Business Magazine

How to Grow Your Economy by 50 Percent Overnight

Posted on the 30 October 2013 by Center For International Private Enterprise @CIPEglobal
Not counted: Nigeria's GDP model is based on the year 1990. (Photo: Wayan Vota)

Not counted: Nigeria’s GDP model is based on the year 1990. (Photo: Wayan Vota)

In 2014, one small policy tweak will grow Nigeria’s economy by 40 percent, causing it to overtake South Africa as the largest in the region. A similar change in Ghana caused that country’s economy to grow 60 percent, while in Guinea-Bissau and Gambia the economy doubled in size. Even the United States increased its output by 3.6 percent using the same technique. What happened?

GDP rebasing. Simply put, these countries are all changing the way they measure their Gross Domestic Product — the sum total of all economic activity in a country in a given year — to better reflect what’s really happening the economy.

When Nigeria’s rebasing is complete, it won’t mean the country is actually producing 40 percent more goods and services. Living standards won’t jump by 40 percent — the government will just be counting more accurately. But it’s still hugely important.

In many poor countries, even basic statistics like population can be hard to calculate, as the government simply doesn’t have the resources or know-how to gather this statistical information. That’s why most countries use simplified models to determine their official GDP numbers. These models are supposed to be recalibrated every few years to reflect structural changes in the economy, like the growing importance of services and new telecommunications and computing technologies. But many African countries are still using models established in the 1980s or early 1990s. When Ghana updated its base year from 1993 to 2006, it discovered $13 billion in economic activity that had been missed in official statistics.

The GDP figure is one of the most important statistics used by policymakers and businesses to make decisions about investment, lending, foreign aid, taxes, and the delivery of government services. Indeed, while Nigeria’s people won’t be any richer after the rebasing than they were before, the change will reduce the government’s debt-to-GDP ratio from 17.3 percent to as low as 10 percent and shrink the budget deficit — though it may also be disqualified for some aid, as Nigeria could officially become a middle-income country. The change will also affect academic studies that use changes in GDP to measure the impact of different policies and country characteristics, potentially leading to a new understanding of what works and what doesn’t.

Even in the United States, where comprehensive tax and business registration records and sophisticated, well-funded statistical agencies make it relatively easy to get a solid picture of the economy, changes to the GDP model can have a big impact. For instance, earlier this year the Bureau of Economic Analysis began counting private R&D spending as an investment rather than an expense, reflecting the shift to an “ideas-based economy.”

In countries like Nigeria, however, there is an additional dimension to the technical problem of rebasing GDP: many (if not most) of the businesses in the country are informal, meaning they aren’t officially registered and don’t pay taxes. This doesn’t just create headaches for government accountants. Informality means that the government misses out on much-needed tax revenue necessary for providing infrastructure, education, and other services. For the business owners, it means great difficulty in accessing capital, hiring workers, and signing contracts. Informal businesses are also ripe targets for corruption and expropriation, as they lack secure rights to their property.

GDP rebasing puts this problem into sharper relief, as the new figures will lower the GDP share of government revenues to just 17 percent — well below the level that is considered optimal for a country like a Nigeria. For countries plagued by informality, inaccurate GDP figures are just the tip of the iceberg. By making it easier to register a business, smoothing out regulatory burdens, and reducing corruption and complexity in the tax system, Nigeria can capitalize on the structural changes taking place in its economy to unleash a new wave of economic growth that doesn’t only exist on paper.

Jon Custer is Social Media / Communications Coordinator at CIPE.

Back to Featured Articles on Logo Paperblog