10 February 2013

Ethiopia: GDP Rebasing Might Suppress Growth - Economists


For economists, Gross Domestic Product (GDP), which is the market value of final goods and services produced within a country in a given period of time, is the most important measure of economic activities.

Thus, when responsible departments make announcements about it, it will automatically get the keen attention of experts in the profession.

The growth rate of the Ethiopian economy for 2011/12 was announced this week, as we heard from officials at the helm, and it was said that it followed a different trend to that of previous years. So, for those who only have the sense of hearing the word 'double-digit' economic growth, the disclosed economic growth rate may not sound similar, although the rate, which is 8.5pc, can still be rated as outstanding compared to the current trend in other sub-Saharan Africa economies.

The government has pointed towards the change in the base-year, as well as a low performance in some sectors, as reasons for the high but 'single-digit' economic growth performance of the economy.

It is good practice to change and work with a new base year, for at least two reasons. A new base-year can better accommodate the current characteristics of the economy, compared to that of an outdated base year, if the current socio-economic conditions of the country are believed to be differing, structurally, from the past. GDP rebasing could also be done to keep up with the evolution of prices in the economy. In other words, commodity prices are recalculated according to prices of a more recent time.

When such things happen, especially in developing countries, GDP may jump by unbelievable rates, such as 60pc, as we have seen withGhana. With such adjustments in base years,Ghanahas now moved from a low-income to a low-middle-income country, which is good as they now feel as though they have tangibly progressed. Their main reason for rebasing was due to a major structural change in their service sector within that period. As a result, some of their informal sectors got the chance to join the formal sector in their GDP calculation.

However, often, as we have seen in developed countries, rebasing may cause growth to go down. Such a slowdown happens since major structural changes only take place slowly in developed countries, as opposed to developing countries. In those countries, rebasing is mostly done for the sake of accommodating current prices and may also be used for the purpose of improving statistical methodologies.

Thus, if the Ethiopian rebasing is done for the sake of incorporating the recent prices, the current drop in the Ethiopian economy, in terms of economic growth rate, may be justifiable to some extent. However, is the drop that comes with rebasing not 'offsetable'?

Economic growth is known for coming from productivity growth and accumulation of capital. The Ethiopian government is known for investing on the means of production, both in physical and human capital.

There have been huge investments in physical infrastructures, like; roads, hydropower, and universities. The latter are known for being the hardware for producing the human capital of a given nation.

Such activities, on behalf of the government, need to be appreciated. They, at first, lead to the accumulation of capital, whilst at the same time, or at a later stage, they may have an impact on the productivity of the nation.

In the Ethiopian case, since investments in infrastructure are well underway, the recent growth of the economy, most probably, has been coming from the accumulation of capital, rather than from productivity. However, is having economic growth through accumulation of capital sustainable?

Experiences of both countries that failed - including African countries of 1960s and 1970s and the former Soviet Union - as well as those that succeeded - particularly the former East Asian Tigers and the current South East Asian countries - do not support the sustainability of having growth only through accumulation of capital. If that is the case, what are countries likeEthiopiato do, in order to make their economic growth sustainable and, as of now, be able to offset the drop that comes from GDP rebasing?

The answers may lie on basing growth to come from increasing productivity. However, is this easy? It definitely is not. Why? Because having economic growth with high productivity, compared to that of accumulation of capital, needs an all too different strategy.

Under planned development strategies, accumulation of capital may be relatively easy, if there is a political commitment to do it. The government will collect taxes and, if it is politically committed to development, it will direct such finance to investment rather than consumption.

This may be the reason why we have been seeing a rise of capital in the Ethiopian economy over the past couple of years. Roads, universities, irrigation canals, airports and other vital infrastructures have been constructed across the country. However, the biggest headache remains making sure that citizens are ready and capable to utilise those infrastructures and become more productive.

Are there any unique policies from the government that can direct productivity? What will happen if economic growth finishes its honeymoon with expansionary fiscal policies of the government?

I have huge doubts in answering these questions. However, I believe, if there are strong incentives for the efficient utilisation of resources across activities, the current investment in means of production will help generate sustainable growth, whilst, too, offsetting the current dropdown in economic growth.

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