G. Usvatte-Aratchi, 25 Sept. 2010, [without tables because of technical hitch]
It was reported in The Island newspaper (18th September, 2010) that the Honourable Basil Rajapakse M.P. and Minster for Economic Development said that ‘the aim of the President (had) been that Sri Lanka would reach US$ 4,000 per capita range by 2015, for which (the ) economy must grow at eight percent’ (presumably per year). This morning (21 September 2010) The Island reports that ‘Central bank Governor said that it took 56 years to double per capita income and reach US$ 1,000 while it took six years to further double it to US$ 2,000 within the next six years ‘.It is reported that he further said, ‘We hope to double per capita income within the next six years…’ The President of the Republic as Minister of Finance when presenting Budget 2009 mentioned that per capita income had doubled to US$2,000 from 2005 to 2009. I want to examine the substance of these claims using the same figures as used by the Governor of the Central Bank and demonstrate that the claims are entirely without substance and therefore deserve to be thrown out as without merit.
Doubling per capita income from 2009 to 2015
First let me demonstrate that the hope for doubling per capita income from 2009 to 2015 is an expectation which is no more than ‘a flattering dream or worthless fancy’ (The taming of the shrew). No one in his Secretariat or in the Central Bank of Sri Lanka seem to be able to do the simple arithmetic of calculating a series that grows at a uniform rate over a period of years. The expected rate of growth of GDP 2010 to 2015 is 8 percent per year. As population grows at 1 percent per year, the expected annual rate of growth of per capita income is roughly 7 percent per year.
For their and your information, Column I in the Table carries the series of per capita income growing at 7 percent per year, resulting from ‘a rate of growth of the economy at 8 percent per year’ during the years 2009 to 2015. The figures in Column I are calculated by multiplying the figure for each year by 107 percent. The first year is 2009 for which the Central Banks gives a number for actual GDP per capita. It is clear to everyone including those whose competence in arithmetic is poor, that growing at seven percent per year, per capita income will increase no more than 50 percent between these two years. To those less intimidated by numbers, it would have been clear from the outset that nothing that grows constantly at seven percent per year could double itself within six years. A magnitude that grows constantly at seven percent per year will double itself in roughly 10 years. For a magnitude to double itself in six years, it needs to grow at roughly 10 percent per year. (See Table 1)
Note: All actual figures are from Central Bank, Annual Report 2008, 2009. Other figures (column I) are my simple calculations, as explained in text. All figures, except in Column IV are at constant prices. The figures in Column IV are at current market prices using current exchange rates. The estimated figures for years 2010 to 2015 are at 2009 (constant) prices and for 2005 to 2009 (column III) at 2002 constant prices.
Doubling of GDP from 2005 to 2009, a false claim
In the Budget Speech for 2009 and in several other publications, the Minister of Finance claimed that per capita income in this country had doubled in the five years from 2005 to 2009. The Central Bank confirmed this position in one (may be more) of their publications. This was based on figures in Column IV, which are from the Bank’s Annual reports. Note that these outputs are at current prices (and is not concerned with price changes) in each year converted into US dollars at rates of exchange prevailing in each year.
However, if you calculate the same information at 2002 constant prices (Column III), the figures are very different. Between 2004 and 2009 per capita income grew at no more than 28 percent ( 119,770 divided into 93,906 and multiplied by 100). The income of people who lived in this country, increased by 28 percent between 2004and 2009 and did not double. It was at least irresponsible not to bring these facts to the attention of the public, when the other set of meaningless figures were crowed about. The professional staff of the Central Bank and the Ministry of Finance (forget about political hacks) had an obligation to the public out of whose money they are paid to be truthful to them. They may be hindered by the wiles of scheming men. After all, these officers are some of the brightest people in the country.
Governor Cabraal, as I have quoted, says that ‘it took 56 years to double per capita income and reach US$1,000’ per capita income in Sri Lanka reached US$ 1,000 in 2004; 56 years previous to that is 1948. So far as anybody knows, there are no reliable GDP figures for any year previous to 1950. (See Central Bank of Ceylon (1998), Economic Progress of Sri Lanka, pages, 277-279). Then the Governor’s statement is prima facie without foundation.
Recall that the claim that GDP per capita doubled from 2005 to 2009 rests on the use of GDP at market prices for comparison. Let us play the same game. (I will use Central Bank figures right through.) (See Table 2)
Note: All data are from the Central Bank: Economic Progress of Sri Lanka, Annual report 2002, Annual Report 2005 and Economic and Social Statistics of Sri Lanka 2009. GDP for 1950 is at factor cost prices, others at market prices. Population figures are from the Central Bank.
Figures in Table 2 have been calculated using exactly the same technique as the figures on which the ‘story’ about doubling per capita in 5/6 years has been built by the Central Bank and government. It is manifestly evident from Column IV that since 1950 it did not take 56 years (that is till 2006) for per capita income to double. The longest it took to double was26 years from 1950 to 1976. It took 11 years from 1980 to 1991 for per capita income to double. The number of years will depend on the initial year one chooses. It is well for all of us to realize that it is a little bit difficult to lie with numbers; it shows.
However the numbers used by the Bank and government are meaningless for measuring growth in human welfare, which is what we do when we measure changes in GDP per capita or income per capita. It has some meaning in one year or when one wants to compare between/among countries in a given year who do not count in the same currency. To be meaningful one must compute GDP per capita at constant prices. To understand its significance let us take a simple example. Imagine that I am a mango consumer. My entire budget is spent on buying mangoes. I buy 1,000 mangoes in 2005 and at Rs.30 a piece, I spend Rs.30,000 on mangoes. In 2009, the prices of mangoes rises to Rs 60 a piece. I still buy 1,000 mangoes and pay Rs.60,000 for 1,000 mangoes. My expenditure on mangoes has doubled but I eat no more than what I had eaten in 2005. A careless person or a cheat might say that I ate twice as many mangoes in 2009 as I did in 2005. That is what is being done in this story about doubling income per capita in 5 years. It is just not true. Being economical with the truth in the same manner is the villainy of the Central Bank.
There is still a problem to be solved. Many are perplexed by the doubling of GDP per capita in US dollar terms between 2005 and 2009, as shown in the Table 1. Surely, domestic inflation has no bearing on dollar prices, they would tell me. That is not true. Of the 98 percent increase in GDP per capita in dollar terms, 28 percent is growth in real income (the number of mangoes I eat) and 72 percent rise in prices. The managed price of the dollar ensured the doubling of GDP per capita in dollar terms. With that increase in rupee prices (72 per cent), the dollar value of the rupee may have fallen such that the growth in per capita income in dollar terms is roughly the same as the growth in per capita real income in rupee terms. Imagine that in 2009 the dollar was valued at Rs.180. Then per capita income in 2009 in dollar terms would be $1,310, which would register the same increase of 28 percent in income per capita in rupees. It then follows that the high (and now rising) value of the rupee maintained over the last few years has contributed to the false value of doubling income per capita between 2005 and 2009. Had the exchange rate been permitted to fall as domestic prices rose, the rise in per capita income in dollar terms would have coincided with that in rupee prices. The resulting domestic economy, of course, would have been very different from what it is now. (Please note that I make no recommendation that Rs.180 per dollar in some sense is the right rate of the dollar.)
How was the rupee price of the dollar kept low in that manner? Can’t we perform that miracle further and drive down the rupee price of the dollar to roughly Rs.50/$ and raise the value of our GDP per capita to US$5,000? (Well, it has been falling in 2010 and is now about Rs.111 to the dollar). The fall in the price of the dollar is the result of two things: first, the high rate of interest in this country compared to 0.25 to2.00 percent on bank deposits in the main financial markets; and, the confidence that foreigners have that the rupee price of the dollar would not be allowed by government to rise. Even though comparative rates of interest in Colombo are 6-8 percent higher than in money centre markets, a rise in the rupee price of the dollar, would scare speculators from bringing in money into Sri Lanka. Similarly, so long as the rupee value of the dollar remains stable, it pays to undertake day trade in the Colombo share market. If you earn, say, three percent per day, given some 20 trading days in a month, you would double your money every month. Not bad until one day the rupee crashes!
No, you cannot drive down the price of the dollar to Rs.50.00 because we do not have the dollars to drive down the price. It is no different from the market for mangoes. If you want to drive down the price of mangoes, raise the supply. We don’t have the dollars because we do not earn it from net exports and nobody in his right senses will lend us that amount of dollars. Well, try some multilateral lending agencies as they tend to do crazy things these days.
Perhaps, one part of the ‘Miracle of Asia’ is the discovery that anything that grows by seven percent per year doubles in five years! Then what happens to something that grows for five years at 14 percent per year? You will see from compound growth tables that anything that grows at 14 percent per year also doubles in five years. Then on the principle that if x=y and y=z, it must follow that x=z, it must be true that 7=14! Marvel of marvels!
The discrepancy between figures in Column III and Column IV are explained as follows: At constant prices, output increased by 26 percent from 2005 to 2009 (Central Bank Report 2009, statistical Appendix, Table 2). This growth rate is in conformity of the pattern since 1978. This is the 1,000 mangoes that we talked about earlier and, in the economy, the increase in the bundle of goods and services available to the people. At current market prices, value of total output increased by 98 percent from 2005 to 2009. The price increase is roughly 72 percent. This is confirmed when you accumulate (not add) the price increase between those two years using the annual rates of inflation in Key Economic Indicators in the Central Bank Report.
During the five years 2005-2009, per capita income (=GDP per capita) rose by 26 percent in rupee terms. Between 2005 and 2009, prices rose roughly by 72 percent. The two add up to the 198% of GDP at current market prices from 2005 to 2009. Per capita income in real terms, that which matters to you and me, most certainly did not double from 2005 to 2009. It will not double between now and 2015 (as expected) at expected and feasible rates of growth.
The rupee is severely overvalued against the dollar. The overvaluation is maintained by heavy borrowing overseas at very high rates of interest. That explains the high volume of foreign exchange reserves maintained by the Central Bank, high liquidity in money markets and the buoyant share market. This policy stance is highly dangerous. As Carmen Reinhart and Kenneth Rogoff observed in This Time is Different (2009) ‘Highly indebted governments, banks or corporations can seem to be merrily rolling along for an extended period of time when bang!- confidence collapses, lenders disappear and a crisis hits.’
(Please note that I use GDP per capita and income per capita interchangeably as meaning the same thing as does the Central Bank and the Minster for Economic Development and the President.)