7% growth and widespread scepticism

By the Economist

There is widespread and unprecedented scepticism about last year's economic growth of 7.4 percent. Even the Chief Justice is reported to have told an audience in Colombo that he did not believe the economy grew by as much as 7 percent. His scepticism is shared by an extensive array of persons from common people to academics. The question as to whether the economy really grew by 7 percent has become a talking point.

The general doubt is based on a gut feeling that if the economy grew by as much as 7 per cent there should be visible benefits. Instead they view 2006 as a year of costs and burdens, when their living standards were eroded and their economic difficulties increased. The commonsense view is that economic growth of this magnitude should be accompanied by benefits rather than burdens. Is there a truth in this popular concept of economic growth or is it a fallacy?

Before answering this all important question, let's look at some of the reasons for the doubts and questioning. Prior to the Central Bank's Annual Report that disclosed the 7.4 percent growth, the Department of Census and Statistics announced an economic growth of 7.2 percent. The discrepancy created some doubt about the Central Bank's higher figure. This discrepancy is in fact inconsequential. Such slight discrepancies are common place in highly advanced countries too for various reasons such as different time periods used as for instance the calendar year and the fiscal year.

They also arise owing to the use of different sources of data such as Balance of Payments data versus customs data and different methods and surveys to estimate components of the national accounts. National accounts are, in any case, approximate estimates and many of the statistics on which the accounting is done leave much to be desired. In fact in the case of a broad range of statistics of production they are either estimated through proxy figures and indirect imputations or simply estimates of persons like the grama sevakas. The range of reliable production figures for the calculation of the added values in output is not many. There are reliable figures only in a few sectors and sub sectors. These relatively reliable statistics are from tea and rubber production, financial sector statistics, trade statistics and some industries, provided the industries concerned send correct returns. The nature of statistical data collection is such that wide margins of error are likely.

In as far as the difference between the Census and Statistics and the Central Bank estimates are concerned, the fact that it was so small adds to a different concern as to whether the similar figure was by accident, collusion or cooperation. It is not possible to deal with the detailed issues of statistical collection here. Suffice it to say that at the best of times the national accounts are estimates and subject to broad margins of error. However, if these errors are of a similar magnitude year in and year out, then the growth figure remains largely unaffected. Nonetheless this character of rough estimation leaves room for massaging the figures. Whether there was such manipulation of the national accounts we will not know as there are no alternate figures to compare with. Therefore gut feelings are all we have and each person is entitled to have his own assessment and interpretation of these estimates.

The significant issues about growth are not statistical. A pertinent issue is whether the good growth performance should have translated into benefits. The answer is paradoxical: Yes and No. It is certainly yes to those in certain sectors of the economy where there was growth. A case in point is fisheries, where production increased by a significant 62 percent from the 2004 tsunami-affected depressed production that had declined by about 50 percent. Consequently, the incomes of fishermen would have grown. The paddy sector is a debatable one. Although paddy production showed a healthy growth, it is not clear whether farmers as a whole benefited as prices were depressed. Besides the growth in paddy production was not high as production in the previous year was also high. Those farmers who were able to sell their larger harvests at prices of around Rs. 16 would have benefited, not so farmers who sold their output at depressed prices.

Those in financial services and telecommunications would have benefited. These benefits would have come through increased dividends, increase in share values and increase in wages. The latter benefit may have also been confined to certain levels of employers. This is the reason why growth in the economy does not necessarily benefit all persons and may even hurt some owing to inflationary pressures in the economy. It must be stated in no uncertain terms that the inflationary pressures that were generated last year were not due to the increment in real goods and services. It was mainly due to increased government expenditure that did not lead to increases in goods and services that people consume. Those on wages and fixed incomes are more likely to have lost rather than gained in the growth.

In as far as the national accounts are concerned, it is the net increase in physical production that matters as the value of the output is monetised at a constant price. An added complexity arises owing to the value of production in several sub-sectors in the services sector being measured by the costs or sale values. In the case of educational, health, administrative and security services of the government, the value of output is the cost of services that are largely measured in terms of the salaries paid. When the numbers employed and the salaries paid are increased the value of output in these also rises. This has been an important component of the increase in output of last year.

This increase is felt only among those receiving the benefits of increased salary incomes and not by those obtaining the services. Besides, the increase in the output of services such as in defence and increases in salaries do not add to the amount of services available to consumers. The real issues in last year's growth is not the statistical figure on which the government and the Central Bank like to dwell on. It is the quality of the growth that is hardly discussed. What were the sources of the growth and is the growth substantial? Is the growth sustainable? Has it been achieved with costs that would affect the long term growth and development of the economy? These are the issues of concern.

The fact that the growth was accompanied by high inflation, the highest trade deficit, strains on the balance of payments and the depreciation of the currency, lets the cat out of the bag. These indicators lead to credence of the commonsense view that the growth was qualitatively insubstantial.