25 June 2004
The Finance Ministry of Pakistan came out with the Annual Economic Survey last week, and it offered both a huge surprise, and an explanation for an economic mystery that had developed over the last seven years. The mystery was how did India’s economy, measured on a per person (commonly called per capita) basis, become so much larger than Pakistan’s?
After the first 45 years of growth, Pakistan had enjoyed a faster rate of growth resulting in a higher per capita GDP (gross domestic product) than India. Since 1991, India has grown faster than Pakistan, but it started from far behind. However, about 1998, India’s statistics surged past Pakistan, and widened their lead through the next several years. By 2003, India had a GDP per capita of 500 dollars, while Pakistan, depending on the source, was about 450. Measured using an alternative technique that takes into account the lower costs of services and labor in poor countries (i.e. a haircut in Pakistan does not cost 15 dollars) to more accurately reflect purchasing power, India was listed as being way ahead at 2800 dollars versus only 1900 for Pakistan.
This was an obvious statistical paradox as any visitor even today to Karachi and Mumbai can tell. How can Indians have a statistical standard of living that is 50% higher than Pakistanis, but on the ground there is no Pakistani equal to the miserable poverty of large segments of the Indian population? World Bank data on poverty shows that even today the proportion of the Indian population living on less than two dollars per day in purchasing power is much higher than in Pakistan. Consumption statistics on such mundane items like electricity and food show Pakistan as equal or better than India. And statistics on underweight and malnourished children favor Pakistan.
Calculating the size of the economy (the GDP) is in fact a very complex and difficult task. And then to calculate the growth from one year to the next is even more difficult. Throw into that such factors as inflation and technological changes and the picture can get very murky. Imagine a chess game that you photograph, and then someone tells you what each player does for the next 50 moves. If the information is totally accurate, 50 moves later will you be able to replicate the actual situation on the chessboard. But if the information is not accurate, if there are new pieces being introduced, and if you don’t understand some of the moves, you will quickly end up with a chessboard that does not resemble what has really happened. The best thing to do is to go back to the actual game, and take a new picture.
The economy is like that chess board but even more complicated. For example, let’s say that in a certain year 10 million tons of wheat are grown and sold at 200 dollars per ton. The next year 11 million tons of wheat are grown, but sold at 180 dollars per ton. Did the economy grow, or not? In dollar terms there was a 1% decline, but actual wheat production jumped ten percent. If a new car comes with air bags but costs the same in dollars as last year’s car that did not, is that growth? Measuring the economy is in fact quite complex.
The first step in measuring an economy is establishing a profile of the GDP. This is done by creating a base year. But as the economy changes and adds new products and services that never existed before, the base year must be updated to accommodate that. In many countries, the rebasing is done every five years, and no less than every 10 years. For a variety of reasons, this has not happened in Pakistan. Pakistan has only rebased twice, in 1969 to the 1960 base year, and in 1988 to the 1980 base year. Up till this year, the economic statistics were using the 1980 profile of the economy, a hopelessly out of date profile. In 1997, the Nawaz Sharif government began the technocratic process of rebasing. This process, which involved IMF representatives, was completed this year, and the economy was rebased to 1999 data.
The effect of rebasing was dramatic. In India’s case, they rebased in 1998 to 1994 as the new base year, and that is why comparative statistics show a huge leap forward for India in 1998. For Pakistan, the rebasing showed that the economy is actually a full 20% larger than previous statistics had shown. In fact, Pakistan’s economy is 95 billion dollars in size, with a per capita income of 650 dollars, which is about 15% above India’s. The purchasing power figures have not been generated yet, but should show Pakistan somewhat ahead.
In addition to the economy being larger, this statistical change means that other figures, like the amount of debt to the size of the economy, are better. The debt to GDP ratio is now 75%. And government spending (both education and military) and taxes are a smaller fraction of the economy than previously thought.
This rebasing doesn’t give a poor person a better job or send an illiterate girl to school. It does not bring credit to any single government, who should be judged more on the rate of growth than the size of the economy. But it does suggest that Pakistan, far from being a failed state, is much more successful at development than many realized or have given credit for. As Mark Twain said, there are three kinds of lies: Lies, damned lies, and statistics. Comments can reach me at firstname.lastname@example.org.