By W.A. Wijewardena  –

Dr. W.A. Wijewardena

Jubilance over high growth rate

The Central Bank Annual Report for 2011, released last week one month before its statutory deadline, is jubilant about the real growth of 8.3 per cent which the country is estimated to have achieved, as per the calculations made by the country’s Statistics Bureau – the Department of Census and Statistics – in 2011. According to the Central Bank, this high real growth has marked two firsts: The first time the country had achieved a high growth of 8.3 per cent in its entire post independence history and the only occasion where it has been repeated for two consecutive years. Both these claims are correct in the sense that the closest to this record has been the real growth of 8.2 per cent which Sri Lanka had had in 1968 and 1978 and on no occasion the country had been able to maintain such a high growth in the following year too. Hence, all high growth instances which Sri Lanka had in its post independence history have remained ‘lone spikes’ into the sky in a bar chart plotting its growth, as has been shown by the Chart on page 2 of the Annual Report. In contrast, the growth rates in 2010 and 2011 have been like climbing from a lower step to a higher step implying that this ascend will continue into the foreseeable future. However, as per the estimates made by the Central Bank, the growth rate predicted for 2012 at 7.2 per cent will be even lower than the rate in 2010. Hence, when the growth rates are bar-charted for these three years, it would just appear like the platform on which the first three winners of a game would stand to receive their medals in a sports event: A raised step in the middle and two lower steps on either side.

Growth is good

The Central Bank cannot be faulted for being overtly jubilant about the high growth rate of 2011 because high economic growth has been the most desired goal of all the nations today. If the growth is low, lacklustre or negative, it is considered a sign of failure evoking criticisms. The opposition parties would take advantage of the low economic performance to discredit the government in power and the country’s creditors and foreign investors would form a negative opinion on it. Hence, a country cannot afford to record low economic growth rates. The growth debate is so intense that even a dismayed reader, writing to the editor of this paper as he had written to many other papers, had demanded three leading critics from the opposition to open eyes and take note of the high growth in the economy, among other things (available at: http://www.ft.lk/2012/04/09/harsha-ravi-eran-wake-up-to-the-reality/). Such a free debate on economic issues is a healthy sign since it enables the public to gain wisdom and enlightenment.

A bouquet to CB team on the Annual Report

The Central Bank team which is responsible for publishing its Annual Report has in fact done a wonderful job this year too. Squeezed between two IMF Missions and haunted by an external sector crisis of an unprecedented proportion, all the odds in the system had been against them. Yet, they did the impossible by sticking to their deadlines. Hence, the completion of the Annual Report by them in time is not a simple feat of accomplishment. The report is rich with data, tables and illustrating charts helping the readers understand the developments in all aspects of the country’s economy. The box articles on selected topics have been well-argued, compactly presented and amply illustrated so that even a non-economist could easily follow through. There is no any other place where such a vast array of economic data have been assembled and presented. Hence, in my opinion, they deserve a bouquet from all those who wish to make use of the Report for knowledge enhancement.

Al Jazeera: Statistics mean nothing to the man in the street

Yet, do statistics matter? A news clip telecast on Doha based Al Jazeera TV on Sri Lanka’s new year celebrations this year on the eve of the new year on 13 April 2012 had a cross section of the community interviewed to gauge their opinion on the new year celebrations. It was a unanimous voice in loud by the men in the street that rising cost of living has eaten into their dreams of celebrating a grandiose new year. A former senior central bank official who was interviewed took up the position, quite correctly of course, that households need to learn prudent household management when they find it difficult to meet ends. But the news reporter Minnele Ferdenandez finished the brief news clip with an eye-opening statement: She said that “statistics mean nothing” for the ordinary man in the street (available at: http://www.youtube.com/watch?v=MNJoqjJnsI8&feature=player_embedded).

Economic illiteracy is an issue

Not only the man in the street, but also those of experienced professionals in fields other than economics have found it difficult to understand the meaning of these growth statistics. Recently, a CEO of a company, a successful man on many counts in life and business, asked the writer what is meant by real economic growth and per capita income. His query was about this 8.3 per cent real growth which Sri Lanka has been estimated to have achieved in 2011 and the consequential claim that its per capita income has reached US $ 2836 in 2011, up from US $ 2400 a year ago. Even the MBA students in a local university, all senior Human Resource Professionals in private and public organisations, could not offer a satisfactory explanation when the writer posed similar questions to them sometime back. Hence, upgrading economic literacy at that level is a must so that the central bankers and the ordinary men in the street could communicate with each other effectively.

Growth in an island with only Kevum as a good

What is the meaning of this 8.3 per cent real growth in Sri Lanka in 2011? Suppose there is an island which produces only Kevum or sweet rice cake normally made during these festival seasons. So, people in this island have to eat Kevum, drink Kevum, live in Kevum and so forth, everything to do with Kevums. If they had made 100 Kevums of identical size and quality in 2010, the real growth of 8.3 per cent in 2011 means that they have now made 108.3 Kevums in 2011. If they had 100 people in the island in 2010, each person would have on average got one Kevum, the per capita income of that island. This is of course a very crude estimate because some people would have got more than one Kevum and some people less than one Kevum. But on average if all Kevums are distributed equally, each person would have got at the rate of one Kevum. Economists presuppose that one Kevum available to each person in the island on this hypothetical basis makes their living happy and contended. It is also a very extreme supposition but again on average one could say that it indicates the average level of happiness of the islanders.

A country needs to produce more to feet an increased population

Now suppose that in 2011, their population grows by 1 per cent to 101. Now if the number of Kevums produced in 2011 amounting to 108.3 is equally distributed among the islanders, each person would have got one Kevum plus another little piece. This little piece is that, if a Kevum is divided into 10 pieces, a little less than a piece. The exact number is 1.072 Kevums per person. Thus, the real per capita income of the islanders has increased by 7.2 per cent, roughly, the real economic growth of 8.3 per cent minus the population growth of one per cent.

But according to the calculations of the country’s Statistics Bureau and as reported in the Central Bank Annual Report for 2011, though Sri Lanka’s real economic growth and population growth had amounted to 8.3 per cent and 1 per cent, respectively, per capita income has increased from $ 2400 to $ 2836 or 18.2 per cent. What the CEO of the private company could not understand and the MBA students could not explain properly was this anomaly in the statistics.

Hence, a further explanation is necessary as to how this anomaly has arisen.

Physical products need be valued in money

The country’s Statistics Bureau has not presented its calculations in Kevums and many thousands of other goods and services that have been produced in Sri Lanka in 2010 and 2011. It is practically difficult to do so because these are too different goods and services and cannot be added together. Hence, they have to use a common yardstick or a denominator to present all these calculations. This common denominator has been the use of money in its abstract term, that is, not in actual notes and coins with which we are familiar but the mental feeling of rupees and cents which we perceive as money. Economists call this abstract sense of money as its serving as a “unit of account”.

Suppose in our island, people use another commodity to facilitate the exchange of Kevums among themselves. Suppose that that commodity is Kokis and here Kokis is not what we eat as a sweet meat but a medium to exchange Kevums and a unit of account to record their value. Suppose that the value of Kevums is expressed in terms of Kokis and people when they buy Kevums they pay for them with Kokis. Suppose that in 2010, the price of a Kevum is 1 Kokis and therefore the value of the output in that year is either 100 Kevums or 100 Kokis. Accordingly, the per capita income of the islanders is 1 Kokis.

Inflation increases money value of the output

Now suppose that in 2011 the price of Kokis goes up by 10 per cent and therefore each Kevum is now priced at 1.10 Kokis. Accordingly, the value of output of Kevums in 2011 is not 108.3 Kevums but 119.13 Kokis. The per capita income of the islanders is 1.18 Kokis, a number higher than the 1.07 Kevums which they could actually consume. The per capita income has now increased by 18 per cent and not by 7.2 per cent if it is measured in Kevums.

Suppose that this island has transactions with the neighbouring island so that some of the ingredients for making Kevums they buy from the neighbours and some of the finished Kevums they sell back to them. To do transactions with the neighbours, they have to use the neighbours’ money and let us call that money “Aggala”. If in 2010, one Kokis is equal to one Aggala, then, the per capita income of the islanders is 1 Kokis or 1 Aggala. Suppose our islanders want to keep the value of Kokis as against Aggala at a higher level despite the local inflation of 10 per cent. According to this higher value, suppose that 1 Aggala is now exchanged for 0.9 Kokis. If one wants to calculate the per capita income of islanders in 2011 in terms of Aggala, he has to divide the per capita income in Kokis by this overvalued exchange rate. Accordingly, the per capita income amounts to 1.32 Aggala, up from 1.0 Aggala in 2010.

Per capita income is a measure of welfare

But the question that arises is whether this new value of per capita income would necessarily increase the welfare of the islanders. The answer is mixed. Locally, they still have only 1.07 Kevums for their use and not the higher value of 1.32 Aggala. Hence, it increases their welfare from 1 Kevum in 2010 to 1.07 Kevums in 2011. But as for the transactions with the neighbours, whether the welfare would be higher or lower will depend on whether they could buy more or less ingredients from the neighbouring country for each Kokis they spend. If the value of Kokis against Aggala has depreciated, they have now to supply more Kokis to buy the same amount of ingredients from the neighbouring island. In that case, definitely their welfare has declined and measuring themselves in terms of a higher per capita income of 1.32 Aggala is an illusion. But if the value of Kokis has further appreciated against Aggala, then, of course, their welfare has definitely improved.

Statistical illusion in per capita GDP

Sri Lanka’s per capita income numbers as calculated by the country’s Statistics Bureau suffer from this statistical illusion. The country’s average inflation in 2011 has been 6.7 per cent but this relates only to consumer prices. Since GDP consists of consumption goods, import goods as far as they are used as inputs and export goods, all these prices are needed to be considered when one calculates the value of the GDP of the country. According to the Central Bank trade indices, the unit price of Sri Lanka’s imports has increased by 20 per cent and the unit price of exports by 8 per cent in 2011. This has resulted in a deterioration in the country’s terms of trade or the amount of import units which the country can buy by selling one unit of exports, from 100 to 90. Hence, the value of GDP in money terms should be higher than the consumer inflation. The country’s Statistical Bureau has therefore, quite correctly, used a higher price factor of 7.8 per cent to calculate the money value of GDP. Economists call this higher price factor “the GDP Deflator” because in actual practice the real value of GDP is measured by deflating or discounting the money value of GDP by this factor. But it has used the exchange rate of Rs 113 per dollar to convert the rupee value of per capita GDP into dollars in 2010 and the rate of Rs 110.54 in 2011. This has resulted in a phenomenal increase in per capita GDP from $ 2400 in 2010 to $ 2836 in 2011. Since the actual exchange rate against the dollar had depreciated to Rs 113.90 by the end of 2011 and further to Rs 130 per dollar within two and a half months thereafter, the dollar value of the per capita GDP is in fact a statistical illusion.

CB would have clarified this position

The country’s Statistical Bureau cannot be faulted for this statistical illusion, because their job is just to compile statistics. The job of the Central Bank is to interpret them properly so that the public would be enlightened of the true facts behind the numbers. I would have loved if a box article had been inserted to the Annual Report for 2011 clarifying this position instead of arguing in the text, by means of the Text Table 1.5, that the country is set to reach a per capita GDP of $ 4574 by 2015 on this basis.

So, Minnele Fernandez of Al Jazeera is correct. After all, “statistics mean nothing” to the man in the street.

(Write is a former Deputy Governor – Central Bank of Sri Lanka and teaches Development Economics at the University of Sri Jayewardenepura. This article first appeared in Daily FT  – W.A. Wijewardena can be reached at waw1949@gmail.com )