23 September, 2020

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The “Re-based” National Accounts: What Does It Mean?

By W. D. Lakshman

Prof. W. D. Lakshman

Prof. W. D. Lakshman

The Department of Census and Statistics (DCS), the official statistical agency, has recently uploaded into its website, an undated report on “Rebasing National Accounts Estimates.” DCS uploads into its website similar reports regularly, at least a few in a month. Only a very few of them would usually come under public scrutiny as closely as the above report has over the last few weeks. Indeed this “Re-basing” report came into public notice, not through the DCS website, but through the political statement made by Deputy Minister Dr. Harsha de Silva around the DSC report and brought to public attention by daily news telecasts. As may be many others, I also was made to look up the report in the DCS website only after this political statement of the Deputy Minister.

As most countries in the world, Sri Lanka too follows the United Nations’ System of National Accounts (SNA) in the preparation of its national accounting statistics. The SNA, first introduced in the early 1990s, has its latest revised version published in 2008. The aggregative economic measure known as the Gross Domestic (or National) Product (GDP or GNP), which is now perhaps a household word, is derived from a national accounting exercise. Those who are even superficially familiar with the subject know that the GDP is derived as the value of output less intermediate consumption or the sum total of values added produced by all productive agents in an economy. The computation of GDP can be made through three methods – product, expenditure and income methods. The SNA is a system of coherent, and integrated national accounting framework in which the statisticians try to estimate a country’s national product aggregates using these three methods simultaneously.

In no country in the world do statistical authorities have access to all necessary sources of information to estimate aggregates like the GDP with a 100 per cent accuracy. Making best possible use of limited available sources of information and sometimes undertaking statistical surveys to fill gaps in essential data sources, they make estimates of aggregates like the GDP as best as they could, working on various simplifying assumptions linking the available information to the variables forming part of the national aggregate concerned. Under these circumstances, the estimate of GDP for a particular year should not be taken as an absolutely correct measure of GDP but only as the best possible estimate which the officials in service can arrive at under prevailing data availability conditions.

In these circumstances, it is nothing but right that the methods and conventions used in the GDP computations are revised from time to time as there are various changes taking place in underlying conditions as time passes. The development of national accounting systems in Sri Lanka commenced in the early 1950s under severe limitations. Since then these systems have undergone change and revision on many subsequent occasions. The latest such revision is this change announced a few weeks ago. The change is described as one of “re-basing” from a 2002-base to a 2010-base. This base year change implies the following. In the national accounting data published so far, 2002-based price indices have been used to convert the domestic/ national product estimates “at current prices” into “constant price” estimates. The announced change is that the DCS would now on begin to use 2010-based price indices for this purpose. A GDP data series at constant prices is called a series of “real” GDP and are used to work out the widely used growth rate numbers.

The change in statistical practice announced by the DCS is, however, a broader and more comprehensive change than a mere “re-basing”. It involves a revision of the activity classification, together with an increase in the number of activities taken into account, in the national product computation. It is noted that 40 broad economic activities were covered in the national accounting exercise earlier, and in the new system, the coverage has been raised to 48 broad economic activities. In addition, the data sources and data collection methods in the GDP computation have been strengthened. Changes have been introduced in respect of price and volume indices used in the conversion of “current price” estimates to ”constant price” estimates although the DCS’s internet paper does not provide details about these changes in indices. This document also mentions a number of other changes introduced to the national accounting practices.

The DCS discusses the impact of the “re-basing” of national accounts on several significant economic variables. One set of these effects is summarised in Table 1. As should be expected, the new series of GDP estimates show higher values than the old series, as the number of economic activities coming into the GDP computation process has been raised in the re-basing process. As Table 1 shows, for all the years for which GDP numbers were re-computed, GDP in the new series is higher than in the old series by proportions varying between 5.2 per cent and 15.2 per cent. The lowest percentage difference recorded between the old and the new series for 2014 may be noted. Per capita GDP at current prices, stated in US dollar terms (last two columns in Table 1), also shows higher values in the new national product series than in the old one. The re-computation of GDP has also influenced sectoral composition (or the structure) of the Sri Lankan economy broken into agricultural, industrial and service sectors. The contribution of the agricultural and industrial sectors to the GDP in all the years from 2010 to 2014, according to the old series of GDP estimates, was higher than according to the new series. Accordingly, the new series shows a greater service sector bias in the economy than was shown in the old series. The new series also shows, over time, a gradual increase in the service sector dominance of the economy, whereas the old series has shown a gradual decline of service sector dominance during the 2010-14 period.

Prof. W. D. Lakshman

I have begun this article by referring to some political controversies which this “re-basing” article in the DCS website gave rise to over the last few weeks. None of the points discussed so far in this article about this DCS “re-basing” exercise was responsible for these controversies. The controversy that continues is about the implications of this statistical exercise of the DCS for growth rate estimates for the two years, 2013 and 2014.

The rate of growth of a country, despite its weaknesses as an economic measure, has come to be widely used as a dominant macro performance indicator. Several countries which exhibited continuous high growth rates – around 8-10 per cent per annum – for about 10 years in the recent past had succeeded in “economically taking off” and achieving perceptibly high levels of economic well-being for their people over a relatively short period as a single generation. Examples from among our Asian neighbours include countries like Japan, South Korea, Hong Kong, Singapore, Taiwan, Malaysia, People’s Republic of China and so on. The achievement of a high and sustained economic growth rate has been a national policy goal in Sri Lanka too at least since the end of the 1970s. The highest annual rate of growth we managed to achieve, however, was 8.2 per cent and until the beginning of the decade of 2010s, such high growth rate achievements could not be sustained for any extended period of time. Until the publication of this new series of GDP data, we believed that our rate of growth since year 2010 remained above 7 per cent excluding the year 2012 with its 6.3 per cent rate of growth. There were two years (2010 and 2011) during this period with 8 per cent or higher growth rates. According to the new GDP series, the 2012 growth rate – the lowest for these five years according to the old series – was the highest for the period at 9.1 per cent. The high growth rate claim of this period was not only a “statistical” phenomenon. There were also other strong elements of impressionistic evidence around us at that time making us believe that the growth rate numbers presented by statistical authorities were indeed realistic and clearly in the domain of acceptability.

Prof. W. D. LakshmanThe growth rate concept looks at the total production activity in a country over time in real terms, or by removing the impact of price inflation on the value of outputs produced through such productive activities. As explained, GDP or GNP is the statistical measure of this total output expressed in value added terms. Changes of GDP over time have two components, the change in real output and change in prices of the goods and services produced. The rate of economic growth over time is measured using GDP valued at “constant prices”. Any series of values expressed “at current prices” can be converted into values “at constant prices” by deflating the former by an appropriate price index. Prior to the development of the new series of GDP discussed in this article, the current price GDP was deflated by a series of 2002-based price indices to derive constant price GDP numbers. The new series of GDP at current prices, however, is deflated by a set of 2010-based price indices to derive the constant price estimates. This is what the DCS calls the re-basing of national accounts. Table 2 presents the impact of this re-basing exercise on the estimated annual rates of growth over the four years 2011-14.

While noting the significance attached to the “growth rate” by all political regimes, I have pointed out that prior to 2010 Sri Lanka had failed to attain and sustain a high rate of economic growth for an extended period of time. The political regime in power during the high growth era of 2010-14 was claiming the credit for facilitating such high growth rates during this period and for being able to maintain those high rates consistently for half a decade. Knowingly or unknowingly, the DCS has uploaded the results of its so-called “re-basing” exercise at a sensitive time of the run-up to a Parliamentary election. A DCS report on national accounting, which otherwise would have gone unnoticed except by a few professionals, has become a source of political debate.

Whatever it may be, what could be an economist’s objective view of the data sets presented in Table 2 above? The problematic numbers are those for 2013 and 2014. In any attempt to explain and understand the drop in the growth rate as between the old and the new series of GDP estimates, one has to look at current price GDP estimates and price indices used in the deflation of current price estimates. As already noted, the estimates of GDP at current prices for all five years 2010-14 are higher in the new series than in the old, but by different percentages. Particularly noteworthy is the 5.2 per cent difference in 2014 in contrast to 2-3 times larger differences recorded for the other four years. It is unfair on the part of the DCS to present a new series of statistics which has numbers so widely divergent from the old series without explaining at least some significant factors responsible for these wide divergences between the two sets of estimates. In deflating current price estimates to derive constant price estimates of GDP, the statistical authorities use different price indices. Again no information is provided about the price indices used, 2002-based and 2010-based. Because of the lack of required information to understand and explain, I would be hesitant to ditch the older series, simply because a newer series has been made available. The time at which this document was uploaded into the DCS website and the manner in which this document’s “unexplained downgrading” of 2013-14 growth rates was used by the government in power for its political benefit are further reasons for being cautious in the analytical use of this “re-basing” exercise.

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Latest comments

  • 5
    0

    Sorry about your knowledge on SNA: Compiling National Accounts Statistics was formalised by the United Nations Organisation with the publication of the Measurement of National Income and the Construction of Social Accounts in 1947 (1947 Report).
    The United Nations published a more comprehensive set of standard accounts and tables in 1953 termed the System of National Accounts (1953 SNA) where widely applicable concepts and definitions were presented.
    In addition, taking into account country experiences when implementing the 1953 SNA, a revised version was issued in 1960.
    This was followed by the 1964 revision of the SNA which improved its consistency with the Balance of Payments Manual of the International Monetary Fund (IMF).
    The 1968 SNA expanded the horizons of National Accounts compilation by including input-output tables and balance sheets and increased importance in estimating at constant prices.
    The 1993 SNA was a noteworthy leap in National Accounts Statistics as it broadly complemented with other international statistical standards.
    The latest of the series, 2008 SNA is an updated version of 1993 SNA which addresses developments brought about by changes in the economic environment, advances in methodological research and the user requirements.
    2015 many changes happened.

    • 2
      1

      @ Ms. Aniza,
      This information seems to be a rip-off from the official web pages for SNA http://unstats.un.org/unsd/nationalaccount/hsna.asp

      You should have simply referred us to this webpage,instead of pretending to know this stuff, whoever you are.

      Your action is tantamount to plagiarism (word for word replication without giving credit), and CT editors should take note.

      • 9
        1

        Instead of appreciating her efforts, WD’s henchmen acting to protect lack of knowledge of so called Sri Lankan Fake Professors. This is the low quality SL professors and it is better to check these fake profs have over 20 articles in ISI and SCOPUS level international journals.

        • 6
          0

          Biggest damage to Sri Lankan academia made by this man. We have many proofs for that. Appoint Commission to check Colombo University Econ Dept and Colombo University under this man regime. Actually CB sacked this man from VC position.

          • 4
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            I 100% agreed with you. Yes MY3 appoint commission to check this low level works of this mask man in his family dept. He was the main economic advisor to corruptive Mahinda regime.

  • 2
    2

    Thanks Prof Lakshman for drawing attention to and discussing an important matter. While the jump from an ‘Old’ to a ‘New’ is of intrinsic interest to the theoretically minded, for pragmatic folk the more important concern is that once a new system is adopted it should remain consistent and useful thereafter.

    One point on which I have a slightly different take is this. You say it is “Particularly noteworthy is the 5.2 per cent difference in 2014 in contrast to 2-3 times larger differences recorded for the other four years”. Well the root of the matter is not this but that the growth rates in 2013 and 2014 fell to 3.4% and 4.5% (from 8.4% and 9.1% in the two previous years) in the New System, but remained high 7.2% and 7.4% in the Old System. If there is a big difference in purported growth rates between the two series, this narrowing of the gap is to be expected.

    So the key question harks back to my first paragraph; reliability. Why are growth rates in the two systems so different? What are these 8 new sectors (40 to 48); do they make an unusual contribution? [A New Series can move the whole Old Series bodily upwards, but thereafter the year on year growth rates should remain comparable]

  • 2
    0

    Most reporting of economic as indeed other major social phenomena in Sri Lanka are subject to political whim. In Cabral’s period as head of the Central Bank, many incompetent and irresponsible policy decisions decimated the value of poor people’s economic resources (ie EPF).

    There is on-going controversy regarding Mahendran’s juggling with treasury bond issues.

    In view of the contexts of these unholy actions by those responsible for the security and welfare of the country’s citizen’s money, it should be expected that unrealistic re-calibrations of statistical bases yield not accurate information but politically vindictive or expedient misinformation.

  • 0
    0

    Dear Prof. Lakshman,

    I being an economic analyst uses GDP figure in my writings. For me GDP should reflect the economic status of the country. Now we have three methods of calculating GDP. For example let us consider following approach suggested by IMF.

    “The expenditure approach adds up the value of purchases made by final users—for example, the consumption of food, televisions, and medical services by households; the investments in machinery by companies; and the purchases of goods and services by the government and foreigners” (IMF official website).
    This approach is clear. It says GDP=C+I+G+NE whereas, C=Consumption, I=Investment, G=Government expenditure and NE=Net exports.

    IMF explains that there are another two methods of computing GDP. Those are production approach and income approach. But we got to select one method of computing GDP.

    But, in regard to the above GDP equation, measuring of each variable perhaps except the last two is not that easy. This is where country’s statistical authorities should work creatively and professionally. When it is difficult in measuring certain items using the selected approach, then they might use accounts prepared in accordance with the other two approaches. But they should do that to arrive at a realistic figure for the use in selected approach. They can’t mess up all three together. Therefore if GDP is accurate, it should be explained in all three approaches separately.

    But honestly, I do not understand, when you explain as follows:

    “The computation of GDP can be made through three methods – product, expenditure and income methods. The SNA is a system of coherent, and integrated national accounting framework in which the statisticians try to estimate a country’s national product aggregates using these three methods simultaneously.”

    As far as I know and guess, SNA is a accounting framework which supports each approach while maintaining coherence among three methods so as to facilitate trouble shooting in the approach you chooses. Is this the case Prof. Lakshman. Thank you.
    Hema

  • 0
    0

    It is noted that 40 broad economic activities were covered in the national accounting exercise earlier, and in the new system, the coverage has been raised to 48 broad economic activities.

    So 8 new economic activities have been included in GDP calculation. Wonder if the 8 new economic activities include Prostitution and Illegal Drug sales and Smuggling like the UK and Italy.

    • 0
      0

      [Edited out] Please write instead of posting links – CT

  • 0
    0

    Dr Laksman…

    Indeed Global Account and Auditing system has been manipulated by US led National Account System had been reveled in during 2008 Wall Street Finical crisis and collapse of Stock market and after math of Great Recession.

    I do want teach or advice to Dr Laksman who has very in-depth knowledge of economic evolution in Sri lanka, as well as World Economy last 67 years.

    In fact MR ruling alliance that since 2005 policy of economies and public policy affect in different direction of by the political and economic, social innovation of path of capitalism ,more than shifted new beginning of model of sustainability different from the past backward simple commodity production of economy.

    Man like Harshed de Silva is not an Economics, who has not well verse on read modern capitalist development ,he was orthodox school of thought that belongs Neo-liberal scripter writer ,did not realized change of New Economic phenomena.

    Well, Kumar David is an Engineer who has no relationship of closer integration market forces and last decades of Globalization of the Economics of world.

    That is why, Silva playing of numbers of accounting system and denied GDP and GDN is criteria base on monitoring that national economic and Per Capita Income and its growth. This not an inevitable that innovation be denied that DCS and NAS fair biased by UNP-Silva style of an Accounting system.

    MR economic policies that alternative had been succeeds in redirection of capitalist growth of innovation. Nowhere do politics of MR shape market forces more than in the capitalist lopsided growth and its arena.

    Infrastructures boom during by MR policies much as the lowering the Highways express ways, new roads through out and communication cost has promoted Capitalist growth and development.

    UNP has changes in the rules of the game of economy growth that have been equally important of capitalist growth has been stop flow of capital from foreign investments by anti- China an investment policy of UNP that pro-US & Indian policy .

    Current global economy is driving force of financial market by printing of paper currency of US, EU and Japan.

    There are two critical aspects to this contention UNP led MS regime has undermined development.
    1 First is that development Sri Lankan economy decrease, the country’s overall output as measured for by GDP of UNP policies.
    2 Last government GDP has increased and ensure that all have been benefited.

    MR ruling alliance pushed a political agenda the shape market forces to work for nation economy, they have of course ,reveal their macroeconomic and mega economic management successfully.

    Moving from lower productivity to the higher level, new business venture hands created replace old business that destroy by UNP led War tone economy of 30 years of LTTE led Tamil Terrorist separatist of TNA political agenda.
    The Capital mobility and investment promoting doing so will enrich them at the rest of society by MR ruling alliance.

  • 3
    0

    Yes it is better to check qualification of Sri Lankan Professors. [Edited out]

  • 2
    0

    Dear Prof ~ Read your erudite article in toto. Understood only a micro %. Rest was beyond my ken as me-no-economist. Nevertheless, going through some of the comments I could gather that you had tried to drive home some “home truths”.
    DCS projecting the Re-basing N/A Estimates to be brought to the public through a Dep. Minister could be deemed as an exercise most de-basing.
    Giddyap Prof………………….Cheers ~@~

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