GDP growth figures are cooked, not ‘massaged’



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The revelation made by JVP parliamentarian Anura Kumara Dissanayake that the Director of the National Accounts Division of the Department of Census and Statistics (DCS) had been prevailed upon by his superiors to ‘massage’ the GDP growth figure for the first quarter of 2013 and bump it up from 5.5% to 6% has exploded upon Sri Lanka like a dirty bomb. One newspaper editor told the present writer that he had uploaded the video clip of Dissanayake’s speech in parliament to his personal facebook page - so strong has been the impact of this revelation that the government was ‘massaging’ vital economic indices to hoodwink the public. Last week, several trade chambers including the Ceylon Chamber of Commerce called for a full investigation into the allegation that GDP growth figures were being doctored by the Department of Census and Statistics (DCS).


The government should heed the call of the business sector and appoint a commission of inquiry to look into these allegations. No country can go forward with the private sector which is the main source of economic growth and wealth creation entertaining doubts about such a basic economic indicator such as the growth rate. If this doubt is left unattended, it will grow like a canker on the government.  Minister Nimal Siripala de Silva’s rejoinder in parliament to the effect that the DCS has always done its duty conscientiously under all governments and that even the Asian Development Bank had forecast a growth rate of 6.8 for the year 2013 which matches the figure finally published by the DCS, has not had much resonance among the public.


When MP Dissanayake made this now famous speech during the budget debate on 20 December 2013, alleging that the (Acting) Director of National Accounts in the DCS had been asked to bump up the GDP growth rate for the 1st quarter of 2013, from 5.5% to 6%, he read out a few sentences from what he described as a ‘kata uttaraya’ (testimony) made by the then (Acting) Director of National Accounts in the DCS. He never tabled this document in parliament. The present writer approached Anura Kumara Dissanayake after a seminar last Wednesday and asked for a copy of this document but he said that he would have to ask the lawyers first. It is clear that the JVP has not shared this document with the UNP either. We obtained from other sources a copy of the document that Dissanayake quoted in parliament.


The ‘kata uttaraya’ that Parliamentarian Dissanayake was referring to was the submissions made by H.S. Wanasinghe, the former (Acting) Director of National Accounts of the DCS on 24 July 2013 in the presence of SLAS officer Buddhika Vehehregoda who had been appointed by the DCS to  inquire into a series of charges against Wanasinghe.  When Dissanayake read out a few sentences from this document in parliament, nobody asked him to table the whole document that he was reading from. The government naturally would have been frightened out of their wits when they heard what was in it and they certainly would not ask him to table it in parliament. As for the UNP, perhaps they did not bother to do so because the issue is ‘owned’ by the JVP. Anura Kumara Dissanayke, Vijitha Herath, Tilvin Silva and the others must be laughing their heads off at how easily the cat can be set among the pigeons and an uproar created with even the captains of industry calling for investigations and foreign funded NGOs asking for nothing less than a parliamentary select committee to look into the allegations! Had Wanasinghe’s submissions made to inquiring officer Buddhika Veheregoda been tabled in parliament, things would have been very different.    


How GDP figures are cooked


Before we delve further into Wanasinghe’s  ‘kata uttaraya’, we should have an understanding of how the GDP figures are compiled. The Gross Domestic Product of a country can be calculated in one of three ways - according to the value of total production output, total expenditure, or total income in the economy. The method used in Sri Lanka is the production approach.  National accounts are very different to the accounts of an individual business enterprise. In the case of an individual business, it is possible to keep track of everything that is produced.  But things are very different when it comes to the accounts of a whole nation. It is impossible to keep track of what every farmer in the country produces on a quarterly or annual basis, or sales in all the retail businesses, production in all the industries, construction sites, and so on.


Because of the impossibility of keeping track of everything that goes on in a country, national accounts are compiled on the basis of periodic sample surveys and the growth rate is estimated on that basis. National accounts can never be anything more than ‘estimates’ in any country. It may be the case that in a developed economy where much better track is kept of economic activity,  the data available to compute the national growth rate would be better than in less developed countries with large informal sectors.  But in every country, be it developed or underdeveloped, there will always be shortcomings in the data available to compute the national accounts. For example, the data from the sample surveys of various sectors may not have come in and ‘assumptions’ would need to be made to put out a growth figure for the quarter.


In the UK for instance, the British Office of National Statistics surveys about 44,000 businesses every month in the manufacturing, retail and construction sectors while figures on agricultural output is provided by the Department of Environment, Food and Rural Affairs. A very similar method is followed by Sri Lanka, but the size of the samples is much smaller in this country. For example the size of the Sri Lankan sample to survey industrial output is only 200 businesses. In SL figures on agricultural output is provided by the Department of Agriculture. GDP estimates are calculated in this manner on a quarterly and annual basis.


Two staffers of the Office of National Statistics of Britain, J.Jones and G.Walker, observed in a paper written last year, that the quarterly GDP growth estimates are prepared on the basis of incomplete data even in Britain and that this preliminary estimate is based on a ‘trade-off between accuracy and timeliness’. The initial estimates are revised over the following months as more information becomes available. They also observed that because adjustments, benchmarks, forecasts and the application of weights have to be made to produce a growth figure from incomplete data, the GDP is ‘a complex estimate to produce and is often difficult for people to understand how it is produced’. 


In Sri Lanka, national accounts are compiled according to the System of National Accounts (1993) endorsed by the IMF, the World Bank, European Commission, the United Nations and the Organisation for Economic Cooperation and Development (OECD). The whole process of compiling national accounts is all about inferences and extrapolations. If the accounts of individual companies are prepared by bookkeepers, the national accounts are prepared by statistical ‘cooks’. Whatever raw data they get from the surveys have to be mixed with theories and hypotheses to produce an informed estimate. GDP figures are always only estimates and not precise figures. As Morten Jerven, Assistant Professor at Simon Fraser University said in an interview last year, "There is always some information missing in any GDP estimate. The validity of GDP data is always an issue. Because of the manner in which GDP figures are compiled, they can be called into question and indeed often are."


GDP figures in Britain


Last year, Ed Conway the Economics Editor of Sky News UK confessed that though he had been covering economics for over a decade, he did not really know how the GDP figure was actually put together until one day he got the opportunity to do a documentary about it and cameras were admitted for the first time into the Office of National Statistics (ONS) in Britain. Conway wrote of his journey of discovery as follows:


"I vaguely assumed that the Office for National Statistics (The British equivalent of our Department of Census and Statistics) had some kind of electronic hotline into British business, some privileged access to their numbers, which in turn became the Gross Domestic Product number. Turns out I was monumentally wrong. For it transpires that GDP is actually a big, big survey.


"There is arguably no other number out there that can swing the financial markets quite so much, that can influence Britain’s feel good factor, that dominates the headlines and strikes fear into politicians. And yet there are many people who question whether we can really rely on the numbers. The first estimate of GDP is created from data collected in tens of thousands of surveys from businesses around the country - whether they’re manufacturers, construction firms, retailers or others.


"The problem is that by the time that first estimate needs to be produced, the ONS only has 44% of the relevant data (the rest arrives in dribs and drabs over the following months). So there are some pretty big gaps to be filled, and the ONS has to make some estimates about what the other data will eventually say when it comes in. It relies for this on computer models, backed up by assumptions and calculations from the ONS staff themselves. After they discuss them in so-called "balancing meetings" the statisticians ask each other whether the data are reliable and their assumptions have foundation.


"The ONS maintains that its record of revisions is acceptable by international standards. But some argue that the ONS has a tendency to revise history so substantially that often periods we thought at the time were slumps were actually booms. A case in point is the early 1990s - at the time, the ONS said the UK was suffering a double-dip recession. But by the end of the millennium it had revised its assessment - far from slumping, the UK was actually bouncing back forcefully at that point. Which implies that the ONS, and the way it puts together this most important of all numbers, will remain in the spotlight for the foreseeable future."


How it’s done in the USA


Susanne Trimbath, the Chief Economist of a consulting firm that works with CBS News of the USA, had this to say about the way GDP is calculated.


"Many people believe that the GDP comes from something like an income statement prepared by accountants.  It does not.  The GDP is an estimate of the total output of all production that occurs in the nation.  The Bureau of Economic Analysis (BEA) estimates the GDP using a variety of assumptions based on information reported from surveys conducted by the Census Bureau and from tax returns submitted to the Internal Revenue Service (IRS)."


"Since some data is simply not available, BEA has to make assumptions about the direction of the changes that they cannot record.  For example, for the first quarter of 2011, the BEA assumed that nondurable manufacturing inventories increased, exports increased, and imports increased. When you read that exports increased this year, that is because the BEA assumed it increased – they did not actually have any data to measure it when they released the new GDP numbers."


"Some data that the BEA needs, such as new car sales, are simply not reported anywhere.  Thus, the BEA developed estimating methods that adjust the data they can collect to match their concepts. Sometimes there just is no primary source data and the entire category is estimated.  The BEA makes seasonal adjustments, uses moving averages, inputs new data as ‘best level’ or ‘best change’, and data series are interpolated and extrapolated."


"Don’t put too much weight on every number reported about the economy.  When politicians start talking about, say, the impact of new tax rules on the GDP, they are not just comparing apples and oranges – they are making apple sauce! When someone asks me – a professional economist – how I think the economy is doing, I tell them: "Look out your window. Do your neighbours have jobs? Are the streets being cleaned and the trash being picked up? Is there more or less traffic when you go to work or the grocery store? Any of those signs will tell you as much as the GDP will about the economy."


Learning to live with it


In every country in the world, there are imputations and assumptions in compiling national accounts. Every country ‘cooks’ their national accounts in a controlled way according to certain set guidelines. Those who are not familiar with the manner in which national accounts are compiled, would be appalled at this. The Sri Lankan business community has asked for an investigation into the revelations made by parliamentarian Anura Kumara Dissanayake. While waiting for an investigation, there is something that the business community can do to reassure themselves about the bona fides of the Department of Census and Statistics.


The sample used to survey industrial output in this country for the purposes of compiling the GDP figures is rather small – just 200 of the biggest industrial establishments which provide their turnover figures on a monthly basis. These 200 companies are undoubtedly members of one trade chamber or another. So what the Chambers can do while waiting for an investigation, is to ask the largest industrial firms among their membership whether they reported turnover increases in excess of 6%  in 2013. If they have, then the business community will know that the growth figure reported by DCS is an accurate estimate.


Let us now come back to what Anura Kumara Dissanayake said in parliament. The gist of what the MP said was that on 17 June 2013, the then (Acting) Director of National Accounts had been asked by the Director General of the department to ‘bump up’ the growth rate for the 1st Quarter of 2013 to 6% in a situation where the officers of the National Accounts Division of the DCS had decided earlier that the growth rate was 5.5%. On 18 June 2013, the (Acting) Director of National Accounts had skyped the officers of his division and said that the growth rate had been fixed at 5.5% on everybody’s agreement and that if a different figure is to be given, they should take another look at the raw data they had. (That is all that Anura Kumara Dissanayake said in parliament about the matter.)


On the same day, 18 June 2013, H.S.Wanasinghe was transferred from the National Accounts Division to the Cartography Division of the DCS.  This makes it look as if Wanasinghe had been transferred out of the National Accounts Division because he had estimated the growth rate too low. The JVP too has been trying to make it look as if Wanasinghe had been transferred because he had refused to yield to pressure to bump up the growth rate.


Nothing could be further from the truth. On 12 July 2013, H.S.Wanasinghe filed Fundamental Rights application 222/13 in the Supreme Court against this transfer.  In his petition to the SC, Wanasinghe has not mentioned a single word about this spat over the GDP growth rate. What he has said in his petition is that he had been transferred out of the National Accounts Division as a punishment for his role in a trade union called the Government Statistical Services Association and in particular for having filed action in the SC against the DCS in 2012 demanding that service minutes be formulated for the department. In fact it turns out that that H.S.Wanasinghe is a founder and leading member of the Statistical Services Association and in just 12 months between July 2012 and July 2013, he and this trade union had filed five separate fundamental rights cases against the DCS resulting in no less than 28 hearings of the SC with more hearings scheduled for this year!


 Wanasinghe had in fact been fighting pitched battles with his department over a range of issues and this matter relating to the GDP growth rate came at the end of a series of skirmishes. Wanasinghe had good reason to believe that his transfer out of the National Accounts Division to a less high profile division was due to his involvement in the Statistical Services Association and his litigation against the Department. Because of the multiple lawsuits he had brought against the DCS, both recruitment and promotions in the department had been suspended and some people in the department would have been furious. He did not claim before the court that he had been transferred out because he had given a low estimate for the GDP.  In fact his submissions show that Wanasinghe actually did not have any issue with the DCS over the GDP growth rate.  


What Wanasinghe actually said


The submissions H.S.Wanasinghe made to inquiring officer Buddhika Veheregoda on 24.7.2013 goes into four and a half closely typed pages and Anura Kumara Dissanayke read out only a few sentences from the document in parliament. The public does not know what the rest of the letter says or whether parliamentarian Dissanayake was quoting things in the correct context. To be sure, the sentences that Dissanayake read out in parliament are in the document. Wanasinghe did say that he had come up with a GDP growth figure of 5.5% for the 1st Quarter of 2013 and he had been told by his superiors to increase the estimate to 6%. Many people think there is something suspicious or underhand in this, but this is a perfectly legitimate exercise in the process of compiling the GDP figures as Wanasinghe himself has said in his submissions. In addition to the few sentences that Dissanayake read out in parliament, Wanasinghe also made the following points in his submissions:


* On page 1 of his submission, Wanasinghe explained that the raw survey data available for the industrial, agricultural and service sectors are used to arrive at a rough GDP figure. Then this figure is analysed in terms of economic principles to see whether it balances. If it does not balance, the data is examined over and over again until the accuracy of the estimate is established. (As explained earlier, that is indeed the way things are done in all countries)  


* On page 1-2 he said that he had never before functioned as the director of a Division in the Department of Census and Statistics and that this was his first stint in a position like that. Furthermore, because of the complexity of the indices compiled by the National Accounts Division, international studies had pointed out that one had to serve at least eight years continuously in this division in order to acquire the necessary experience in compiling national accounts. Though he had an understanding of economics, Wanasinghe said he did not have the time to acquire practical expertise in the national accounting process as he had served in the division only for six months.


* On page 2-3 he has said that he did not hold a hard and fast position that the quarterly growth rate (for the 1st quarter 2013) should be 5.5% and that according to the principles of national accounting it is not possible to hold such a position. He said that national accounts estimates are made based on the details available at a given point in time.


* Explaining this point further, Wanasinghe said on page 2 that when the sectoral growth figure for agriculture, livestock and forestry was first formulated, it appeared as 2%. On a subsequent computation, it appeared as 1.5%. When the data changes, the growth rate also may change and in balancing the sectors, changes have to be made. Therefore it is not possible to hold a hard and fast position that the growth rate is exactly 5.5% no more no less.


* On page 3 Wanasinghe said that in the past, the practice was to hold several rounds of discussions with the Director General (of the DCS) before finalising the growth rate. After he (Wanasinghe) had become the Acting Director of the National Accounts Division, he too had followed this practice and held several rounds of discussions with the Director General  when finalising the growth figure for the last quarter of 2012, but that he had not followed the same practice with regard to the growth figure of the 1st quarter of 2013, because the Director General himself had said that so many meetings were not necessary and that it would be better if a figure was worked out and finalised after discussion with the Director General. Therefore, he (Wanasinghe) had not organised multiple consultation meetings as in the past.


These few points would suffice to show how misleading it can be when Anura Kumara Dissanayake reads out just a few sentences from a five page document. The immediate thing that can be done to counter Dissanayake’s allegations about doctoring the GDP growth figures is to table in parliament the full document he quoted from. It may also be expedient to release Wanasinghe’s submissions to the trade chambers. It must be said in conclusion that this controversy initiated by Anura Kumara Dissanayake has given everybody an opportunity to be educated about the manner in which the GDP is calculated. In every nation on earth - this figure is only an estimate, an approximation and nothing more.


 
 
 
 
 
 
 
 
 
 
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