It’s time to give GDP a break
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The New Times carried a front page headline on Friday in which one of my favourite ministers, Claver Gatete said: "Rwanda’s economy is bouncing back" (to faster growth following a wobbly start in the 1st quarter). Then one reader joked, "I hope it bounces back to my pockets too."
Readers’ attention is always grabbed at any mention of the economy and indeed, the headline was the most read on the website, that day. That is telling enough.
This thing called GDP may sound too big and vague to most people in most cases, but its actual meaning and effect should be as basic and simple as the current situation in our pockets. Unfortunately, this is not always the case, hence explaining why GDP may be an unreliable tool.
Let us start with a simple definition of GDP or Gross Domestic Product, in full. It is the total monetary value of all goods and services produced in a country over a specific period; often calculated on a quarterly basis.
Simply put, the value of an individual’s economic activity plus that of others equals to the national value. But that is assuming that all value in the country is traceable which is not true. A lot of value is still hard to track or measure because of the largely informal nature of our economy.
The other weakness is when a country’s total GDP is divided among the total population to calculate GDP per individual, or the economic value attributed to each person; this approach will put a small holder farmer and a real estate millionaire on the same level.
For instance, to calculate Rwanda’s per capita GDP, one would simply get Rwf7.1 trillion and divide it among 12 million Rwandans. This would give everyone an equal share of the country’s wealth. It is a utopian formula.
At Davos last year, MIT professor Erik Brynjolfsson correctly pointed out that: “We need a new model for growth and just as we are reinventing business, we need to reinvent the way we measure the economy too.’
It is a school of thought International Monetary Fund (IMF) Director Christine Lagarde supported during the same event when she was quoted saying: “We have to go back to GDP, the calculation of productivity, the value of things – in order to assess, and probably change, the way we look at the economy.”
My problem with GDP is that as it broadly aims at painting the situation of an economy at national level, its pictures, unfortunately, often don’t reflect the state of affairs in the economy at individual level. There is always a mismatch.
This is why sometimes GDP growth may be high when majority of people are crying of poverty or sometimes GDP growth is low yet people are showing more signs of prosperity. It resonates with the argument that GDP is not a good measure of welfare. But it should be, to make sense.
For instance, Nobel Prize-winning economist Joseph Stiglitz sometime last year noted that while GDP growth in the US has gone up every year except in 2009, most Americans today, are worse off than they were a third of a century ago.
In Rwanda’s case, the picture painted by our GDP numbers is equally confusing. What our eyes see every day as robust economic activity doesn’t seem to match the number on the IMF economist’s calculator.
Just last week, Laure Redifer, the IMF mission chief in Rwanda said his economists have revised their growth projection for Rwanda to 5.2 percent from their earlier forecast of 6.2 percent. Naturally, such a decision should scare you as it means things are going to be tough!
It would mean no money in the economy so no money in our pockets. Then you go out on Friday night, with the IMF headline in your head. It is the official launch of Riders at Kigali Heights only to find it is a full house! A Heineken that you normally buy at Rwf1000 from Simba supermarket is at Rwf3000 and people are happy to pay the price.
Last Friday, you went to the Jazz junction for Isaiah Katumwa’s concert at Serena, it was a full house and beverage prices there were thrice the normal market prices. The next day, it was the Kigali International Comedy festival at Convention Centre, the venue was half-full.
These events are just a few examples of a number of successful social events we have seen this year, including what I think was the biggest of all; Diamond Platinum’s show in Nyamata earlier this year where half a million bottles of beer lay on the grass at the end of the show.
When you go to top social hangouts such as Coco-bean, Javas, Choma’D and many others, you clearly see why GDP may not be showing us the full picture of the state of our economy.
Simon Kuznets, the man behind the idea of GDP, in 1930, actually warned us that his formula was not a suitable measure of a country’s economic development.
But does the ordinary man on the street care whether we get a new measure of GDP or not? Someone asked. And someone answered. “What we measure informs what we do. And if we’re measuring the wrong thing, we’re going to do the wrong thing.” It’s time to give GDP a break.
Views, expressed in this article are those of the author and do not necessarily represent those of the New Times Publications.