Overstated decline?
While the Philippine Statistics Authority reported a 16.5 percent economic contraction in the second quarter, could things actually have been better than what those numbers suggest? In a recent group chat with my Ateneo Economics faculty colleagues, someone mused that perhaps the reported decline in the economy partly reflects how most of our purchases are now being made in the informal sector.
He was alluding to the experience now common to many of us since the quarantines began, and persists to this day even with substantial easing up on various restrictions. Opting to confine ourselves to home rather than risk exposure to the coronavirus outside, my family has turned to buying our daily needs from sellers who take orders online or via text messages, and then deliver the items to our doorstep. Our purchases span the range from fresh produce like fish, meat, and vegetables, to household items like plastic storage boxes or household chemicals, all on a cash-on-delivery basis. There’s also a vegetable vendor who comes around in a van daily, shouting “Gulay!” as he drives through the neighborhood. His van’s rear door opens to an interesting array of fresh vegetables and fruits, a veritable produce market on wheels. These days, about the only regular needs we couldn’t buy this way are medications, which still require a trip to the drug store.
It’s indeed likely that most of us have shifted a large part of our usual purchases to informal sellers, with a corresponding reduction in purchases from formal business establishments whose transactions are more easily tracked in the economic data. My colleague could be right:
Much of the measured decline in economic activity might well be a reflection of a widespread shift away from formal recorded transactions in favor of informal ones below the radar. It’s not because there was a dramatic decline in our purchases, hence in the production activities associated with them; it’s more because the now more prominent economic activities are not directly recorded, hence largely escape gross domestic product (GDP) measurement.
Another colleague volunteered: “There are also many more of us who just cook our own meals, and no longer eat in restaurants.” That, too, would indeed mean that less of that daily activity now enters our GDP accounts, even if we are not necessarily eating less. This has always been one of the major limitations of GDP as a measure of economic activity; it only captures production and consumption that go through product and factor markets. If you cook your own meal out of produce grown in your own home garden, all of that never gets counted in GDP. But if that exact same meal had been purchased in a restaurant that sources its food ingredients from formal wholesalers and suppliers, that enters the GDP accounts. If you’re now having your hair cut by a family member or friend rather than going to your usual barber or hair salon forced to stay closed under the quarantine, GDP records a decline even if you never stopped getting haircuts.
This points to an important reason why GDP has never been a good basis on which to compare economic performance across countries. Some countries and societies have proportionately more do-it-yourself, hence unrecorded, production activities relative to those with more developed market systems. For the same reason, GDP as a measure is also often cited as unfair to women, because their valuable economic services in the home like child care, food preparation, and home management are never accounted for—and yet are counted if a hired yaya or housekeeper does the work.
Perhaps most importantly, GDP accounts have always failed to consider the state of our natural wealth, and how it depletes and depreciates with most activities in the modern economy. Company accounts routinely consider depreciation of physical assets as a cost, and yet national accounts completely ignore depreciation of our arguably more valuable natural assets. Many of us have in fact welcomed how the lockdowns helped revive nature and cleanse our air.
If our economic yardstick only accounted for all these, perhaps we wouldn’t be fretting now about a -16.5 percent decline.
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