Where is the growth?

Mismeasuring Long Run Growth: The Bias from Spliced National Accounts

by Leandro Prados de la Escosura (Carlos III)

Abstract: Comparisons of economic performance over space and time largely depend on how statistical evidence from national accounts and historical estimates are spliced. To allow for changes in relative prices, GDP benchmark years in national accounts are periodically replaced with new and more recent ones. Thus, a homogeneous long-run GDP series requires linking different temporal segments of national accounts. The choice of the splicing procedure may result in substantial differences in GDP levels and growth, particularly as an economy undergoes deep structural transformation. An inadequate splicing may result in a serious bias in the measurement of GDP levels and growth rates.

Alternative splicing solutions are discussed in this paper for the particular case of Spain, a fast growing country in the second half of the twentieth century. It is concluded that the usual linking procedure, retropolation, has serious flows as it tends to bias GDP levels upwards and, consequently, to underestimate growth rates, especially for developing countries experiencing structural change. An alternative interpolation procedure is proposed.

Source: http://econpapers.repec.org/paper/cgewacage/202.htm

Distributed in NEP-HIS on 2015 – 01 – 09

Reviewed by Cristián Ducoing

Dealing with National Accounts (hereafter NA) is a hard; dealing with NA in the long run is even harder…..

Broadly speaking, a quick and ready comparison of economic performance for a period of sixty years or more, would typically source its data from the Maddison project. However and as with any other human endevour, this data is not free from error. Potential and actual errors in measuring economic growth is highly relevant economic history research, particularly if we want to improve its public policy impact. See for instance the (brief) discussion in Xavier Marquez’s blog around how the choice of measure can significantly under or overstate importance of Lee Kuan Yew as ruler of Singapore.

The paper by Leandro Prados de la Escosura, therefore, contributes to a growing debate around establishing which is the “best” GDP measure to ascertain economic performance in the long run (i.e. 60 or more years). For some time now Prados de la Escosura has been searching for new ways to measure economic development in the long run. This body of work is now made out of over 60 articles in peer reviewed journals, book chapters and academic books. In this paper, the latest addition to assessing welfare levels in the long run, Prados de la Escosura discusses the problems in using alternative benchmarks and issues of spliced NA in a country with a notorious structural change, Spain. The main hypothesis developed in this article is to ascertain differences that could appear in the long run NA according to the method used to splice NA benchmarks. So, the BIG question is retropolation or interpolation?

Leandro Prados de la Escosura. Source: http://www.aehe.net

Retropolation: As Prados de la Escosura says, involves a method that is …, widely used by national accountants (and implicitly accepted in international comparisons). [T]he backward projection, or retropolation, approach, accepts the reference level provided by the most recent benchmark estimate…. In other words, the researcher accepts the current benchmark and splits it with the past series (using the variation rates of the past estimations). What is the issue here? Selecting the most recent benchmark results in a higher GDP estimate because, by its nature, this benchmark encompasses a greater number of economic activities. For instance, the ranking of relative income for the UK and France changes significantly when including estimates of prostitution and narcotrafic. This “weird” example shows how with a higher current level and using past variation rates, long-run estimates of GDP will be artificially improved in value. This approach thus can lead us to find historical anomalies such as a richer Spain overtaking France in the XIXth century (See Prados de la Escosura figure 3 below).

An alternative to the backward projection linkage is the interpolation procedure. This method accepts the levels computed directly for each benchmark year as the best possible estimates, on the grounds that they have been obtained with ”complete” information on quantities and prices in the earlier period. This procedure keeps the initial level unaltered, probably being lower than the level estimated by the retropolation approach.

There are two more recent methods to splice NA series derived from the methods described above: the “mixed splicing” proposed by Angel de la Fuente (2014), which uses a parameter to capture the severity of the initial error in the original benchmark. The problem with this solution is the arbitrary value assigned (parameter). Let’s see it graphically and using data for the Maddison project. As it is well known, these figures were recently updated by Jutta Bolt and Jan Luiten van Zanden while the database built thanks to the contributions of several scholars around the world and using a same currency (i.e. the international Geary-Kheamy dollar) to measure NA. Now, in figure 1 shows a plot of GDP per capita of France, UK, USA and Spain using data from the Madison project.

GDP per capita $G-K 1990. France, UK, USA and Spain. 1850 – 2012

The graph suggests that Spain was always poorer than France. But this could change if the chosen method to split NA is the retropolation approach. Probably we need a graph just with France to appreciate the differences. Please see figure 2:

GDP pc Ratio between Spain and France. Bolt&vanZanden (2014) with data from Prados de la Escosura (2003)

Figure 2 now suggests an apparent convergence of Spain with France in the period 1957 to 2006. The average growth rate for Spain in this period was almost 3,5% p.a. and in the case of France average growth shrinks to 2,2% p.a. Anecdotal observation as well as documented evidence around Spainish levels of inequality and poverty make this result hard to believe. Prados de la Escosura goes on to help us ascertain this differences in measurement graphically by brining together estimates of retropolation and interpolation approaches in a single graph (see figure 3 below):

Figure 3. Spain’s Comparative Real Per Capita GDP with Alternative Linear Splicing (2011 EKS $) (logs).

In summary, this paper by Prados de la Escosura is a great contribution to the debate on long run economic performance. It poises interesting challenges scholars researching long-term growth and dealing with NA and international comparisons. The benchmarks and split between different sources is always a source of problems to international comparative studies but also to long-term study of the same country. Moving beyond the technical implications discussed by Prados de la Escosura in this paper, economic history research could benefit from a debate to look for alternative measures or proxies for long-run growth, because GDP as the main source of international comparisons is becoming “dated” and ineffective to deal with new research in inequality, genuine savings Genuine Savings, energy consumption, complexity and gaps between development and developed countries to name but a few.

References

Bolt, J. and J. L. van Zanden (2014). The Maddison Project: collaborative research on historical national accounts. The Economic History Review, 67 (3): 627–651.

Prados de la Escosura, Leandro  (2003) El progreso económico de España (1850-2000). Madrid, Fundación BBVA, , 762 pp.

PS:

1) This paper by Prados de la Escosura has already been published in Cliometrica and with the same title

2) Prados de la Escosura’s A new historical database on economic freedom in OECD countries | VOX, CEPR’s Policy Portal.

Neoliberalism: A Cultural Social Construction

Crisis Without End: Neoliberalism in a Globalized Environment

by Richard N. Rambarran (University of Hyderabad)

Abstract: Since the 1970’s, both politically and theoretically, neoliberalism as an ideology has been on a persistent rise to the point where, in the twenty first century, it has garnered hegemonic dominance. Despite several recurring crises in countries since the ascendance of neoliberalism, we yet remain reluctant to point out the political economy philosophy as a root cause of the crises. Instead, many of the academics within Economics prefer to offer bouts of highly technical reasons for the downturn – this is especially true and almost solely applicable to those who practice within the ‘neoclassical’ conjecture of Economics. In a typical Marxian sense, one would have to look no further than the economic system to determine both economic and social outcomes of a country. What dictates that economic system however is the political philosophy of the leaders who guide the economic system – the policy makers. This paper attempts to show the neoliberal political philosophy, as the common thread for major crises within the last two decades. It also proposes a societal trinity for which change is driven through complex interactions among the political, economic and social spheres.

URL: http://EconPapers.repec.org/RePEc:pra:mprapa:67410

Circulated by nep-his on: 2015-10-25

Revised by: Stefano Tijerina

Richard Rambarran joins an emerging group of scholars that are spearheading an aggressive global criticism of modern capitalism, and particularly the impact that neoliberalism has had on its most recent methods of implementation within the international system. Thomas Picketty’s Capitalism in the Twenty-First Century has lead the way in recent times. Nevertheless Rambarran’s contribution to the discussion is welcomed because it points out that the economic political philosophy behind the social construction of neoliberal ideals is the determinant factor in preserving <status quo, even after numerous economic crises.

From Rambarran’s point of view, the neoliberal principles have become an “ingrained” ideology fomented by economists, local politicians and bureaucrats, domestic and multilateral institutions, academic institutions, mass media, corporations, and the consumer.[1] He further argues that today’s mainstream professional economist has perpetuated this social construction using its mathematical and econometric technical rhetoric to distance itself not only from the public sphere but also from the critical role once played by the “Classical economists.”[2] The complacency in the professional sphere has permeated the public sphere, where the collective political and social conscience is more concerned in pursuing the possibility of “wealth and great opulence,” occasionally reacting to economic crises like the one in 2008 only to quickly return to the initial passive approach once individual financial issues are partially resolved.[3]

Rambarran centers on the 1997 East Asian crisis and the 2008 Global Financial Meltdown in order to illustrate how the economic political philosophy has come to dictate “the very mechanics of our lives” through its systemic and institutional framework. He argues that contrary to the views of many scholars that the rise of neoliberalism came with the emergence of political leaders Ronald Reagan and Margret Thatcher, the foundations of the political philosophy and its social construction emerged in the post Great Depression era.[4] The solutions to the 1997 and 2008 crises therefore represent a series of theoretical models constructed since the first modern global financial crisis in order to scientifically justify the perpetuation of neoliberalism.

‘Well what a coincidence! I’m a financial regulator too!’

The ingrained idea that “human well-being and social welfare” are best advanced by the deregulation of the institutions, programs, and norms that once regulated the capitalist machine, seems to be an unquestionable thought. [5] To get to this social reality, argues Rambarran, classic liberal ideas of John Locke, Adam Smith, David Ricardo and the like had to be dismantled in order to neoliberalism to surge. According to Rambarran, neoliberalism is “not simply a minutely revised version of classic liberalism,” it is a new version of capitalism that reduces the role of the state to its minimal.[6] The business-government alliance that pushed neoliberalism forward after the 1930s slowly twisted the idea that “liberating individual and entrepreneurial freedoms and skills” through institutions, programs, and a normative systems “characterized by strong private property rights, free markets, and free trade” were actually responsible for the debacle of the market system in 1997 and 2008, and that greater privatization of services and deregulation for the business sector was the only solution moving forward.[7] These are the principles of nation state building under globalization, the basic political economic structures of nations that welcome open market and free trade, the minimal parameters for participating in the global market system; ideas that, as indicted by Rambarran, are part of the subconscious decision making dynamic between politicians, the private sector, and consumers.[8]

The current realities of this “macroscopic trinity” indicate that the business class, defined by Rambarran as the “intellectual class,” heavily influences political, economic, and social perceptions of nation building under a globalized system.[9] An intellectual class responsible for the cultural social construction of neoliberal principles that originated in the industrial world during the first half of the twentieth century and that began to spread across the developing world after the Second World War.

Neoliberal economists obsessed with breaking the chains of state regulatory systems and interested in returning to the deregulated conditions of the pre Great Depression era used theoretical models to debunk Keynesian economics.[10] During the 1970s and 1980s neoliberal principles became the formula for stagflation in the highly developed countries, and the remedy for the increasing external debt crisis across the developing world. The effective release of the forces of the market justified the dismantling of the social welfare state and the institutional and programmatic bodies that awarded citizens levels of accountability within the triangular dynamic of government-business-constituent relationships across the world. Nationalist development models based on Import Substitution Industrialization were dismantled and replaced by the principles of deregulation, privatization, and the strengthening of private property rights.

According to Rambarran, the implementation of the neoliberal experiment across the world produced mixed results, but the ability of the intellectual class to market success stories through its propaganda machine in order to justify the long-term preservation and expansion of neoliberal principles across the world gave birth to the Asian miracle.[11] Foreign direct investment and the “inflow of speculative money” would be the driving force behind the miracle, as capitalists in the industrial world shifted their production and manufacturing operations to newly unregulated regions of the world while at the same time taking advantage of the liberalization of capital accounts, escaping the already fragile regulatory systems in their own nation states, and setting the tone for the initial stages of accelerated “neoliberal globalization.”[12] Once the “speculative bubble…popped” foreign investors quickly pulled their money from the region, decreasing confidence in the East Asian region.[13] The neoliberal experiment had revealed the need for regulatory systems in order to impede the emergence of new unregulated speculative markets across the world under a more interdependent global market system, but the reshuffling of capital back into the industrial economies allowed the neoliberal propaganda system to quickly market the success of Free Trade zones.

 Rambarran misses the opportunity to explain the historical developments that took place between the Asian crisis of 1997 and the 2008 Global Financial Crisis that pushed neoliberalism further into the collective subconscious. Discussions about the emergence of the Canada-United States Free Trade Agreement, the North American Free Trade Agreement, and the consolidation of the European Union would have allowed the author an opportunity to illustrate how neoliberal intellectuals engineered and marketed to their constituents the illusion of a globalized economy for the sake of the consumer and the domestic worker.

The author’s lack of historical evidence makes his argument less convincing. The 1997 and 2008 crises help illustrate how neoliberal forces are able to perpetuate their principles even after severe global economic, political, and social damage, but he is not able to explain how the intellectual forces within his “macroscopic trinity” were able to create the social cultural construction that turned neoliberalism into an unquestionable economic political philosophy.

For example how neoliberal economists such as Milton Friedman and Lauchlin Currie together with multilateral organizations engineered the expansion of neoliberalism to markets across the world. How marketing and public relations intellectuals such as Philip Kotler and Daniel Edelman perfected the use of mass media in order translate the principles of neoliberalism to consumers, distancing them from their role as constituents and shifting their agency toward the world of consumption. How the roles of politicians and bureaucrats was redefined by Thatcher and Reagan in order to reinvent the democratic relationship between representative and constituent, and how the educational system at all levels was reengineered in order to replicate and export neoliberal ideals across the world.

A more detailed explanation of the concepts behind his “social trinity” would have clarified the dynamics between the intellectual class, and political, economic, and social actors. Why is there a one-way communication dynamic between economic actors and society? Why is the communication between political and economic actors a one-way dynamic? And why is the intellectual class not present within the political, economic, and social realms but separate from them? I would argue that the success of the expansion of neoliberal thought is that they now represent government, economic policy, and the collective social conscience. It is why it is more prevalent then ever before to see private sector representatives running for office, managing government institutions, and redefining the nature of once sacred social institutions such as universities. It is not a phenomenon of the industrial world but a common trend across the global system.

References

Duménil, G. & Levy, D. “Neoliberal (Counter) Revolution.” In D. Johnston & A. Saad-Filho, Neoliberalism: A Critical Reader. London: Pluto Press, 2004, pp. 9-19.

Harvey, D. A Brief History of Neoliberalism. London, United Kingdom: Oxford University Press, 2007.

Rambarran,R. “Crisis without End: Neoliberalism in a Globalized Environment Modeling the Historic Rise of Neoliberalism and its Systematic Role in Recent Economic Downturns,” Munich Personal RePEc Archive, October 22, 2015.

Palley, T. I. “From Keynesianism to Neoliberalism: Shifting Paradigms in Economics.” In D. Johnston & A. Saad-Filho, Neoliberalism: A Critical Reader. London: Pluto Press, 2004, pp. 20-29.

Picketty, T. Capitalism in the Twenty-First Century. Cambridge MA: Harvard University Press, 2014.

[1] Rambarran, “Crisis without End”, p. 1.

[2] Ibid.

[3] Ibid.

[4] For more information see Harvey 2007, Palley 2004 and Dumeril & Levy 2004.

[5] Rambarran, 2.

[6] Ibid.

[7] Ibid., 3.

[8] Ibid.

[9] Ibid.

[10] Ibid., 4.

[11] Ibid., 10.

[12] Ibid., 11.

[13] Ibid., 13.