Not quite fool proof

The­ory that GDP is un­der­es­ti­mated is dif­fi­cult to prove

Finweek English Edition - - Economic trends & analysis - GARTH THE­UNIS­SEN gartht@fin­

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

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