A widening gap between GDP and ... reality

SCMP April 16 2007

In a recent column in this newspaper Jake van der Kamp drew attention to some interesting statistics from Macau. Per capita gross domestic product in the gambling enclave, he noted, last year overtook that of Hong Kong - HK$217,000 against our HK$213,000.

But any visitor to Macau can quickly see that, by comparison with Hong Kong, most of it appears grimy, overcrowded and poverty-stricken. Indeed, while per capita income has almost doubled since 2000, average workers' earnings have lagged far behind, and those of unskilled workers even more so. The GDP figure is largely the result of construction and gambling booms, little of which rub off on the average Macanese.

It is a very fair point. But it is equally fair to point out that Hong Kong's per capita GDP is, for somewhat different reasons, equally misleading if one wants to assess changes in the real disposable incomes of your average householder.

Officially, GDP here is US$27,300 - which is roughly on a par (depending on exchange rate fluctuations) with the likes of Australia and France.

But a relatively low proportion of Hong Kong's overall income goes on compensation for employees - 51 per cent in 2005, reflecting both the massive profits made by local property and utility companies, and partly the profits passed through the city's books by mainland and other trading companies.

The gap between statistics and reality has been getting far, far worse thanks to the curious results of the methods employed by Hong Kong's statisticians. Whether by chance or not, the official GDP growth numbers are way out of line with other ways of calculating real incomes, whether at the overall or household level.

According to the official data, the cumulative annual changes in GDP - the government's headline figure - since 1997 come to no less than 37 per cent! We all know that is nonsense, but it happens to be the figure that the government has boasted.

It compares with an actual increase, in current Hong Kong dollar terms over the period, of just 8 per cent. The difference is supposed to be accounted for by price deflation increasing the real value of Hong Kong income. But which measure of deflation? The government's headline growth figure uses the overall GDP deflator. But if you use the domestic demand deflator, which is supposed only to reflect price changes affecting the domestic economy, the cumulative growth falls from 37 per cent to 24 per cent.

If you use the consumer price index as the deflator, the cumulative GDP increase is a mere 16 per cent, or less than half the official number.

Even the government's own words reveal how statistics lie. Last year, the official GDP was boosted by a 0.4 per cent decline in the overall deflator even while domestic prices were rising 2 per cent.

This decline was, says the government, 'mainly due to continued deterioration on the terms of trade' - meaning Hong Kong's imports were getting more expensive relative to its exports.

Thus, by statistical magic, a decline in Hong Kong's real disposable income is transformed into an increase in official GDP! A common-sense interpretation of last year's growth would be that it was some 2.5 per cent less than the 6.8 per cent in official statistics.

Nor is this just a one-off event. If it were, it would be shrugged off. But it has become semi-permanent due to the manner of calculation and the size of re-exports relative to the economy. Most years since 1997 have seen a similar effect, which cumulatively account for the huge discrepancies between the different measures of income.

Nor is it about to stop. The government forecasts that this year will again see a 0.5 per cent decline in the GDP deflator even as the domestic demand deflator rises by 1.5 per cent. So the scene is set for another overstatement of real income by 2 per cent.





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