Lies, damned lies, and GDP figures
This morning I read ST’s front-page article “Economists raise growth forecast to 9%” with more than the usual distaste. Besides the fact that it came next to a picture of the Health Minister exposing more skin than I can block out with one eye closed, the article reinforced a simplistic, flawed understanding of GDP.
GDP is simplistic and flawed as a measure of an economy’s health. This should be clear to anyone looking at the growth figures from the last few years. According to this table from the department of statistics, GDP grew 1.8% in 2008 and shrank 1.3% in 2009. Breaking it down, in Q1 of 2008, GDP grew 7.4% – which was offset by low growth (2.7%) in Q2, complete stagnation (0%) in Q3 and shrinkage (-2.5%) in Q4. In Q1 2009 GDP shrank another 8.9%. Yet I’m sure if it wasn’t pointed out, no one would have noticed that our economy was 11.4% smaller in Q1 2009 compared to six months ago. Did you earn 11.4% less at the start of 2009 than in the middle of 2008? Similarly, did you earn 15.5% more at the end of Q1 2010 than at the start? Probably not. Looking at it from a different perspective, how would you like it if the price of meat or eggs or milk went down 9% in 3 months and up 15% in another 3 months? This should make it clear that the volatility of Singapore’s GDP figures (down 9% one quarter, up 15% in another) makes analysing them, even attributing any significance to them, an exercise in futility – and what use is a statistic that can’t be analysed?
Another thing about GDP figures: they’re a mere numbers game. As CIMB-GK economist Song Seng Wun puts it in the article, “the simple mathematics of the numbers suggests that it’s quite tough to fall below 10 per cent growth for this year.” What he’s saying is, even if the economy stagnates for the next six months, we’d still be “growing” at least 10% for the whole year. What he’s saying is that the next 6 months and whatever follows next year is irrelevant, at least for this year’s growth forecast. This is attributing way too much importance to the figures and too little to actual movements in the economy – it’s akin to saying “who cares about the next half of the year? The numbers still look good!” I’m sure this isn’t quite what he intended, but the image of Nero fiddling does come to mind.
Besides criticising the utility of GDP figures in general, there are some aspects peculiar to (or “uniquely Singapore” about) Singapore’s GDP figures. Singapore is a small, open economy – when we say that, we mean that Singapore is a relatively small economy compared to, say, the UK, or Brazil, and that it depends on international trade far more than most other economies. In fact Singapore is the one country that’s more dependent on international trade than any other in the world (that’s because we’re not counting Hong Kong). As a result, a slight shrink in big economies (and trade partners) like the EU and the US can result in a very big drop in GDP here in Singapore. We’re like a small sampan caught in a huge storm in the middle of a very big ocean. In more technical language, that translates into more volatility in the growth statistics – rendering them even more useless as a measure of economic health. Is the strength and robustness of our economy – our companies, our institutions – dependent on what’s happening in the US or Japan or the EU? Probably yes, but probably not to such an extent as the statistics suggest.
Furthermore, there is massive foreign participation in our economy. Take a look at the table on page 5 of this document. Total GDP in 2008 was $257.4 billion, out of which the share of resident foreigners and resident foreign companies was $117.6 billion (roughly 45%) and “indigenous” GDP $139.7 billion (55%). In most economies the foreign share of GDP is far lower, and the indigenous share far higher. What we can expect from this is that the amount of money taken out of Singapore by foreign companies would be far higher than in most other economies (profit repatriation and such), and proportionately less would be available to trickle down into the wages of the man on the street. I expect the picture for wages is similar, since expatriates probably make up a disproportionately large minority of high-wage earners, compared to most other countries. I am not advocating that we chase foreign companies and expats out of Singapore – the benefits they bring in job creation, experience and other less tangible areas surely outweigh the costs. I’m merely pointing out that, given that their share of GDP is so high, GDP itself is not useful as an indicator of the benefits of economic growth that accrue to Singaporeans.
Given all the above, I do find it distasteful that the media adopts this relentlessly self-congratulatory, back-patting tone every time it reports good GDP growth figures. It would be far more revealing and truthful if they reported good wage growth or a fall in income inequality, and we would be the better for it.
