The FM's drive by GDP growth forecasting model

When reporters asked the Finance Minister about the GDP growth, Saifur Rahman discounted the BB estimates, instead made his own prediction. He suggested that the growth in the current fiscal year would exceed 7 percent mainly due to acceleration in employment generation. His forecast is based on his watching "drive by construction sites" (Saifur's DCS model).

Saifur contends that "When one goes outside Dhaka, he or she can realise that plenty of development work is going on. When I go to Sylhet by road I have to pass through three other districts and I see factories and brick kilns are springing up on both sides of the road and hundreds of people are working there. So, the RGDP growth will be more than that of BB forecast." What a naïve observation unseemly of a country's finance minister!

The FM scoffed the statistical procedure used by Bangladesh Bureau of Statistics (BBS) as backdated. He said, "If the data were updated, our growth rate would look much healthier." Is he suggesting that BBS statisticians should be driving around the countryside and count the drive by construction sites and accordingly manipulate the RGDP figure?

Several years ago a group of BB officers who came to study at Eastern Michigan University told me that the then Prime Minister announced in a public meeting that the RGDP growth was 5 percent. When the PM was reminded that the growth rate was 4.5 percent, she ordered the BB to come up with a figure of 5 percent. The officers and staff of the BB worked overtime to manipulate the data to arrive at 5.0 percent growth rate. Since then country's RGDP growth stayed around 5 percent.

I trusted my students from BB although I never concerned myself to verify their story. I now believe that when the FM predicts RGDP growth using his DCS model, anything in that economy is possible. In fact, I will not be surprised if the actual growth comes out better than 7 percent as desired by the divinely gifted. Compared to last year, this writer certainly expects a higher real growth this year primarily due to higher government expenditure on:

• Much needed national security (including added security to three exquisite official residences of the prime minister, her ministers' residences and their travels),
• Fighting terrorists, looking for their hideouts and paying for court cases,
• Chasing and repressing oppositions and using state law enforcing apparatus to despoil rightful political assemblies and feeding the jailed political functionaries,
• Extravagances in SAARC conference exhibiting glamour for fake image while masking poverty and plights of the poor,
• Image building numerous foreign travels by the prime minister and her entourages.
• Newly politicised election conducting appointments,
• Massive salary hikes to government employees, ministers and lawmakers,
• Other seemingly anti-people activities (you name it).

The construction sites, in all likelihood, are being built by expatriates, or his party functionaries with borrowed funds from banks only to default later. When the people are walking or traveling in panic, remain awake to run for shelters or "sleep with eyes open" only to escape terrorists' slaughter to live for another day, they must be oddly intrepid to undertake building houses and business. Where would the born-poor and die-poor rural people (with 30 percent or more unemployment rate) get resources to build buildings and businesses the FM is alluring us to?

Why does the FM conjure up such statements which are nonsensical in nature? One possibility is that the government is bored with 5 percent growth year after year. So, they now need a new higher growth figure and the FM is setting the stage to fabricate that growth rate. Such a creepy attempt, if it were to be true, appears quite possible for an administration confronted with the worst crises imaginable from all fronts -- not to speak of the trepidation posed by the growing popularity of opposition parties as the national election is fast approaching.

Regarding the BB's policy of continuing with a concretionary monetary policy, the FM mocked that policy contending that BB's judgment is incorrect. He argues that BB makes such forecasts based on various statistics (as economists would expect of BB), but it does not examine the money supply and its relation with the RGDP.

The monetarist model of the Quantity Theory of Money (MV = PY) relates money growth with nominal GDP growth (NGDP, growth before adjusting for inflation) as follows:

%ÄM + %ÄV = %ÄP + %ÄY

Where,

• %ÄM= means percentage change in money supply (money growth rate),
• %ÄV = percentage change in the velocity of money (growth rate of velocity of money)
• %ÄP = percentage change in the price level (inflation rate)
• %ÄY = percentage change in real GDP (growth rate of RGDP)

The velocity of money is defined as the number of times a typical dollar (or taka) has been used on average in transaction (buying goods and services) during a given year (Y/M). If we assume that changes in velocity are very small then V can be considered constant so that percentage changes in velocity will be equal to zero (%ÄV =0).

The equation would then be a simple model of the determination of NGDP. In that case, if the Central Bank wanted to make NGDP, say at 6 percent per year, it needed to merely let the money supply grow by 6 percent per year. In such a simple world, economists could use the equation to predict NGDP growth by predicting the growth rate of money. And policy makers could control NGDP growth by controlling growth of the money supply. Predicting real growth by predicting money growth is similar to living in fool's paradise.

Unfortunately, we live in a real world where velocity of money is not constant and things become complicated by multitude of factors many of which are beyond our control. However, the non-constancy of velocity does not render the equation useless. All economic models make assumptions that are in some degree unrealistic. Without making these assumptions no economic model could ever be built except perhaps that of Saifur's DCS model.

A word of caution is that FM may not confuse the relationship between money growth and RGDP growth with that of money growth and NGDP growth. The former relationship is much more complicated which is beyond the scope of this non-technical article. If nations of the world could pave their way to riches by printing new money, there would be no poverty and destitution on the surface of the earth.

It may be noted that GDP was never intended to be an indicator of progress or welfare. Simon Kuznets -- GDP's creator -- said in 1934 that "The welfare of a nation can scarcely be inferred from a measurement of national income". The United Nations Human Development Programme (UNDP) argues that all countries should pay much more attention to the quality rather than the quantity of growth. It identifies "five damaging forms of growth:"

• Jobless growth which does not translate into jobs.
• Voiceless growth which is not matched by the spread of democracy.
• Rootless growth which snuffs out separate cultural identity.
• Futureless growth which despoils the environment.
• Ruthless growth where most of the benefits are seized by the rich.

UNDP call these types of growth which are "neither sustainable nor worth sustaining." One may, however, notice that it is the ruthless growth which may be of some interest to us in the context of our current government functionaries.

A UN report presented at the UN meetings on September 14 -16, 2005 (attended by PM Khaleda Zia and other world leaders), indicated that Bangladesh has achieved fifth worst ranking (only next to Ethiopia, Rwanda, Niger and Madagascar) in failing to reduce poverty alleviation. The progression of poverty alleviation is recorded at 0.52 percent well below the target of 2.2 percent. The government claims that over the last 10 years the average RGDP growth is little over 5 percent. If poverty alleviation is progressing only at 0.52 percent, then where did the GDP growth go?

The answer may be inferred from the May 15 Poverty Monitoring Survey Report (2004) of the BBS which indicated that per capita income increased 17.51 percent at the national level, but the share of the growth attributable to the non-poor is a lopsided 19.

38 percent, and that of the poor is a measly 4.82 percent. This explains why the plight of the poor is becoming shoddier. Since the economy was growing at 5 percent it would not be perverse to typify that growth as being "ruthless growth" (where most of the benefits are seized by the rich). No wonder the country has been getting the most corrupt country ranking for five consecutive years now!

Dr. Abdullah Dewan, Professor of Economics at Eastern Michigan University, USA is presently visiting Dhaka.