Rise of service-based economies highlights flaws in GDP data

• Methodology dates back to WWII
• Hard to capture services growth
• Implications for Gulf policymakers

This month Dubai made headlines across regional media as the emirate announced its gross domestic product grew 3.3 percent in the second quarter, while similar economic statements by other Middle East governments also generated ample news coverage.

Yet, as economies become increasingly services-based, capturing their real size and growth is becoming more difficult, and that may have implications for Middle East policymakers and investors.

“GDP remains a very useful statistic, but it’s always a crude measure of overall economic performance,” says Jonathan Haskel, an economics professor at London’s Imperial College Business School and joint winner of a 2017 essay competition on how to improve GDP methodology.

Omar Al-Ubaydli, president of the Bahraini Economists Society in Manama, says that although GDP is measured professionally in the Gulf the data set typically still has flaws and there are many challenges in measurement. 

“The process of gathering GDP data is expensive and resource consuming,” Al-Ubaydli says. “Poorer countries don’t have the resources to gather data as accurately as richer countries.”

Haskel highlights the complexities involved in compiling data, which relies in part on sample surveys being completed correctly.

“That’s something which is much more difficult in developing countries,” he says. “So, one must be much more careful about country comparisons of GDP in that context.”

OECD/Herve Cortinat

So-called establishment surveys are the underlying source data for GDP estimates, according to a December 2021 World Bank study. The study found that, of the 20 territories in the Middle East and North Africa, only five compile establishment surveys: Saudi Arabia, Kuwait, Morocco, Malta and the West Bank and Gaza.

Price surveys, meanwhile, are essential in creating an accurate consumer price index, which is a gauge of inflation and the basis for measuring real GDP. Unlike nominal GDP, real GDP is adjusted for inflation.

The World Bank advises price surveys be conducted monthly and, although 19 of the 20 Mena territories compile such surveys, only 11 had done so in 2021, the year of the study.

In the Middle East, investors should consult indicators other than solely GDP to obtain a true sense of economic activity and economic growth, Al-Ubaydli says.

He recommends analysing government finances, public and private sector debt, the balance of payments, unemployment, stock market performance, and business and consumer confidence measures.

“GDP and GDP growth are good starting points, but you’d be a fool to only rely on those to assess an economy,” says Al-Ubaydli. “GDP modelling isn’t quite as sophisticated as you may believe.”

• GCC economic data
• Mena economic data
• Dubai GDP grows 3.3% in Q2

Services constitute a growing portion of economies and are harder to measure than the production of tangible goods, according to Diane Coyle, an economics professor at the University of Cambridge.

Coyle, who was also a joint winner of the 2017 essay prize, says there is always pressure on statisticians to produce timely data, so early estimates of the previous quarter’s GDP are almost always revised as more of the component sources become available. 

“These revisions can be significant, which makes life frustrating for policymakers trying to figure out what, if anything, they need to do to respond to the business cycle,” Coyle wrote in GDP: A Brief but Affectionate History.

Calculating imputations

Countries commonly include imputations, which estimate the value of goods or services that do not involve money changing hands, in their GDP calculations. For example, imputed rent is the amount of money a homeowner would charge themselves if they were to rent the home in which they live.

Imputations provide about 15 percent of US GDP, for example, while subsistence farming is a common imputation in developing countries.

“GDP is an artificial construct, whose definition has frequently been changed, and which leaves out household activity such as caring, or producing free online entertainment or software, zero price digital services and many environmental costs,” Coyle tells AGBI.

“So, it is all ‘invented’ in a sense. It still tells us something useful about the economy and jobs, but the shortcomings are increasingly problematic.”