Jake's View

Opinion: Sorry President Widodo, GDP rankings are economists’ equivalent of fake news

‘GDP is an attempt to emulate the corporate world by putting money numbers on performance but... with GDP you get no equivalents of the corporate balance sheet or profit and loss account and no notes to the accounts’

PUBLISHED : Tuesday, 02 May, 2017, 8:02am
UPDATED : Tuesday, 02 May, 2017, 8:02am

“Indonesia’s economic growth is the third in the world, after India and China,” said Indonesian president Joko Widodo

-- SCMP, May 1

Third in the world, is it? What world is that?

Within Asia alone I count 13 countries with higher reported economic growth rates than Indonesia’s latest 5.02 per cent.

They are India (7.5), Laos (7.4), Myanmar (7.3), Cambodia (7.2), Bangladesh (7.1), Philippines (6.9), China (6.7) Vietnam (6.2), Pakistan (5.7), Mongolia (5.5), Palau (5.5), Timor-Leste (5.5) and Papua New Guinea (5.4).

But of course President Widodo’s Indonesia is a very populous country with 261 million people. We cannot really compare it with pipsqueak places like Timor or Palau. Thus let’s draw the line at the 200 million people or more.

This gives us six countries across the world and, in terms of economic growth, Indonesia is in the bottom half of these six behind India, China and Pakistan. Try it at a cut-off of 100 million people or more and you still get no luck. Bottom half again.

Way to go, Joko. Don’t let the facts get in the way of a good story. We’ll make a journalist of you yet.

But it is still a rather silly story. Politicians look at these gross domestic product numbers as a report card on their achievements. The higher the number the better they have done.

The fact is that economic growth rarely has much to do with them except when they impede it. Then they easily make great strides. On the way up, Indonesia is 261 million people pulling together. But it only takes one person to unhitch the wagon and send it rolling down again. Let us be grateful he is not the sort to do it in this case.

I think it is also a rather silly story because gross domestic product is a highly inexact number. The best analogy here is a car with a three-speed manual transmission. In GDP growth terms, these three are for practical purposes (1) zero to 4 per cent, (2) 4 to 8 per cent and (3) probable nonsense. Don’t even ask if you’re in reverse.

GDP is an attempt to emulate the corporate world by putting money numbers on performance but, leaving aside that the figures are not audited, with GDP you get no equivalents of the corporate balance sheet or profit and loss account and no notes to the accounts. All you get is the applications half of the cash flow statement.

Even this is deficient. GDP takes no account of depreciation and amortisation, a big omission. If a company buys a car which it expects to last for five years, it must deduct a fifth of the cost of that car from its profits and its net worth every year. In GDP you can pretend the car is new forever.

GDP also makes no distinction between construction and destruction. Build a public housing block on the site of a car park and the cost of construction goes into GDP.

Tear it down again 20 years later after the residents have trashed it (Europe and America here, not Hong Kong), and the cost of blowing it up and repaving the site for a car park goes into GDP as well. One minus one equals two. Love that government math.

But GDP does attempt one trick that any corporate accountant would give up as a hopeless task. You get all the GDP numbers not only in dollars of the day but with each component separately adjusted for inflation to give you an overall real growth rate for the economy. These are the numbers I quoted above.

How do you work out these separate inflation rates?

Simple. You don a feathered wolf mask under a full moon and then draw a pentacle in the dust with chicken’s blood while intoning the words:

“Fista, wista, mista pate,

Give me my inflation rate.”

Works every time. You know it does. Just check out the latest GDP numbers and you will see they always have real growth rate in at least two decimal places; 5.02 per cent for Indonesia, for instance.

Thanks for the show, Joko, but you have better things to do with your time than make silly GDP boasts.