Bill Gates: how GDP understates economic growth

GDP may be an inaccurate indicator in sub-Saharan Africa, which is a concern for those who want to use statistics to help the world's poorest people

Bill Gates guardian.co.uk, Wednesday 8 May 2013 14.47 BST

Ghanaian youths learn new skills on computers. When Ghana updated its reporting a few years ago, its GDP jumped by 60%. Photograph: Andrew Aitchison/ Andrew Aitchison/In Pictures/Corbis Even in good financial times, development aid budgets are hardly overflowing. Government leaders and donors must make hard decisions about where to focus their limited resources.

How do you decide which countries should get low-cost loans or cheaper vaccines, and which can afford to fund their own development programmes? The answer depends, in part, on how we measure growth and improvements in people's lives. Traditionally, one of the guiding factors has been per capita GDP the value of goods and services produced by a country in a year divided by the country's population. Yet GDP may be an inaccurate indicator in the poorest countries, which is a concern not only for policymakers or people like me who read lots of World Bank reports, but also for anyone who wants to use statistics to make the case for helping the world's poorest people. I have long believed that GDP understates growth even in rich countries, where its measurement is quite sophisticated, because it is very difficult to compare the value of baskets of goods across different time periods. In the United States, for example, a set of encyclopedias in 1960 was expensive but held great value for families with studious kids. (I can speak from experience, having spent many hours poring over the multi-volume World Book Encyclopedia that my parents bought for my sisters and me.) Now, thanks to the internet, kids have access to far more information for free. How do you factor that into GDP? The challenges of calculating GDP are particularly acute in sub-Saharan Africa, owing to weak national statistics offices and historical biases that muddy crucial measurements. Bothered by what he regarded as problems in Zambia's national statistics, Morten Jerven, an assistant professor at Simon Fraser University, spent four years examining how African countries obtain their data and the challenges they face in turning them into GDP estimates. His new book, Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It, makes a strong case that a lot of GDP measurements that we thought were accurate are far from it. Jerven notes that many African countries have trouble measuring the size of their relatively large subsistence economies and unrecorded economic activity. How do you account for the production of a farmer who grows and eats his own food? If subsistence farming is systematically underestimated, some of what looks like growth as an economy moves out of subsistence may merely reflect a shift to something that is easier to capture statistically. There are other problems with poor countries' GDP data. For example, many countries in sub-Saharan Africa do not update their reporting often enough, so their GDP numbers may miss large and fast-growing economic sectors, like cell phones. When Ghana updated its reporting a few years ago, its GDP jumped by 60%. But many people didn't understand that this was just a statistical anomaly, not an actual change in Ghanaians' standard of living. In addition, there are several ways to calculate GDP, and they can produce wildly different results. Jerven mentions three: the World Development Indicators, published by the World Bank (by far the most commonly used dataset); the Penn World Table, released by the University of Pennsylvania; and the Maddison Project at the University of Groningen, which is based on work by the late economist Angus Maddison. These sources rely on the same basic data, but they modify it in different ways to account for inflation and other factors. As a result, their rankings of different countries' economies can vary widely. Liberia is sub-Saharan Africa's second-poorest, seventh-poorest, or 22ndpoorest country in terms of GDP, depending on which authority you consult.

It is not only the relative rankings that differ. Sometimes, one source will show a country growing by several percentage points, and another source will show it shrinking over the same time period. Jerven cites these discrepancies to argue that we cannot be certain whether one poor country's GDP is higher than another's, and that we should not use GDP alone to make judgments about which economic policies lead to growth. Does that mean that we really don't know anything about what works (and what doesn't) in development? Not at all. Researchers have long used techniques like periodic household surveys to collect data. For example, the Demographic and Health Survey is conducted regularly to determine things like childhood and maternal death rates. Moreover, economists are using new techniques like satellite mapping of light sources to inform their estimates of economic growth. Although such methods are not perfect, they also are not susceptible to the same problems as GDP. Other ways to measure overall living standards in a country are similarly imperfect; but they nonetheless provide additional ways to understand poverty. One, called the Human Development Index, uses health and education statistics in addition to GDP. Another, the Multidimensional Poverty Index, uses 10 indicators, including nutrition, sanitation, and access to cooking fuel and water. And, by using purchasing power parity, which measures the cost of the same basket of goods and services in different countries, economists can adjust GDP to gain better insight into living standards. Yet it is clear to me that we need to devote greater resources to getting basic GDP numbers right. As Jerven argues, national statistics offices across Africa need more support so that they can obtain and report timelier and more accurate data. Donor governments and international organisations such as the World Bank need to do more to help African authorities produce a clearer picture of their economies. And African policymakers need to be more consistent about demanding better statistics and using them to inform decisions. I'm a big advocate for investing in health and development around the world. The better tools we have for measuring progress, the more we can ensure that those investments reach the people who need them the most. Copyright: Project Syndicate, 2013. Bill Gates is co-chair of the Bill & Melinda Gates Foundation.

Economic Times, 17th Sept., 2009 The GDP fetishism

Recent methodological advances have enabled us to assess better what contributes to citizens sense of well-being, and to gather the data needed to make such assessments on a regular basis, says Joseph E Stiglitz

STRIVING TO revive the world economy while simultaneously responding to the global climate crisis has raised a knotty question: are statistics giving us the right signals about what to do? In our performance-oriented world, measurement issues have taken on increased importance: what we measure affects what we do. If we have poor measures, what we strive to do (say, increase GDP) may actually contribute to a worsening of living standards. We may also be confronted with false choices, seeing trade-offs between output and environmental protection that dont exist. By contrast, a better measure of economic performance might show that steps taken to improve the environment are good for the economy. Eighteen months ago, French President Nicolas Sarkozy established an international Commission on the Measurement of Economic Performance and Social Progress, owing to his dissatisfaction and that of many others with the current state of statistical information about the economy and society. The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens own perceptions. Moreover, the focus on GDP creates conflicts: polit ical leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth all of which

might lower GDP growth. The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics. For example, while GDP is supposed to measure the value of output of goods and services, in one key sector government we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more even if inefficiently output goes up. In the last 60 y ears, the share of government output in GDP has increased from 21.4% to 38.6% in the United States, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the United Kingdom, and from 30.4% to 44.0% in Germany. So what was a relatively minor problem has now become a major one. Likewise, quality improvements say, better cars rather than just more cars account for much of the increase in GDP nowadays. But assessing quality improvements is difficult. Health care exemplifies this problem: much of medicine is publicly provided, and much of the advances are in quality. The same problems in making comparisons over time apply to comparisons across countries. The United States spends more on health care than any other country (both per capita and as a percentage of income), but gets poorer outcomes. Part of the difference between GDP per capita in the US and some European countries may thus be a result of the way we measure things. ANOTHER marked change in most societies is an increase in inequality. This means that there is increasing disparity between average (mean) income and the median income (that of the typical person, whose income lies in the middle of the distribution of all incomes). If a few bankers get much richer, average income can go up, even as most individuals incomes are declining. So GDP per capita statistics may not reflect what is happening to most citizens. We use market prices to value goods and services. But now, even those with the most faith in markets question reliance on market prices, as they argue against marktomarket valuations. The pre-crisis profits of banks one-third of all corporate profits appear to have been a mirage. This realisation casts a new light not only on our measures of performance, but also on the inferences we make. Before the crisis, when US growth (using standard GDP measures) seemed so much stronger than that of Europe, many Europeans argued that Europe should adopt US-style capitalism. Of course, anyone who wanted to could have seen American households growing indebtedness, which would have gone a long way toward correcting the false impression of success given by the GDP statistic. Recent methodological advances have enabled us to assess better what contributes to

citizens sense of well-being, and to gather the data needed to make such assessments on a regular basis. These studies, for instance, verify and quantify what should be obvious: the loss of a job has a greater impact than can be accounted for just by the loss of income. They also demonstrate the importance of social connectedness. Any good measure of how well we are doing must also take account of sustainability. Just as a firm needs to measure the depreciation of its capital, so, too, our national accounts need to reflect the depletion of natural resources and the degradation of our environment. Statistical frameworks are intended to summarise what is going on in our complex society in a few easily interpretable numbers. It should have been obvious that one couldnt reduce everything to a single number, GDP. The report by the Commission on the Measurement of Economic Performance and Social Progress will, one hopes, lead to a better understanding of the uses, and abuses, of that statistic. The report should also provide guidance for creating a broader set of indicators that more accurately capture both well-being and sustainability; and it should provide impetus for improving the ability of GDP and related statistics to assess the performance of the economy and society. Such reforms will help us direct our efforts (and resources) in ways that lead to improvement in both. (The author, Professor at Columbia University, served as Chairman of the Commission on the Measurement of Economic Performance and Social Progress. )