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Wednesday, 5 December 2012

How reliable are our GDP numbers?

One of the questions we get often relates to Zambia’s GDP. Recently someone asked : are the GDP growth figures a true reflection of Zambia’s economic performance?

The simple answer is no because GDP has several limitations for a country such as ours.

First, GDP measures the value of output produced in Zambia. But only that which is officially recorded. It does not capture our large informal sector (believed to be around 40% - 60% of gross national income), where the bulk of transactions are not recorded. So countries which record transactions better will have higher GDP than Zambia but that does not mean our true national output is smaller.

Secondly, GDP does not take into account negative externalities. So if you produce more copper and you cause sickness to people around Kankoyo, they say GDP has increased. But that is only because we are not producing the 'right amount' of copper in a safe and humane way. The true cost of producing copper is not being included.

Which leads to the third point. GDP does not measure quality of life. It does not tell us whether Zambians today are better in terms of “quality of living” than we were last year. It is a pure measure of income. Quality of life should not be confused with standard of living, a measure of income. Quality of life includes other things e.g. basic human rights, freedom, good mental well being, wealth in general, education, etc. Things that are seen as building blocks of “real development”

And of course it goes without saying, money cannot give you happiness. Especially if societies are highly unequal, like we have we in Zambia. The few control all the resources, mine our copper and keep shuffling national jobs among themselves. We are deeply unequal and as a result deeply unhappy.

A word of caution.

GDP growth may be a potentially useful statistic. It tells us that measured GDP has grown. But we need to be clear what the changes may be signaling. If GDP grows it is not necessarily the case that the economy has grown. It could simply be that more and more businesses are becoming formalised. In short our growth may be due to the fact that we are now better at recording and we have fewer black markets! In practice very little may have changed!

3 comments:

  1. Have you seen the paper by Alwyn Young on African GDP statistics -- he uses DHS data to come up with alternate estimates, but has to group all sub-Saharan Africa together because it's an unbalanced panel - thus no specific estimate for Zambia. My post on it: http://www.bdkeller.com/2012/12/alwyn-young/

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  2. Another reason GDP measures may not be appropriate for a country like Zambia is that it exports are large quantity of natural wealth (in the form of copper and cobalt in particular). This is problematic on two counts (both of which can be more easily understood if you consider what question we are really wanting to ask: "how much is the well-being of Zambians changing over time?")

    Firstly, the activities of the foreign-owned mining companies is included in GDP statistics, but this should not be seen as a reflection of the well-being of Zambians. Rather the benefit is to the mining companies. A better measure to use in this case is Gross National Product (GNP).

    Secondly, the act of mining involves the extraction of Zambia's wealth - every tonne of copper exported makes Zambia poorer (unless the proceeds of that export are used to benefit Zambians). So if Zambia's GDP increases because of mining, it could be at the expense of a loss in the country's wealth. The World Bank's "Changing Wealth of Nations" project recognises this issue and tries to adjust countries' GDP figures to take account of this loss of wealth (They call it "Adjusted Net Savings", or "Genuine Savings").

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  3. Also a note on the accuracy of GP stats in Zambia (and African countries in general):

    See this story: http://www.bbc.co.uk/news/magazine-20639775

    There was also a similar story in the economist at the time I think.

    Secondly, for Zambia - if you compare the tax revenues said to have been paid by the mining industry (published a year or so ago on this website) and the share of GDP from the mining sector for certain years (I think 2008 and 2009 are good examples) you will see that the GDP contribution is far too low in comparison with the tax revenue. By definition tax paid by the mining sector should be a proportion of the total GDP contribution.

    I can try to find the figures if any one is interested.

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