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The numbers game: governments flaunt them, but do they add up? [The Fiji Times, 19 June 2002]

28/03/2012

 Numbers, numbers, puzzling numbers: GDP growth rates, public debt, debt to GDP ratios, rates of inflation.  And disagreement about what the numbers mean.

Last week, the media focused on the Reserve Bank projections of economic growth rates (and other statistics), and also on reservations by USP economists, including USP’s august and experienced Vice Chancellor.

Some members of the public, after the sensational, and confused media coverage, may have been asking:  are these Reserve Bank growth projections merely propaganda to help the current Government?

This interpretation would not be correct.

The Reserve Bank, like the Fiji Bureau of Statistics, tries to give the best economic projections they can, from the data at their disposal.

However, problems arise when various interest groups (Government, Opposition parties, and sometimes the media), try to draw unjustifiable conclusions from the statistics.

Look at the following different interpretations of the same statistics.

What do politicians want?

  All governments (under Rabuka, Chaudhry, and Qarase), try to convince the public, as they should, that the economy is doing well because of their special policies.

Government tells the public that the growth rate is being increased from 1% to 5%; the public debt has been brought down from 46% to 40% of GDP; foreign debt is low; the foreign reserves are healthy; inflation is low.  And therefore the economic future looks bright.

The statistics quoted are usually fairly accurate.  But unfortunately, they do not necessarily imply that the economy is on track to do well over the long term (such as the next ten years).

The SDL Government points to the 4% and 6% growth rates predicted for 2002 and 2003.  Similarly, the Fiji Labor Party pointed to the 9% growth rate in 1999 as evidence that they were managing the economy well.

But both these sets of growth rates are not good predictors of the long term prospects, for two reasons.

What about the long term?

  First, a growth rate merely gives the percentage change of a country’s income (GDP) for one year, compared to that for the previous year.  If the previous year’s GDP was low (because of one-off events), then the growth rate for the following years can appear artificially high, while the economy “catches up”.

For instance, while the average growth rate between 1992 and 1996 was 3.9%, the El Nino drought resulted in a negative growth rate for 1997, and a small 1% growth rate for 1998.

Naturally then, the 1999 growth rate was higher because of the recovery from the drought.  Compared to the GDP one would have seen in 1999 had the 1992/1996 trend continued, the actual 1999 GDP was just 5% higher (although still good news for that one year).

Similarly, the 2000 coups caused a collapse of almost 3% in GDP for 2000.   The 2001 growth rate of 2.6%, while positive, did not even recover the ground lost in 2000.  And the 4% growth rate expected for 2002, will just take the Fiji economy back to the 1992/1996 trend line GDP.

These high growth rates are possible in the short term because of “catching up” allowed by excess capacity in the economy.  Tourism rooms are available and output of sugar, gold and garments can be increased, without any great new investment.

But growth rates of above 6% for the long term, such as the next ten years, are not on the cards, at the moment.  As Narube, Governor of the Reserve Bank correctly pointed out at USP last week, the Reserve Bank  projections for 2002 and 2003 are short-term projections, not long-term ones.

Need for high investments

  For long-term growth of above 6%, of the kind enjoyed by Singapore and Mauritius, Narube also agreed with the USP economists that investment, as a proportion of GDP, would have to be raised from the current low levels of below 15% to well above 25%.

Such a large broad based increase in investment, while easily possible for Fiji, is not happening, and has not happened since 1987.

Some investments will continue to be made, such as in tourism or the occasional biscuit factory.  And they will have their effect in raising the growth rate momentarily.  Mahogany may well add significantly to our growth path.

But our problems of unemployment and poverty can only be tackled if there is broad based investment throughout the country, by the thousands of small to medium sized investors.

Political uncertainty: no investment

  The reality today is that the bulk of private investors (small and medium sized) do not feel confident enough in the political stability of the country, to risk their capital.

Rightly or wrongly, private investors worry that as long as the major political parties do not come to some political consensus and as long as law and order continues to be undermined, there will continue to be industrial disputes, danger of international boycotts, road barricades by landowners, and escalating crime.

A clear indicator of the lack of broad-based investment in the economy is that the commercial banks’ loans to the private sector in 2001 was even less, in real terms, than its loans in 1994; while lending to the agricultural and other productive sectors has plummeted, even by the Fiji Development Bank.

The Reserve Bank itself has been pointing out for several years now,  in seminar after seminar,  this fundamental weakness in Fiji’s investment record.  But they may understandably be reluctant to emphasise the links to political issues, in case the Government sees this as political interference by the Reserve Bank.

Perhaps the Reserve Bank ought to use their constitutional independence to be more forthright, especially when their short-term growth rate projections become political football.

And Public Debt?

  And what of Fiji’s public debt?  Have successive governments been performing well in recently bringing the debt:GDP ratio down from about 46% a few years ago to around 40% today?  And is Fiji’s public debt “too high”, as opposition parties like to claim, because the debt to GDP ratio is around 40%?   Paradoxically, the answer to both questions is: not necessarily.

 

First, just note that the public debt has been reduced largely because Government has sold off some $350 millions of its assets through privatisation of the ATH, Air Pacific and NBF.

 

This reduction in public debt is not through tight controls of expenditure or increased recurrent revenues.   Can you imagine a dairy-farmer boasting that he has brought down his debt- by selling the cows?

 

Secondly, there are many countries, such as Singapore,  whose debt:GDP ratios are even higher than 40%, but they continue to perform well economically.  What matters is how productively these countries (and Fiji) have used their borrowings and public debt.

 

In Fiji, where the debts arose out of capital development such as the Monasavu Dam or the Suva-Nadi highway, the increases in debt were productive, bringing long-term benefits to the country, with future generations rightly being asked to share the burden.

 

But Fiji’s public debt has also been increased because of mismanagement (such as the NBF disaster) or wasteful recurrent expenditure.  The resulting increases in public debt creates no income or wealth in the future, and is unfair on the future generations.

 

In such a situation, even a 40% debt:GDP ratio may be too high.  While a further increase in Fiji’s public debt, for productive purposes, may well be justifiable.

 

And is it positive that Fiji’s public debt is mostly local, and not to foreigners? On the surface of it, yes, because of the reduced likelihood of balance of payments problems, as in Argentina.

 

But remember that the Fiji Government has been able to borrow locally, mostly because it has a captive lender- FNPF.  FNPF has not only been constrained by Government from investing abroad, but FNPF is also not able to find local borrowers (because of the lack of confidence by investors).

 

Fiji’s low foreign debt ratio is in fact the result of a depressed local economy and low levels of private sector investment for the last ten years- hardly a positive indicator for the economy for the long term.  If the economy recovers, we may well find that relatively inefficient government investment has crowded out private sector investment.

 

And is the current low inflation rate an indicator of economic buoyancy?

 

  Unfortunately, there are many healthy economies (including Mauritius, etc), with higher rates of inflation; while there are many stagnant economies, with low rates of inflation. Low rates of inflation, by themselves, are no indicator of current or future well-being.

 

Moderate rates of inflation may not only be indicators of buoyant demand in the economy, but also encourage private sector investment by making it easier for borrowers to pay back lenders (and savers).

 

And high reserves?

 

  And what of  high levels of foreign reserves, also often quoted as a sign of the strength of the economy?

 

Reserves in Fiji remain high because the Reserve Bank has strong restrictions on the export of capital by citizens and local companies.  Reserves also remain high if domestic investment, incomes and expenditure are constrained, thereby reducing demand for imports and foreign exchange.

 

Fiji’s high levels of foreign reserves, while giving security to those who sell goods and services to us, are not necessarily any great indicator of economic well-being.

 

And last, an economy as a whole can have high rates of growth of aggregate GDP, but the benefits of growth may not be distributed fairly to the poorer classes in the country.  Poverty and unemployment may even be increasing while the bulk of the benefits of growth are enjoyed by the rich few.  Hardly great for the country as a whole.

 

The numbers game

 

  Numbers indeed can tell opposite tales in the hands of different authors.

 

The public just needs to read carefully, and between the lines as well.

 

 

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