Thursday, April 24, 2014

Does size matter?

The questionable criteria used to measure national economies.

We seem to have an obsession with size: from the bedroom to the boardroom and from national accounts to bank accounts.

This fixation is most likely rooted in the belief that size represents power and influence. So it is not surprising that the recent “re-grading” of Nigeria’s economy to being the largest in Africa ahead of South Africa caused some flutter in the media and, as this Moneyweb article pointed out “put a little dent in our national pride”. That article made a good comparison between the key economic indicators of the two countries so will not be recapped here.

The elephant in the room is that based purely on a calculation process of one specific indicator one can dramatically re-position a country’s economy. In this case the indicator is Gross Domestic product, or the value of goods and services produced in a year. A “re-basing” of that measurement in Nigeria’s case has not only put the country ahead of its closest African rival, but a full 1/3rd bigger. At a stroke of a pen, it has also reduced the country’s economic growth rate by about 1-percentage point, or 14% in real terms.

This all may seem academic and technical, a view that inappropriately scoffs at the considerable weight that is placed on this one holy cow in economic measurements. It stands virtually alone in driving a large number of very important decisions that affects the lives of ordinary citizens – monetary, fiscal and in company boardrooms. These in turn can affect confidence, investment, credit ratings, taxes, interest rates, exchange rates, prices and jobs.

It’s often been said that if you can’t measure it, you can’t manage it. Against that there is the aphorism often attributed to Albert Einstein but more likely coming from American sociologist William Bruce Cameron, which says: “not everything that counts can be counted, and not everything that can be counted counts”. I’ve often used that quote in relation to our obsession with measurements. What it does not quite cover, and which is very relevant to important national statistics, is that it is not only what is counted or omitted, but also how it is calculated.

A very large number of national statistics are not based on purely scientific criteria like measuring distances or temperature, but on surveys and sampling. While I am not a statistician and perhaps not fully qualified to challenge the veracity of such measurements, the Nigerian re-rating at least points to anomalies in the process of measurement and compilation of data. The rebasing of GDP, which most countries do regularly in at least five year intervals, implied a reassessment of relative contribution and influences of the various components.

While it is clearly impossible to do a fully comprehensive collection of all data, sampling has to rely on a number of complex and difficult criteria that inevitably increase the potential for inaccuracies and flaws. The size of the sample is one and the integrity of the data at source another. Then there is interpretation and adjustment for deviations from the norm, such as seasonal factors, to eventually extrapolate a dubious “average” which can be notoriously misleading.

A good example is the highly important inflation measurements or CPI, which virtually every citizen scoffs at as far removed from their own experience of rising living costs. In the end, no-one and nothing is “average”. Statistics iconoclast and statistics guru in his own right, Mike Schussler, has regularly taken issue with mainstay statisticians on some of the vital metrics that guide our economic destiny, including the GDP holy cow, inequality measurements, unemployment, poverty indicators and many more.

Defensive responses to his postulates ignore the all-important reality that these metrics can be challenged and that they are not infallible or absolute. It’s a bit like the Nkandla affair which has become unashamedly trivialised into a “who-dunnit” to draw attention away from the intolerable hypocrisy of one man’s blatant ostentation in the midst of misery and deprivation. It could, of course, be an indictment of many others here and in the rest of the world, who fail to acknowledge that inequality is perhaps the world’s biggest economic challenge, reaching the intolerable proportions that it did in the 19th century when it led to a rewriting of economic textbooks and spawned the founding theories of conflicting ideologies that threatened to plunge humanity into global conflict.

Perhaps the most important of the many challenges to the GDP measurement goes back more than 4½ decades when US presidential candidate, Robert Kennedy challenged it as “measuring everything except that which is worthwhile.” This raises the question what other “worthwhile” activities should be measured and how should they be interpreted?

It will be something of a contradiction to the theme, if I attempt a list of important national indicators, similar to the quarterly, monthly, weekly or daily indicators which I dealt with previously. Ultimately no indicator or statistic can be seen in isolation. We can expect much of that in the run up to the elections to support either the “good story” or the “bad story”. Virtually any indicator or statistic can be used or misused to support a particular argument, sometimes out of pure mischief or opportunism. Some of those more vulnerable to abuse are the Gini-coefficient reflecting inequality and the Consumer Price index measuring inflation.

At the very least, most of the important measurements that are trotted out regularly should be accompanied by disclaimers that draw attention to other metrics in the background. Here, I would include the UN’s Human Development index which covers life expectancy, education, and income; the WEF’s annual Global Competitiveness report; the Gini-coefficient because of its growing importance as an issue of our time; national debt and inflation. Of course there are many others that may be more relevant to another specific measurement or statistic being focused on.

But the above relate to specific long established criteria of what makes for a winning nation: having an external focus and developing people. These are far more the outcome of a national attitude, willingness and behaviour than they are of policies, institutions and measurements.

1 comment:

  1. Stunning article (as Usual) it also makes one think of the possible answer(s) to the question :
    "How long is a rope?" Any answer will be correct(or incorrect for that matter)