Faster growth: Reality or fiction?

Editor’s note: Following is the continuation of the second and last part of a report on the President Gloria Arroyo’s final State of the Nation Address, which will be delivered today. The first part of this series reviewed the President’s 10-point agenda, and part two began by looking at her administration’s claims of fast growth.

Conclusion

Very weak database

Felipe Medalla of the University of the Philippines School of Economics and Karl Robert Jandoc, a Ph.D candidate, do not suggest that the possible overstatement is deliberate on the part of the National Statistical Coordination Board (NSCB) or the government. Indeed, the analysis of the two economists covers the post-Asian crisis period, which include the years between 1998 and 2000, when Medalla was economic planning secretary of then-President Joseph Estrada.

But they complained about the statistical board’s “very weak database,” which makes it difficult for independent experts to validate imputations that affected some of the values used in the national income accounts. They also described as “ad hoc” the changes that the board made in the estimation methodologies.

The Philippine Center for Investigative Journalism e-mailed the agency’s chief, Secretary-General Romulo Virola, for a comment, and he responded to say the board was still in the process of writing a comprehensive response to the paper of Medalla and Jandoc. Virola added that his terribly undermanned staff was simply overwhelmed with other tasks, including preparing the national accounts estimates for the second quarter of 2009, which are scheduled to be released next month.

In an article dated April 2009 and published on the agency’s website, Virola tried to clarify some of the issues raised by Medalla in earlier media interviews and presentations. He said that consumption expenditures in the national accounts were conceptually different from family income and expenditures. “If these terms are conceptually different, why should their growth rates be the same?” he asked. “Simple arithmetic should be able to explain why not.”

Virola, however, also acknowledged that the terms were “conceptually close to each other,” and proceeded to show that the growth trends of the two data sets are consistent if one used current figures rather than real or inflation-adjusted numbers.

But Medalla and Jandoc also take issue with Virola’s comments. The two remarked: “Given the obvious weaknesses of the national income accounts, it is quite alarming that the head of the NSCB could argue with alacrity that the divergence between the growth rates of real expenditures in the FIES [Family Income and Expenditures Survey] and NIA [National Income Accounts] is not an inconsistency just because the relationship between the nominal growth rates of FIES expenditures and personal consumption expenditures seems to show a nice fit.”

They added: “The first lesson that one is taught in any introductory undergraduate course in microeconomics and macroeconomics is that the effects of inflation should always be sorted out from real changes in economic variables; and that from the point of view of measuring welfare, expenditures, and output, it is real variables – not nominal—that matter.”

The debate is not esoteric as it sounds. The real-world implications are serious as they are plenty. Two chiefs of the Bureau of Internal Review (BIR) have already been fired for failing to meet tax collection targets based on GDP growth forecasts, the economists pointed out.

In recent years, Luzon was saddled with excess power generating capacity that was built to address supply shortfalls implied by rising GDP growth. “It is now fashionable to attribute the failure of electricity shortage to materialize to low elasticity or responsiveness of demand for electricity to output growth,” Medalla and Jandoc wrote. “But again, it could very well be that output has not grown as fast as the NSCB estimates.”

Quality of stats

The reliability of GDP data also bears on the government’s economic strategy and anti-poverty programs. If growth numbers are dependable, then the problem becomes the quality of economic expansion or translating growth into more jobs and incomes. If not, boosting economic growth in the first place is a major concern.

“It seems there is enough evidence to at least make government and analysts reexamine the quality of economic growth statistics before they try to answer these policy issues,” Medalla and Jandoc wrote.

It’s not just academics who are complaining about the reliability of the national income accounts. Big revisions in fourth quarter 2008 GDP growth estimates, announced by the National Statistical Coordination Board when it reported this year’s first quarter numbers in May, triggered shock and some angry comments from international analysts who help clients make investment decisions.

The board initially reported in January that quarter growth in the fourth quarter reached 1 percent. Four months later, in May, it revised the estimate and said growth was likely only 0.3 percent.

“Speaking frankly, this is the kind of release which makes an economist feel sick in the stomach,” wrote Nikhilesh Bhattacharyya, an associate economist at Moody’s economy.com, a unit of the US credit rating agency, in a blog shortly after the board announced first quarter GDP results. “The major source of discomfort is at how the National Statistics Coordination Bureau has conveyed the information that the Philippine economy is performing so poorly, having previously given the impression it was performing so well.”

He added: “With no reliable retail sales releases or other indicators of consumer spending, one has to rely solely on GDP figures for gauging household consumption, which makes up over 75 percent of total GDP. Prior to today, data showed resilient household spending had led to the Philippine economy to expand 1 percent quarter-on-quarter in the fourth quarter, probably outpacing growth in China, India and Indonesia. Evidently, it turns out the Philippine data [were] way off the mark.”

Resilient, complacent

Bhattacharyya surmised that the statistical board’s high GDP growth estimates late last year may have convinced government planners that the economy remained resilient and lulled them into complacency.

“Policy makers took their foot off the stimulus accelerator,” he wrote. “Monetary policy rate cuts were tempered, while the government was confident about achieving growth at the higher end of its 3.1-percent to 4.1-percent growth target and did not announce any new spending measures.”

The agency’s Virola, in an e-mailed response to a request for comment on the complaint of the Moody’s.com economist, said, “The quality of the national accounts estimates and their revisions [are] very much a function of the data used. The data come from the data ‘providers’—households, establishments/enterprises in the private sector, the government, etc. If these data providers do not cooperate [do not respond to surveys, delay their data submissions, do not provide accurate responses/data, etc.] the quality certainly suffers.”

The board admitted that the GDP estimates needed improvement, and was now taking steps to address the weaknesses. In April, it got a grant from the World Bank to strengthen the agency’s ability to revise the national accounts system, and to improve its quality and usefulness.

Questions about faster GDP growth may chafe the politician in President Arroyo, especially because it could undermine one of the few remaining pillars propping up her legitimacy. But perhaps the Ph.D. economist in her would be intrigued enough to also look into the issue more deeply, and allocate more funding to help the board do a proper job of measuring the real state of the economy and of the nation. –Roel Landingin, Philippine Center For Investigative Journalism