Not quite fool proof
Theory that GDP is underestimated is difficult to prove
THE NOTION THAT the size of SA’s economy could be underestimated may not be new, but when President Thabo Mbeki stands up and says so it certainly warrants some further investigation.
As a result, Finweek decided to poll several leading economic minds to ascertain whether or not the claim holds any water.
By far the most popular reason given for the alleged underestimation is that official GDP figures underestimate the size of SA’s informal sector.
According to Statistics SA the informal sector accounts for between 6% and 7% of GDP. However the World Bank puts the figure as high as 28,4%.
This is according to a paper published in 2002 by Friedrich Schneider titled Size and Measurement of the Informal Economy in 110 Countries around the World.
What’s interesting though, is that both the World Bank and Stats SA use remarkably similar definitions of informal economic activity. The World Bank defines the informal economy as all economic activity that would be taxable if it were reported to the state. Stats SA’s definition regards all economically active business entities that are not registered for either VAT or income tax as informal.
Considering the similarity of the definitions, the size of the discrepancy between the World Bank’s estimate and that of Stats SA does imply some local undermeasurement.
However, when Finweek pointed this out as far back as 2005, Stats SA claimed the World Bank was “wrong”, as informal activity typically accounted for a “very small trade value” rather than massive value add (see Finweek 20 April 2005).
Econometrix Economist Tony Twine agrees.
“Hawkers add precious little in terms of value added,” he says. “Their contribution to the economy is simply the small profit margin they add to their costs.”
Rashad Cassim, Deputy Director-General of Economics at Stats SA, also argues that even if the informal sector were somewhat underestimated it still wouldn’t make any major difference to existing GDP estimates.
“There’s a big difference between the absolute size of the economy and the rate of economic growth,” says Cassim. “Even if the absolute size of the economy is wrong, it wouldn’t affect the rate of growth. For example if we found that the absolute size of economy was 10% larger it would affect the size of the base used for our calculations but not the rate of growth.
“Unless there was some startling finding that the informal sector accounted for a massive percentage of economic activity and was growing at say three times the pace of the formal sector, it really wouldn’t make much difference.”
Another red flag raised by economists is the role of illegal immigrants. T-Sec Econo- mist Mike Schüssler claims that between 3m and 10m illegal immigrants are living in SA, many of whom provide services that are not formally captured by GDP estimates.
However, Joe de Beer, Head of National Accounts at Stats SA, disagrees.
“GDP calculations do not deal with individuals but with the business entities they work for,” he says. “If the business they work for is a VAT-paying entity, then their economic activity will be captured. As statisticians, we simply ask for annual turnover figures so, from a GDP calculation perspective, it doesn’t matter if businesses employ illegal immigrants or not.” However, Schüssler says it’s these very VAT receipts that point to why SA’s GDP could be underestimated.
According to Schüssler, VAT as a percentage of GDP has grown from just over 5% in the early Nineties to an average of 7,55% for the first three quarters of last year.
Given a loose correlation between growth in VAT receipts and economic growth, Schüssler says this could imply that the absolute size of SA’s GDP could be underestimated by up to 1,5% a year.
Although De Beer acknowledges that growth in VAT receipts is “quite closely correlated to GDP growth” he says that to simply argue that a 4% increase in VAT receipts implies a 4% increase in GDP is “a complete oversimplifi- cation”.
“Although some parts of GDP should grow at roughly the same rate as GDP, not all parts of GDP are linked to VAT,” he says. “For example, one does not pay VAT on your mortgage but this still forms part of GDP.”
De Beer also points out that GDP calculations use constant 2000 prices to remove price changes from the equation while VAT growth is expressed in nominal prices. Again this could result in VAT growth appearing considerably larger than GDP growth.
GDP could be underestimated by up to 1,5%. Mike Schüssler