It is widely accepted that for many countries on the continent gross domestic product (GDP) is understated. The question is by how much.
Ghana created quite a stir when revisions to its GDP data announced in 2010 showed that the country’s economy was 60% bigger than previously believed. Ghana was thus transformed overnight from a low-income to a middle-income country. This happened as GDP per capita, an important measure of wealth, rocketed from about $550 to $1,100.
The news prompted the World Bank’s chief economist for Africa, Shantayanan Devarajan, to declare Africa a “statistical tragedy”. Granted, it is an overstatement. But his comment emphasizes the implications of this shortcoming – if the data is inaccurate, those governments and development agencies could be making poor decisions.
What happened was that Ghana changed the base year for its data from 1993 to 2006, taking into account the deep structural changes in the economy during that period.
The base year is the reference year in terms of GDP, expressed at constant prices, and it determines the importance which various sectors have for the economy. In Ghana’s case, the country’s registry of business was out of date and the national accounts failed to capture the output of these companies. According to the Ghana Statistical Service, the share of services in the economy rose from 36.1% to 51.1%, while the contributions of industry and agriculture both fell.
Many economies in the region have base years which are more than a decade old – which compares poorly with the international best practice of revising the base every five years. This is particularly significant in the case of Nigeria, the continent’s second-biggest economy, which has announced it is in the process of changing its base year from 1990 to 2010. The new GDP figures will be announced next year. There is a general perception that after taking telecommunications and entertainment into account, the economy will be about 40% bigger than it is at present.
According to the regional research head for Africa at Standard Chartered, Razia Khan, the revision means that Nigeria’s economy will be just 10% smaller than South Africa’s. With its economy growing at around 7% a year, compared with South Africa’s pace of less than 3%, the Nigerian economy is likely to be the biggest on the continent by 2015. The revision will also affect the whole of sub-Saharan Africa. Nigeria’s economy already accounts for nearly one-fifth of the region’s total output, so an upgrade means that the combined economies of sub-Saharan Africa will be significantly bigger than estimated at present.
This poses the question: how many other economies on the continent are also bigger than the current data suggests? According to Kim Zieschang, the Division Chief of the Statistics Department at the International Monetary Fund (IMF), the Washington-based lender anticipates providing technical assistance to a “large number” of sub-Saharan African countries, and in fact is already doing so. This means that many countries have asked the IMF for help in upgrading their economic statistics, just as Ghana and Nigeria have done.
According to Lyal White, Director of the Centre for Dynamic Markets at the Gordon Institute of Business Science, there are two problems, one is the absence of data and the other is the poor quality of data presently available. Many sub-Saharan African economies have large informal sectors which are notoriously difficult to cover.
It is likely that that there will be upward revisions of GDP data in other countries in the region, but the magnitude of those changes are difficult to assess ahead of the conclusion of their processes, Zieschang says. What is certain is that the revisions will radically alter the ranking of sub-Saharan African countries by size.
So what do the changes mean for countries in the region? Global investors are likely to sit up and take note of bigger economies, which will be more attractive destinations for their capital. There will be more information on which sectors to invest in, and governments will have a better idea of what to do to foster development and growth. Some of the ratios which gauge the quality of a country’s economy will improve – debt to GDP ratios will fall, as will budget deficits, which are also measured as a ratio of the size of the economy.
On the downside this could encourage governments to spend a bit more recklessly. At the same time, the ratios of official revenue to GDP will fall, putting pressure on governments to increase their tax base. A significant drawback is that richer countries may no longer qualify for aid or concessional loans from international agencies. Nonetheless, IMF officials say there would be a good case to revise upwards the thresholds for this type of support.
On the upside the pending upward revisions to GDP data will present sub-Saharan Africa as a more significant player in the global arena.