(Also published on The Malaysian Insider)
Something interesting happened to our national economy in May 2012. Our per capita Gross National Income (GNI) increased from RM29,094 to RM29,661. Our GDP increased from RM853 billion to RM881 billion and our GNI increased from RM831 billion to RM859 billion.
And all of these are nominal figures for the year ending 2011. Did we suddenly grow richer without actually realising it? Did we discover some hidden loose change in the deep recesses of the nation’s glove compartment or underneath the car seat?
Sadly, we’re not going to find an extra RM567 in our bank accounts, BR1M notwithstanding. These revisions occurred as part of a larger “rebasing” of our national accounts, a regular exercise undertaken by the Department of Statistics, due to improvements in data collection methods and conceptual innovations in the way we measure economic activity.
For this particular exercise, the base year to measure real economic activity was changed from 2000 to 2005 (hence the term “rebasing”). Previous base years were 1970, 1978 and 1987. This means that data for real economic activity such as GDP and GNI have been revised upwards as has nominal economic data, as indicated in the opening paragraph.
There are a few reasons why these statistical revisions are important, especially for the readers of this paper.
Firstly, they constitute important measures for policy makers who want to achieve certain economic targets. For example, the 2 per cent upwards revision in GNI per capita means that the nation is that much closer to the RM48,000 GNI per capita by 2020 goal set by the Economic Transformation Programme (ETP). The upwards revision in nominal GNI by RM28b or 3.4 per cent also means that the goal of an RM1.7 trillion economy by 2020 is closer to being achieved.
With these revisions, it also means that some of the intermediate and longer term targets set by the ETP may have to be revised. For example, using the ETP’s linear projection method of calculating its GNI targets, the nominal GNI target for 2012 will be RM894.
This means that nominal GNI only has to increase by 4.1 per cent from 2011 to 2012, and this target will surely be exceeded by a large margin, not necessarily because of the success of the ETP but more to do with the calculation method and the recent statistical revisions.
In addition, it may make sense for the RM1.7 trillion by 2020 target to be revised upwards given that it only requires an average nominal growth rate of 7.9 per cent from 2012 to 2020 in order to reach this target which is less than the 8.2 per cent average growth rate achieved from 2001 to 2010.
A more ambitious goal of a 10 per cent nominal GNI growth rate and a 6 per cent real GNI growth rate (assuming a more realistic 4 per cent GNI Deflator rather than the 2.8 per cent inflation rate which the ETP uses) would give us a target of a RM2 trillion economy with a GNI per capita of RM64,000 by 2020.
This revision also affects the government debt to GDP ratio. With the upwards revision in nominal GDP, our debt to GDP ratio at the end of 2011 has decreased from 53.5 per cent to 51.8 per cent, which means that the possibility of breaching the 55 per cent government debt to GDP statutory limit has been decreased, temporarily at least.
Investors and rating agencies then have to decide if this decrease in government debt to GDP ratio is economically significant or just a statistical “gimmick”, especially in terms of the government’s ability to continue to finance an increasing debt level and to raise tax revenue.
Secondly, these revisions are also important to economists, especially those who do more serious economic analysis and forecasting based on past data. They must, for example, make sure that they are comparing like to like, such as comparing real GDP in 2011 in 2005 constant prices to GDP in 2006 using 2005 as the base year rather than the GDP figure calculated using 2000 as the base year.
They must also understand how the individual components of the national accounts have been changed as a result of the rebasing exercise. The devil is in the detail and there are many details within our national accounts which tell us different things about the underlying structure of our economy.
For example, private investment or private gross fixed capital formation (GFCF), which is a component of national income using the expenditure method of calculation, increased by 19.4 per cent and 14.4 per cent in nominal and real terms respectively from 2010 to 2011 before the rebasing exercise.
After rebasing, calculations show that private investment grew by a smaller percentage, 16.6 per cent and 12.2 per cent in nominal and real terms, respectively. The astute economist would want to dig deeper and find out the explanation for this difference.
Economists would also want to understand some of the major changes in methodology in compiling our national accounts. For example, expenditure on weapons systems has been reclassified as capital formation or public investment whereas previously it was categorized as government or public consumption.
This may skew the picture of how much public spending is going into capital investment which is more likely to yield long term positive knock on effects such as roads and other physical infrastructure as compared to public investment in military systems and weapons, which has a much smaller long term multiplier effect, if any.
Thirdly, understanding these revisions is important for basic economic literacy. While some of the more technical aspects of this revision such as methodology and data sources may be too esoteric to be of interest to those who are not data geeks, a basic understanding of the nation’s economy is necessary for the average professional.
Once one is equipped with an understanding of real versus nominal GNI and GDP, measured in 2000 or 2005 constant prices or current prices pre or post 2005 rebasing, one can easily evaluate if statements concerning the larger economy coming from politicians, economists and analysts actually make economic sense. And a higher level of economic literacy will, hopefully, keep politicians, economist and analysts honest, at least when it comes to speaking and writing about the state of the nation’s economy.
* Ong Kian Ming holds a PhD in Political Science from Duke University. He is a lecturer and political analyst at UCSI University.