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Statistics South Africa recently rebased South Africa’s GDP.
Does it matter?
To get started, let’s break down what rebasing is – and what it isn’t – and then put this statistical exercise in the context of the changes in economies.
First of all.
What is the GDP of an economy? There are three definitions. All are equivalent. GDP can be measured:
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as the value of the final goods and services produced by an economy during a given period (a year or a quarter); Where
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as the sum of the value added in an economy during a given period; Where
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the sum of the income of the economy during a given period.
So why the need to periodically rebase the GDP of an economy? Because economies change over time, especially developing ones. How often rebasing is done in a country like South Africa depends on resources and priorities. Statistics South Africa carried out rebasing exercises every five years. The rebasing was done in 1999, 2004, 2009 and 2014. It took a little longer for the last one due to the pandemic.
Frequency is important due to the structural transformation of an economy, inflation and technological progress. For example, during the process of economic development or structural transformation, economies go through a process of urbanization, where more and more people live, study, work and produce goods and services in cities. This leads to the growth of certain sectors, such as services and industry which are more productive and require more human capital compared to sectors like agriculture. The effect of this is that the relative importance of the agricultural sector decreases as services and manufacturing increase.
This process of structural transformation is general. Countries like the United States and the United Kingdom have all been there. South Africa is going through it right now.
The change means that the weight of particular sectors changes in measuring GDP. For example, if there are fewer and fewer people working in agriculture, wages in this sector will be different from those of five years ago. If general prices rise, inflation must be taken into account, and rapid technological progress also affects prices and wages – as well as the demand for and supply of human capital.
Other things are also changing.
Governments need to know periodically how and where GDP is produced, so that better policies can be implemented (also accompanied by fairer taxation). In addition, potential investors need to know which sectors of an economy are growing, which tend to be the most profitable, in order to make better investment choices.
Overall, weights matter.
It’s important to rebase GDP every five years to get more up-to-date data, but we don’t expect dramatic changes. This means that, overall, in relative terms, nothing has really changed, for example, the way South Africa behaves compared to other African countries. South Africa still has the third largest GDP in Africa. This was also true before the relining.
Still, it’s worth finding out what major changes have been made this time around.
How it’s made
Government agencies that calculate GDP use a base year. For example, Statistics South Africa, before the last rebase, used 2010 prices to derive real South African GDP. To obtain real GDP in 2018, South Africa’s nominal GDP in 2018 was multiplied by a 2010 price index.
And prices change, not only because of inflation, but also because of quality changes. Think about an Intel processor and how it changed its speed over time, or how banking was done in 2010 – in the branch – and how it was done in 2018 – on the smartphone.
Nominal and real changes occur in an economy over time. Hence the need for periodic rebasing so that the data is always accurate.
We don’t expect dramatic rebase-related changes to happen every five years. South Africa is a developing economy, which has changed and grown over time, but its growth rates are not as spectacular as, say, a country like China. We therefore expect some changes, but not drastic.
For example, services have seen substantial (but not dramatic) positive changes with rebasing – in other words, their relative size has increased relative to other sectors.
To make sense of this, just think of it in terms of massive developments around the city in areas such as Rosebank and Sandton. All of these new buildings are occupied by people providing services and human capital. In short, structural transformation.
Agriculture, on the other hand, barely changed with relining.
The reduction in general public services is perhaps of more concern in terms of policy or the provision of public goods. It may be too early to draw any conclusions, but it’s worth investigating why.
In addition, gross fixed capital formation, or investment for short, has not changed much. From the first principles, this is not necessarily bad, investment is not one of the main engines of economic growth. Technological progress is, as is human capital.
What it is not about
Rebase is not about enriching economies by decree, and South Africa’s relative economic position in Africa illustrates this well. Re-basing is about providing up-to-date data, in this case the growing importance of service sectors, little change in agriculture, stagnation of general public services, so that better policies (and fairer taxation) can be implemented.
Thus, rebasing the GDP is important, so that more updated data is available. With more and better data, better analyzes and estimates are obtained, better policies are designed and, hopefully, well-being improves.
Manoel Bittencourt works for the University of Pretoria. It receives funding from the NRF. He is affiliated with ERSA.
By Manoel Bittencourt, Professor of Economics, University of Pretoria
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