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Indonesia to change base year; cui bono?

Four years ago, newspapers in India published the intriguing news that their government was likely to benefit from the changes in base year for calculating gross domestic product (GDP) data, as the change would render the fiscal deficit much lower than projected

Hadi Susanto (The Jakarta Post)
Jakarta
Wed, January 21, 2015

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Indonesia to change base year; cui bono?

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our years ago, newspapers in India published the intriguing news that their government was likely to benefit from the changes in base year for calculating gross domestic product (GDP) data, as the change would render the fiscal deficit much lower than projected.

Neighboring Pakistan then amplified the issue by stating that it explained a statistical paradox on living standards between the two countries. This January, India will again rebase its GDP with a newer base year, and the sneaking suspicion regarding who will benefit remains.

Last April, Nigeria, meanwhile, gained the status of the largest economy in Africa, surpassing South Africa after changing its GDP base year from 1990 to 2010. The Nigerian National Bureau of Statistics said that the change would better represent the current structure of the economy.

As a result, Nigerian GDP almost doubled compared with when it was calculated from a 1990 base year.

Indonesia is set for a similar occurrence with the upcoming economic growth announcement in February. GDP, the main element to measure economic growth, will appear in a new base year: 2010.

The year 2000 has been used as a base year for 14 years, or 56 quarters of GDP calculation. Since the base year is essential to develop GDP, it should be renewed or rebased when the economic structure can no longer be appropriately represented by the current base year.

However, changing the base year requires a lot of effort and money, especially in developing countries where administrative data are not yet sufficiently available.

Taking these points into consideration, the Central Statistics Agency (BPS) has decided to rebase GDP from base year 2000 to base year 2010. The base years prior to 2000 were 1993, 1983, 1973 and 1960.

Resetting the base year is usually accompanied by introducing a new classification of GDP components, either components in GDP by expenditure or GDP by industry. Every change in base year usually presents more detailed component classifications of GDP.

More importantly, rebasing usually changes GDP levels because of improvement in methodology, coverage and data source quality. As the result, the level of GDP will likely rise.

After changing the base year from 1993 to 2000 a decade ago, Indonesian GDP in 2000 at current prices was Rp 1.27 quadrillion (US$100.64 billion) using 1993 as the base year, but higher by 9.87 percent using 2000 as the base year. This means there was an additional Rp 125 trillion in nominal GDP amount for the same economy.

Changing the base year from 1983 to 1993, GDP for the year 1993 also came out in two versions. The first version based on 1983 amounted to Rp 302 trillion and the second version based on 1993 totaled Rp 329 trillion, an increase of Rp 27 trillion.

However, the economic growth figure will not be affected significantly, neither upward nor downward. Rebasing mostly affects the size of the economy, not the growth.

This is because as regards the growth, the principle of comparability should be applied as a new set of items can only be compared with another new set of items. Put briefly, an apple can only be compared with an apple.

Nevertheless, the above statement is open to criticism. This is because new data coverage added to the GDP calculation will surely bring a new set of commodities.

And as new commodities, they stick to the rule of industrial life cycles, which states that new commodities grow more quickly than old commodities.

Consequently, overall growth will likely be higher than the old series, although in many cases, the difference is negligible.

The hardest impact of rebasing will be at the level of GDP. The 1983 rebasing increased GDP at current prices by as much as 13.8 percent. The 1993 rebasing raised GDP at current prices by 9.2 percent.

The 2000 rebasing pumped up GDP at current prices by 9.9 percent. This year, Indonesian GDP for the year 2010 will rise by as much as 6.47 percent from Rp 6.45 quadrillion using 2000 as the base year to Rp 6.86 quadrillion using 2010 as the base year.

The increase in GDP will also occur in other years.

Any surge in nominal GDP certainly has a knock-on effect on other socio-economic statistics and indicators, which use GDP as an integral part of their formulae.

GDP per capita, gross national product (GNP) per capita, income per capita and similar statistics will increase population as the denominator remains the same.

As a result, Indonesia'€™s ranking on the world list will surely jump several places. From the latest list of 248 countries in the World Bank dataset on GDP per capita at current price, Indonesia ranks in 144th place, below Thailand at 112th and Malaysia in 76th place. Rebasing will not improve Indonesia'€™s position significantly.

Similarly, the budget deficit, which commonly appears as a percentage of GDP, will look smaller and fiscal conditions will look healthier, because any increase in GDP figures will automatically reduce the budget deficit.

On the other hand, tax authorities will see their reputation damaged by any increase in GDP, which entails a downward correction of tax ratio figures. The current tax ratio is around 12.6 percent (of GDP), burdening the tax authority with the perception that it has performed poorly, a perception that will only worsen.

Therefore, it seems probable that rebasing the year for GDP calculation benefits neither the government nor anybody else. It only benefits those community elements that have an interest in seeing GDP statistics better represent the current economic structure.

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The writer is an economist at the Central Statistics Agency (BPS). The views expressed are his own.

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