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Gross Domestic Product (GDP) is a political Tool

Diane Coyle published a great article on Quarterly Journal of Austrian Economics arguing that Gross Domestic Product (GDP) is still a superior method of measuring a nation’s macroeconomic health.

GDP serves the interests of politicians to the core. Consider for example a recent case where USA president Donald Trump was requesting World Bank to stop proving more loans to China complaining that the country is already receiving too much loans from the multilateral agency.

Researchers globally have always found it difficult to attribute the rise of national income accounting to a single moment, person or place in time. In fact, the need to measure the economy was triggered by the rapid economic growth during the industrial revolution.

Later on the Gross Domestic Product was shaped by both politics and economics. For instance, during the Great Depression two economists Simon Kuznets (American) and Colin Clark (British) were put in charge of producing national income accounts.

Simon Kuznets had a different idea from that of politicians of the time. He wanted to measure the country’s welfare and as a result never wanted to include government expenditure and other items such as expensive housing. On the other hand, political leaders wanted him to measure the total output. Politics carried the day.

Other powerful economists had a role to play in shaping GDP. In Britain, John Keynes influenced and provided a lot of support for national accounts. In his work, he once wrote the following:

“Every government since the last war has been unscientific and obscurantist, and has regarded the collection of essential facts a waste of money.”

That is one of the powerful statements which influenced Austin Robinson (a British economist) to commission his government to engage in collecting more statistics to be used in decision-making.

Austin Robinson was not alone, the multi-lateral agencies such as World Bank Group (WBG) and International Monetary Fund (IMF) and United Nations (UN) now depend on GDP figures for decision-making. Essentially, we can say that GDP is a gold standard in the development world.

GDP has not had a smooth flow everywhere, in the developing countries any changes to methodology of measuring GDP has always been resisted. The main reason is that improvement of GDP will make those countries appear richer and hence miss on development aid. It’s my hope that you remember the rebasing of Kenya’s GDP and the kind of debate it elicited.

China which is the second most powerful economy in the world at one point had a heated debate with IMF over revising of its GDP statistics. China won and her GDP per capita was lowered below the threshold to qualify for concessional loans.

Here in Africa, our own Ghana’s GDP increased overnight by 60% between 5th and 6th November 2010. Ghana suddenly became a “low-middle-income” nation. To say the truth, it’s only the GDP statistics which changed. The reality on the ground remained the same. This changes were brought about by revision of weights used in deriving the price index. This affected the real GDP for the first time since 1993.

The same scenario was observed in Nigeria. The changes added 89% to the country’s GDP overnight in the year 2014.

Changes to the methodology of calculating total output in Kenya resulted in adding 25% to the country’s GDP.

Gross Domestic product has a number of defects including the fact that it does not account for innovation, it does not include household labor which is always unpaid. It’s not a true reflection of the total output due to black markets which accounts for up to 30% of GDP in many countries.

Most economists agree that despite the weaknesses GDP is still a superior measure when compared to all the existing alternatives. Action is needed.

Kenya Joins Africa’s Top 10 Economies After Rebasing of Its GDP

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