Think U.S. GDP numbers are unreliable? Check out Ghana.

November 24, 2012

We've grumbled before about the fact that U.S. GDP data can be fairly unreliable — at least in its early stages. For instance, everyone initially thought the U.S. economy was growing at a 1.8 percent pace in the first quarter of 2011. A year later, we learned that the true number was just 0.1 percent. It's a reason to be skeptical of those early indicators.


President Obama speaks in Ghana in 2009, with no real way to assess the country's GDP. (White House)

But our bouncy revisions are utterly tame compared with what Africa has to contend with. Take Ghana. As Morten Jerven of Simon Fraser University explains, the country's GDP estimates turned out to be off by a whopping 60 percent:

Two years ago Ghana's statistical service announced it was revising its GDP estimates upwards by over 60%, suggesting that in the previous estimates about US$13bn worth's of economic activity had been missed. As a result, Ghana was suddenly upgraded from a low to lower-middle-income country. In response, Todd Moss, the development scholar and blogger at the Center of Global Development in Washington DC, exclaimed: "Boy, we really don't know anything!"

Similarly, we may learn that the Nigerian economy is at least twice as big as officials had thought:

Let us be conservative and assume that the GDP in Nigeria merely doubles following the revision. This alone will mean that the GDP for the whole region increases by more than 15%. The value of the increase amounts to nothing less than 40 economies roughly the size of Malawi's. The knowledge that currently there are 40 "Malawis" unaccounted for in the Nigerian economy should raise a few eyebrows.

One big problem is that calculating GDP — the measure of how much value is being added throughout the economy — is extremely tricky in a country with sparse data. So government agencies in places like Ghana or Nigeria typically pick a "base year" in which there's unusually good data on the economy (say, because a big agricultural survey was carried out). The agencies can then layer on the additional data they collect each year to get a rough estimate of growth.

But as Jerven explains, there's a big flaw in this approach. Ghana's previous base year had been set back in 1993. The structure of the country's economy had changed radically since then, what with new economic policies and new technologies like mobile phones. This meant that subsequent GDP estimates were overlooking or underestimating new and growing sectors of the economy.

And that, Jerven argues, is a common problem throughout Africa. Nigeria's last base year was in 1990. That explains how economic activity 40 times the volume of Malawi's might have gone unaccounted for. And, while it's happy news that parts of Africa are growing much faster than numbers suggest, bad statistics make it difficult to craft sound economic policy.

Seen in this context, the Bureau of Economic Analysis, which calculates GDP for the United States, does a remarkably adept job. True, the BEA often labors to keep pace with changes in the economy — for instance, at one point the agency had to expand the definition of "investment" to include software. But all told, the average revision to quarterly U.S. GDP is only about 1.3 percentage points. In the grand scheme of things, that's pretty impressive.

(Link to the Jerven article is thanks to Tyler Cowen.)

Further reading:

-- Morten Jerven has a new book on this topic, Poor Numbers: How We Are Misled by African Development Statistics and What to Do About It.

-- Dylan Matthews looks at the average error in U.S. GDP data

-- The Bureau of Economic Analysis has an in-depth look (pdf) at how it tries to accurately capture U.S. economic activity — and explains why errors creep in.

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