Aiming for growth using GDP system problematic

National 2 minutes, 9 seconds


MEASURING Brunei's economic growth using the gross domestic product (GDP) system of national accounts can result in misleading indications, which in turn give way to unsustainable methods of boosting the health of the economy.

The GDP system of national accounts is deemed not suitable to Brunei whose economy is still highly dependant on oil and gas production, said Dr Roger Lawrey, acting dean of the Faculty of Business, Economics and Policy Studies, Universiti Brunei Darussalam.

"One implication of this is that targeting a (particular) rate of GDP growth for the future could be problematic," he said in an interview with The Brunei Times.

"If that rate is achieved by increasing oil and gas production, Brunei might be simply reducing its reserves of oil and gas, leading to increased problems in the future," Lawrey said. "If, however, this growth rate is targeted at the non-oil and gas sector, the result, if achievable, could be sustainable."

The thing is Brunei at this point still relies heavily on oil and gas, and without any huge spike in the production of these commodities no perceptible positive change in GDP numbers can be reflected.

GDP figures are usually analysed using constant figures meaning changes in the value of production are tracked using a product or service' price level at a particular base year and not that of the period in review.

Increased oil prices result in more revenue for the country and this is, of course, a good thing, but, again, measuring GDP growth using constant figures will not reflect this.

If, for instance, the production of oil goes down by 10 per cent and the price of oil goes up by 50 per cent, national accounts will state that "constant dollar GDP has declined, apparently indicating that the economy is in worse shape than before", Lawrey said. "But it is clearly better to produce less oil at a higher price than more oil at a lower price."

The second problem is that in diversified economies, higher constant dollar GDP means more economic activity.

"In an oil and gas-based economy like Brunei, higher GDP in the oil sector, in constant or current dollar (terms), generally mean more revenue for the oil companies, their shareholders and the government," he said. But this does not necessarily mean more jobs.

Hence, it is vital to look inside the GDP numbers, he said.

"Looking just at the headline constant dollar figure could give misleading indications of the health of the economy."

The Brunei Times