Ja­pan, the pos­si­ble cul­prits be­hind any mis-mea­sure­ment in­clude fewer com­pa­nies and house­holds fill­ing out off­i­cal sur­veys – the BoJ used tax re­turns in­stead – and miss­ing out on big chunks of the in­ter­net econ­omy.

Of­fi­cially, Ja­pan posted 0.2pc growth in April-June.

“A mea­sure­ment mis­take of 0.5pc in to­day’s Ja­pan ... eas­ily pushes the econ­omy into mea­sured re­ces­sion or pulls it into ac­cept­able growth,” said Martin Schulz, an economist at Fu­jitsu Re­search In­sti­tute in Tokyo.

But a few cor­rec­tions don’t mean Ja­pan’s once red-hot econ­omy is back on top.

“Most of the cor­rec­tions will only lead to one-off cor­rec­tions and not to an undis­cov­ered growth trend,” Mr Schulz said.

De­spite at­tempts to chal­lenge its promi­nence GDP still has a huge im­pact on pol­i­cy­mak­ing.

“If GDP is higher [than thought], then pro­duc­tiv­ity is not quite the prob­lem we thought it was,” said Mr Nielsen from UniCredit.

Dirk Philipsen, an eco­nomic his­tory pro­fes­sor at Duke Univer­sity in the United States, has big doubts about GDP.

“The ques­tion is what do we mean by growth and if we de­fine it by GDP, is it long-term sus­tain­able? The an­swer is most likely ‘No’. It re­quires too much de­struc­tion of the ecosys­tem.”

Even mod­est GDP in­creases don’t nec­es­sar­ily mean much for those strug­gling to get by – and they’re turn­ing to the likes of US pres­i­den­tial can­di­date Don­ald Trump or far­right French politi­cian Marine Le Pen for an­swers, Mr Philipsen said.

“A large num­ber of peo­ple re­alise, or at least sense, that their daily ex­pe­ri­ences are not re­flected in the cur­rent met­rics,” he said. –

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