Several African countries have been revising the numbers they use to calculate their Gross Domestic Product (GDP). Ghana led the pack in 2010 with a 60% upward GDP revision, and now Nigeria boasts a revised GDP of 510 billion dollars, almost double her previously reported GDP—a staggering number compared to other African countries. This makes Nigeria the 24th largest economy globally. Kenya’s new unconfirmed numbers now categorize it as a middle-income country, as its revised GDP of $50bn now means that GDP per capita estimates rise from $943 to $1,136, which is $100 higher than the World Bank’s threshold of $1,036 for middle-income countries. Kenya effectively leapfrogs all previous targets and expectations of attaining middle-income status by 2030 (Vision 2030), by 2016 (UNECA, 2012), or by 2025 (Ernst & Young, 2013).
What exactly is this statistical revision? Calculating GDP is a complicated affair, more so for developing nations that have large informal and subsistence economies. In simple terms, GDP is arrived at in one of three ways: 1) by adding up what everyone earned in a year, termed the income approach, where all wages and salaries to employees, firm profits and taxes are summed up, minus all subsidies; 2) by adding up what everyone spent in a year, termed the expenditure approach, where all personal, corporate and government spending and net exports are summed up; 3) adding up the market value of all goods produced. The second approach is more prevalent. Obviously it is difficult to capture what is not formally reported to agencies such as the Kenya Revenue Authority, thus the jua kali sector remains largely unrepresented in these computations. Consequently, some claim that the GDP numbers largely underestimate the size of the economy by up to $10bn (I’m looking for the reference).
That said, GDP calculated for any given year must be ‘deflated’, i.e. adjusted to changes in price levels, or inflation. To do this, one must select a ‘base year’, i.e. a year in the recent past whose producer or consumer prices can be compared with current prices, thus generating a ratio named a price deflator. Current-year GDP, known as nominal GDP is divided by the deflator and multiplied by 100 to give the real GDP, i.e. the numbers that are actually reported for each year. In the case of Nigeria and Kenya, the base years have been 1990 and 2001 respectively. (Visit this link for a list of base years and planned revisions of African economies). According to the statistical offices in both countries, the base year used to compute the deflator underestimated the real GDP figures for several years due to changes in consumption and investment patterns. For instance, in the Kenyan case, 2009 was selected as the new base year because, until then, there have been major developments in telecoms and financial services sectors, manufacturing and agricultural sectors, and general infrastructure development, which are evidence of changes in investment patterns that warrant a heavier weight in the calculation of the deflator. Such data were not captured in the 2001 base-year figures. Nigeria updated her base year to 2010, and now new fast-growing industries like telecoms and film-making have been included in the GDP deflator calculation.
Why are base years important, and how should they be selected? In an economy with relatively stable economic variables such as inflation and exchange rates, base years shouldn’t matter. But in countries that have seen dramatic changes in these variables, in exports, and in structural changes in the economy such that new industrial sectors are gaining prominence, there’s a need for constant revision of base years used. The IMF recommends that African countries should use a base year less than 5 years old. In fact, the System of National Accounts (SNA) recommends the use of annual chain indices, which means in effect updating the base year each year.
It is important to mention at this point that the quality of the data used in these computations cannot be understated. The impression that new, more reliable data sources are being used in the revisions is just as important, if not more important. The numbers are only useful to the extent of the reliability of the data sources used (see this article by Morten Jerven for a discussion on the quality of African economic statistics).
Are there any benefits to these statistical revisions? Do they mean anything for the common mwananchi? What does it mean to attain middle-income status?
Statistics are important for economic governance; good statistics especially so. They help governments take stock, plan, spend and evaluate progress. Knowing where we stand helps us decide where we’re going. For that primary reason, the revision both of base years and data sources is important.
Being declared a middle-income country is a bonus that comes with some benefits. Foreign investors and foreign governments use these numbers to situate a country in a spectrum of global development, stability, competitiveness, economic potential, etc. Being perceived as making progress at the national level is very good. Such perception attracts investment. More foreign direct investment means more jobs and entrepreneurial opportunities in the domestic market. A middle-income status attaches some small positive regard for a given country’s exports on the international market. Further, it facilitates access to international financing at better rates. For instance, sovereign debt instruments such as infrastructure bonds issued by Kenya henceforth may be perceived as less risky on the international stage, or at the very least, perceived in a more positive light (though damped by security concerns – let’s see how the upcoming dollar deal goes). At the very least, the announcement shines a positive spotlight on Kenya, and gives impetus to the current government to fast-track its economic agenda.
These benefits accrue in the long-term, as they will take a few years to be felt at the household level (maybe less). The biggest challenge now is to reduce wage inequality and eliminate abject poverty in Kenya. Although more pressing for Kenya, most other middle-income countries including the BRICS countries face a similar challenge.