By Zahid Asghar and Mahmood Khalid
Accurate measurement of GDP growth and its constituents is critical for credibility, investor and consumer confidence and sound policy navigation. These measurements also need updating from time to time to maintain quality and integrity, especially because of rapid technological changes in production setups and information revolution. However, measuring economy has always been challenging, and we commonly perceive it as a complex and difficult task. Political and economic issues spring from these statistics influencing the future political landscape.
National accounts provide the basic framework for measuring economy, monitoring and evaluation of economic activity, income and expenditures at the national and sector level. These are central to informed decision making by policy makers, entrepreneurs and the public. The contribution to GDP of each sector is at the heart of the battle for national resources. In such a scenario, it is important that we not misrepresent any sector or even province in national GDP.
Revision of National Accounts to account for structural changes in the economy, relative prices and replacing old base year with new base to better capture the economic activities is a routine matter for most statistical agencies in most countries. For a developing country like Pakistan, with a vast undocumented (or informal) sector and uneven quality of economic statistics, base year revision is usually an occasion to improve the methodologies, bring in newer and better databases, and address long held infirmities in the national accounts estimates.
Most Asian countries, including Bangladesh, China, India, Indonesia, Malaysia, Hong Kong, Philippines, Sri Lanka, Thailand, and Vietnam have followed the practice of rebasing their accounts roughly every 10 years; while Korea and Singapore revise their base year after every 5 years. Developed countries undertake rebasing even more frequently. Bhutan and Pakistan on average took 20 and 17 years, respectively, to accomplish the same task.
If we do base year revision exercise regularly, it will lead to a marginal increase in absolute size of aggregate measures. Because of rebasing as economic activity get better presented with not much change in the growth rate of these estimates. With long breaks, it becomes difficult to assess whether changes in absolute size and growth rates are because of structural changes or some methodological changes. Pakistan has not revised its National Income Accounts (NIA) from base year 2005-06. And there appears to be only a remote possibility they are being updated soon.
The Technical committee on National Accounts expressed reservations about CMI GVA calculations based on poor response rate of CMI. Moreover, the committee did not get any satisfactory answer to its queries. But in India they included the contribution of 36% of non-existing companies in revising the base year to 2015. But do we know how many shell companies exist in Pakistan? It is unlikely. There were many other issues including lack of technical capacity for revision which likely caused postponement of rebasing till now.
Another issue with the current National Income Accounts is that LSM understates the size of manufacturing in national accounts based on 2005-06 CMI data as they only cover 15 broad categories, while the global practice is to include 22 categories. They include industries like office and accounting machines and computers, recycling of waste metal and non-metal scrap, plastics, packaged food among others in LSM. These industries have grown both in size and variety over the past 15 years. We do not base the contribution of the LSM on data provided by establishment or enterprise, but the main approach for National Accounts is functional or commodity approach. We assume the commodity approach is better than establishment approach. What is the gap between the two is difficult to measure unless we carry out some research studies out on the subject.
LSM data is not a proper reflection of industrial data, as PBS has to rely on data provided by industries themselves. So there may be an issue of under-reporting due to evade taxes. For example, Pakistan Auto Manufacturing Association (PAMA) provides data on its members in the automotive industry, but this leaves out Chinese players. PBS relies on OCAC data related to “Refineries, Oil Marketing Companies and a Pipeline Company,” but numbers reported by the former differ many times than that of the latter.
Another major issue is that we assume Input-Output ratios are constant until next rebasing takes place. But delays in revision of base year when rapid technological changes and digital innovations are taking place implies that various sectors’ share is understated or overstated in GDP. Besides this, other variables such as investment are also under reported.
Just like any other asset, national accounts are also an asset that depreciates. Therefore, new periodic revisions are of immense value to gauge economic performance of a country. But this improvement does not come without cost since it requires collaboration with government officials, policy makers, academics, researchers, and businesses.
Government has rightly felt the need to develop quarterly GDP figures and Provincial GDPs. They have setup technical committees, but such committees are toothless and may not contribute as per the actual need. Therefore, there is a dire need to establish a center of excellence in research which continuously working on challenges faced in measurement of economic activity in modern times. Pakistan Bureau of Statistics has neither financial nor human resources to carry out such studies and work on such complex challenges. Besides being a government office has typical problems of governance. Universities have neither research interest in this matter because of limited number of international outlets to publish research work in the area nor any funding to carry out such type of research.
The only way forward for the government is to establish an independent research center in a university to work together on emerging issues and should continuously update on emerging issues. And this being a third party endeavor would increase the credibility of the National Income figures presented by the government as well as provide a robust database for many economic decision-making by private agents and policy makers.
Besides developing a state-of-the-art research center, we also need capacity building at a national level to deal with issues related to measurement of GDP and updating National Accounts. This requires research studies to be commissioned through the research center. We should compel PBS to collaborate and share all necessary information and Ministry of Planning, Development and Special Initiative to set research issues in coordination with the research center to overcome measurement challenges of national economy.
 Asian Development Bank (2002). RETA 5874: Compiling, Rebasing, and Linking National Accounts in the Asian and Pacific Region. Manila: ADB
About the authors:
- Zahid Asghar is Professor, Quaid-i-Azam University, Islamabad
- Mahmood Khalid is Senior Research Economist, PIDE
A good blog, surely there is a need for base year revision.