• What matters in tracking the economy

    Ben D. Kritz

    Ben D. Kritz

    THURSDAY’S column (“The Philippines needs a Keqiang Index”) elicited some interesting feedback from several readers, who suggested that, since I brought it up, I may as well go ahead and develop the ‘Keqiang Index’ the country needs.

    “Kritz Index” does have a nice ring to it, but in order for it to have any practical meaning, what it is actually trying to measure needs to be clearly defined.

    One of the reasons GDP is often considered to be a misleading measure of the country’s economic health is that it is too broad-based. GDP measures nearly all economic activity, but a large proportion of that activity might not necessarily be described as ‘productive’ in the sense implied when the government pats itself on the back for achieving ‘growth.’ If observed over a long enough timeframe, any economy that is not, otherwise, headed for total dissolution will exhibit a fairly consistent growth rate at a certain level (for the Philippines, this seems to be just below 2 percent), simply because the population and prices are always increasing.

    That level, whatever it actually is, represents a kind of baseline; what we are interested in, if we want to measure real ‘growth,’ is economic activity that contributes to a significant deviation (we hope positively) from that baseline growth rate. That is essentially what Li Keqiang was looking for when he first conjured his own index during his time as Party Secretary in Liaoning Province; a broad-based measure like GDP is not helpful, because it muddles the distinction between natural, baseline growth and growth (or retraction) due to changes in policy and market conditions.

    The four indicators I suggested in the previous column—real estate lending, vehicle sales, capital goods imports, and the volume of production index (VoPI)—are appropriate, because they reflect both the consumption and production aspects of the economy, but are still common enough that the index can be applied to other economies for comparison purposes. The original Keqiang index—which tracked electricity consumption, rail cargo volumes, and overall bank lending—was perfectly suited to industrialized Liaoning Province and the economic growth objectives Li was pursuing there, but the index wasn’t as accurate or useful when it was applied to China as a whole, and it was a poor tool for comparing China to any other country. It would be completely useless in the Philippines, for instance, because railroads don’t carry cargo here, and the country’s electricity supply does not provide a large enough margin of surplus during most of the year to make changes in consumption statistically meaningful.

    The Kritz index (the name is starting to grow on me now) is an improvement because it is both appropriate for the Philippine economy and general enough to allow for comparisons with other countries. Real estate lending and vehicle sales are indicators of the consumption side of the economy “beyond the baseline,” or in other words, opportunity-driven consumption above the 75 to 90 percent of consumption that is accounted for by basic necessities like housing, food, utilities, medical costs, and everyday transportation. Capital goods imports and VoPI are indicators of the production side of the economy.

    Capital goods imports reflect the rate of business expansion, and VoPI reflects manufacturing output. Volume is preferable to value in this application, because it also reflects producer sentiment—growing volume of production even in a period when value is decreasing, which has been the case in the Philippines recently, indicates positive producer sentiment and probable economic growth; after all, producers do not produce things that they do not expect to sell at some point in the near future.

    These four indicators that make up the Kritz index are the best ones to use in accordance with the Keqiang model, limiting the number of components because of the Philippines’ “emerging economy” context. The four indicators are also completely independent from external variables, which is not the case with some other indicators suggested by a few readers, such as OFW remittances, BPO revenues, or tourist arrivals, all of which are fundamentally driven by economic conditions outside the country and at best only indicate the Philippines’ efficiency in taking advantage of opportunity, rather than generating its own.

    Tracking economic performance is pointless unless there is some benchmark or target against which it can be compared; what matters in tracking an economy like this one is not as much scale or velocity as it is direction, and the Kritz index is a good tool to do that—it is likely not the only one, and maybe not even the best one, but as I pointed out in the last column, reliance on any single measure (such as GDP) does not present a comprehensive enough picture of the economy. Using this tool, along with the ones already at our disposal, can help to make assessments of the economy—and thus, plans for managing it—much more accurate.



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