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Malaysia: Does counting GDP count when it comes to development?

Richard Record's picture
Photo: Bigstock/Amlan Mathur

The recent debate on whether it makes more sense to measure Gross Domestic Product (GDP) in Ringgit or in Dollars is a healthy one. It reflects a sound interest by many segments of Malaysian society in statistics that measure economic development and how it changes people’s living standards. This is the fundamental question: what does GDP really mean in the daily life of Malaysians. There are sound arguments on both sides and, in a way, both are right, depending on what perspective is taken.

In the World Bank, we use different ways of measuring GDP depending on what kind of comparison we would like to make. For the most part, and when it comes to measuring how the living standards of Malaysians are changing over time it makes sense to calculate incomes, production or spending in ringgit terms. In doing so, we correct for the effects of inflation by adjusting nominal changes into real terms, to capture real change over time – be it quarter by quarter, or year by year. In other words, we develop a real GDP estimate that is linked to constant prices from a base year, and therefore capture real growth in income over time, removing the impact of inflation. In this case, it does not matter if this is done in Ringgit, Dollars, bushels of wheat or any other unit of account. This allows us to have a clear picture of real changes over time.
 
However, it is important that we not lose sight of the fact that in practice, prices are constantly changing across the economy for fundamental reasons other than inflation. For instance, this could be a change in the supply of a Malaysian export or the demand for it, which pushes real prices up and down. These are important changes to look at, and reflect real changes in the country. It is the same with looking at the exchange rate, which is just another price.
 
Now, Malaysian companies and manufacturers who trade internationally will rightly worry about how their costs (especially the costs of inputs they must import) and sales (especially their exports) change due to movements in the exchange rate. If their profit margins drop because their dollar-denominated imported inputs are more expensive with the higher exchange rate to the dollar, they may feel that the country’s strong GDP growth statistics mean little. The same thing applies to Malaysian parents whose children study abroad, and who must spend more ringgit to meet the same educational expenses they had last year.
 
These are legitimate concerns, but not ones that can be resolved by changing the way we measure GDP. Rather, we should focus not on changing the estimate, but rather by looking at the large number of factors impacting the exchange rate – many of which are outside of the control of policymakers.
 
At this point, it should be noted that in some cases, it does make sense to measure GDP in US dollars. This applies in cases where we need to compare Malaysia with other countries, say for example either the size of the economy, or the share of the population living below the local poverty line. To do this we need to convert into a common measurement. This could be any currency, but in practice it is usually the US Dollar.
 
However, the real question is whether GDP is a useful measure of development, irrespective of whether it is denominated in ringgit or in US dollar. Malaysia has set itself the goal of becoming a high-income economy within a generation. In purely mathematical terms, this means reaching a specific threshold. In the World Bank, we consider countries to be “high income” if they have a GNI (Gross National Income, a measure close to GDP) of at least $12,235 per capita in 2018. We use the “Atlas method” which means we take a three-year average exchange rate adjusted for inflation to lessen the effect of fluctuations and abrupt changes.
 
However, this is just one indicator of progress. The true nature of a successful and prosperous nation cannot be distilled into one number, whether GDP, GNI or whatever. Malaysia’s true prosperity is to be reflected in the productivity of its human capital, in the opportunities facing Small and Medium Enterprises (SMEs) to grow, flourish and even fail, and in an economy where entrepreneurs and risk-takers face level playing fields and equal chances to succeed, and to fail.
 
Finally, and perhaps most importantly, measuring growth in GDP or GNI in per capita terms – no matter what the currency – is just an average. It’s a useful tool, but one that tells us very little about who is benefitting from growth and how wealth and prosperity is shared across the population. Is GDP growth being shared by all? Are the incomes of the highest and lowest earners converging or moving apart? This is of equal importance for policymakers, who concern themselves not only with triggering growth, but also its dispersion across regions and segments of the population.
 
Capturing this type of development requires counting a lot more than just one number. So, the real question should be: Is GDP growth enough?
 
A version of this blog appeared in The Star