Why rebasing of the economy is academic

It is official. Our economy is 25 per cent larger than what our previous estimates.

As we have been told repeatedly, it does not mean that we are better off than we thought we were.

So, if does not make a material difference, what was all the fuss about?

I am perhaps more intrigued by the media and public attention that the rebasing of GDP is attracting than most people.

I am intrigued because the whole thing is a rather boring and routine statistical exercise that has in the past not attracted much attention.

That said, we have been told that it will enable the Government to plan better. I doubt, but let’s look at some examples of some implications.

Let’s start with a rather inconvenient one. Earlier in the year, we were told that we are hurtling into an economic crisis because the public wage bill was heading to 14 per cent of GDP, against a benchmark of seven per cent of GDP.

Using the new GDP the consolidated public sector wage bill was 6.8 per cent of GDP in 2013 as compared to 8.5 using the old data.

This includes the wage bill of parastatals and majority Government owned companies, Kengen for example, which pay their salaries out of income.

Excluding the majority owned companies the wage bill comes down to 6 percent, compared to 7.4 per cent using the old data.

The wage bill of the core government namely national government, county government and teachers is about 4.6 per cent of GDP as compared 5.7 per cent using the old data.

I have asserted before that we do not have a public wage bill problem. These numbers reinforce this assertion.

The new data also tell us our revenue effort is not as strong as we think it is. Our tax revenue is in the order of 18 per cent of GDP, down to 22 per cent using the old GDP.

The old data put our revenue way ahead of the African norm which is between 14 and 18 percent of GDP. The new data shows that we are still doing relatively but within the normal range.

That said the revenue yield has declined from 21 per cent a decade ago. This is very significant.

Three per cent of GDP is a very tidy sum of money, something in the order of 140 billion shillings. Why is it declining?

Two reasons. First, the economic expansion is primarily accounted for by the growth of the labour force, and virtually all of this growth occurs in the informal sector, in economic activities whose scale is below the tax net.

Second, the economic expansion in the rest of the economy has been investment led, including both public infrastructure investment as well as private, and investment does not yield much tax revenue.

WASTE OF EFFORT

There is much talk about the Government bringing the informal sector into the tax net. My own sense is that it’s largely a waste of effort.

In Economics 101, we learn that a perfectly competitive economy characterised by many small firms and easy entry and exit would not generate profits. Our jua kali economy is as close to the perfectly competitive economy as you are likely to get.

Running after kiosks is not the way to increase the tax yield. The way to increase it is to make it worthwhile for entrepreneurs to grow their businesses.

As it is now the financial and psychological cost of formalising small businesses far exceeds the benefits accrue to the owners.

Only the most ambitious and determined are willing to tough it out with all the compliance costs, including bribery, and most of us are not that ambitious. We just want a decent livelihood and if we can earn it informally, the better.

A more interesting, and problematic, implication of the new data is of course that we are now a middle income country.

The most widely recognised categorisation of countries by income status is done by the World Bank. It is updated every July.

As of July 2014 middle income countries was a country with an income per capita (national income divided by the population) in the range of 1,045 dollars all the way to 12,746 dollars. The bracket is further broken into two, lower and upper middle at 4125 dollars.

Prior to the revision, our income per capita in 2013 was 930 dollars just 10 per cent below the cut off. The next revision in July next year will definitely see us join the lower middle income club.

So what are we to aim for, now that we have hit the target 16 years ahead of schedule? Well, not quite.

The Vision 2030 target is to sustain growth at 10 per cent per year from 2012. This of itself is not sufficient to tell us what the actual target in terms of income per person.

To calculate that, we need to have a population growth rate and I don’t know what the Vision 2030 population growth assumption is, if any, so I will assume my own: 2.5 per cent per year.

This gives us a per capita growth target of 7.5 per cent per year for 18 years. This would be quite a feat, so far only achieved by China, but I suppose visions are meant to be ambitious.

A 7.5 per cent per capita growth puts the Vision 2030 target at 4700 dollars per capita, which is at the lower end of the upper middle income, halfway between Tunisia (US$ 4360) and Angola (US$ 5010).

The new data tells us that our per capita income is growing at 2.7 per cent. At this rate, we are looking at 1900 dollars by 2030, just ahead of Ghana today (US$ 1760) and way below Nigeria (US$2700).

At the current rate we are looking at 50 years to hit the 4700 dollars target.

In its classification statement, the World Bank observes that the classification “does not imply that all economies in the group are experiencing similar development or that other economies have reached a preferred or final stage of development”.

Case in point. Nigeria’s per capita income is more than twice ours, but our life expectancy is nine years more than Nigeria’s (51 and 61 years respectively).

ECONOMIC RAT RACE

This brings us back to the observation I made at the outset. GDP rebasing is a routine statistical exercise that has been going on behind the scenes all the time, why has it become newsworthy?

My take on this comes from economists George Akerlof and Michael Spence who together with Joseph Stiglitz, were awarded the 2001 Economics Nobel Prize for their contribution to the understanding of how lack of information distorts markets and people’s economic behaviour.

In one of his contributions, a 1971 paper titled “Economics of caste and of the rat race and other woeful tales”, Akerlof gives the example of a native American tribe, the Kwakiutl, whose chiefs competed for status by burning blankets during feasts—the more blankets a chief burned the more prestige he would enjoy.

This is not unlike the current craze among Kenyan CEOs to acquire and flaunt honorary doctorates even though they add nothing to a CEO’s management knowledge or leadership ability.

A more familiar example of this is academic credentialism.

Since it is impossible to observe someone ability, prospective employers reason that a person willing to read for an MBA at night is likely to be more hardworking than one who heads to the pub after work, even though the job does not require an MBA.

So we observe that the more competitive the job market gets, the more credentials employees acquire.

The qualifications are acquired to beat the competition, not because they are required to do the job. This particular proposition, known as “job market signalling” is due to Michael Spence.

The biggest news about Nigeria’s GDP rebasing was that it had overhauled South Africa to become Africa’s largest economy.

We in turn have overhauled Ghana, Tunisia and Ethiopia to become the ninth largest economy in Africa, and the fourth in Sub-sahara Africa.

This is of course until another bunch of countries rebase and the order changes all over again.

It seems to me that what has changed is that we, Africa that is, have finally joined the global economic rat race.

It looks like the status indicators of leaders is changing from the length of the motorcade to moving up the economic pecking order. Not a bad thing. Let the blankets burn.

David Ndii is Managing Director of Africa Economics. [email protected]