UK property taxes highest in developed world, says thinktank

Policy Exchange calls for at least one new 'garden city' and changes to planning rules to deliver 300,000 houses a year

British people pay the highest levels of property taxes in the developed world and more than twice the average for the 34 rich countries in the Organisation of Economic Co-operation and Development (OECD), according to a thinktank report.

The right-of-centre Policy Exchange said politicians should reject new levies on property – such as the "mansion tax" on residences worth over £2m favoured by the Liberal Democrats and Labour – and instead pledge to bring down housing costs by building 1.5m new homes by the end of the decade.

The report called for at least one new "garden city" and changes to planning rules to deliver 300,000 new houses a year.

Councils that fail to hit their own housing targets should be forced to release land to local people who want to design and build their own homes, said the thinktank.

The report calculated that property taxes including council tax, stamp duty, inheritance tax and capital gains tax amount to 4.1% of GDP in the UK – the highest in the OECD and well above the average 1.8%.

By comparison, Canada levies 3.5% of national income in property taxes, the US 3%, Japan 2.8% and Germany 0.9%.

Alex Morton, head of housing and planning at Policy Exchange, said: "No other developed country taxes property more heavily than the UK. Yet rising house prices and falling levels of home ownership have led to many calling for an increase to land and property taxes.

"But these issues will only be solved by genuine reform of the outdated planning system, not a tax raid on peoples' homes. Politicians cannot try to do everything at once and must focus on the most crucial issues.

"The evidence shows where excess credit and under-supply exist, taxation or subsidy can only have a limited impact. That is why policymakers should ignore calls for a new round of property taxes and instead commit to spreading the benefits of home ownership and stabilising the UK economy by building at least 1.5m new homes over the course of the next parliament.

"This means serious reform of the planning system and creating new ways to deliver housing."

Article Source : http://www.guardian.co.uk
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UK GDP growth limited to 1% in longer term, economists warn

IEA paper predicts a post-crisis era of sluggish growth, tempering recent good economic news stories

Britain's economic growth will be limited to just 1% in the longer term as higher government spending, dwindling North Sea oil stocks and an ageing population all take their toll on the country's potential output, a group of economists has warned.

Tempering the recent spate of upbeat news on the UK and chancellorGeorge Osborne's assertion that the economy has "turned a corner", a new paper predicts a post-crisis era of sluggish growth.

The long-term, sustainable growth rate in the UK may be only 1%, compared with the 2.5% that the Treasury thought standard from the 1980s to the 2000s, according to a discussion paper for free-market thinktank the Institute of Economic Affairs (IEA). "Until 2008 the UK had got used to our economy doubling in size every 25 years: unless action is taken it will now only double in size every 70 years," says the group of economists, which includes former Treasury adviser and UK Independence Party candidate Tim Congdon, and Andrew Lilico, the managing director of Europe Economics, an economics consultancy.

They highlight the weakest recovery in "industrial history" and blame a lack of growth for the government's deficit reduction plan being off target.

Commenting on the analysis, the IEA's editorial director, Philip Booth, said: "People shouldn't get too excited about better growth figures and recent forecasts from groups such as the OECD [Organisation for Economic Co-operation and Development]. We still have a long way to go before we recover the loss of output from the 2008 crash. Furthermore, the medium-term prospects for growth do not look healthy unless the government determinedly reduces government spending and regulation."

Following a string of positive indicators on the fledgling UK recovery, the OECD has lifted its forecast for the country's economic growth in 2013. The upgrade to projected growth of 1.5% this year came after stronger-than-expected growth of 0.7% in the second quarter, falling unemployment, and survey evidence suggesting the strongest growth in manufacturing output for almost two decades.

But the economists writing in the IEA paper painted a gloomier current economic picture, noting that five years on from the start of the financial crisis in 2008, GDP is still 3% below its peak. "That is unprecedented in 170 years of shocks that have hit the UK economy since industrialisation," sais the paper, "Will flat-lining become normal?"

Predicting sluggish growth rates, the IEA authors blame higher government spending and tax as a proportion of GDP, more regulation of energy and financial services, the depletion of North Sea oil, higher debt levels for government, business and households relative to GDP. They also note demographic pressures from an ageing population as well as the effects of "low-productivity immigrant workers being added to the working population", though the IEA stressed this was an analysis of the impact of much of the UK's immigrant labour being relatively unskilled, not an argument against immigration.

The paper advocates "bold" reforms if the UK wants to get back to sustainable growth rates of around 2% or more over the long run, including: the rolling back of government activity and influence; the regeneration of affordable credit channels to unencumbered households and businesses; and the implementation of radical supply-side measures.

Booth added: "Britain's growth problem is a productivity problem and not a problem caused by insufficient government borrowing. The government should take note. The solutions lie in its hands."

The comments from the free-market thinktank contrast with remarks from the leader of the UK's trade union movement, Frances O'Grady, on Monday. In her first speech to the annual congress as TUC general secretary, O'Grady called for the implementation of a political action plan to stimulate growth, paid for by taxing the rich, whose wealth had increased dramatically in the past few years.

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UK economy: a miraculous recovery – or a blip in a longer-term decline?

The UK seems to be experiencing a remarkable economic turnaround – but how is it comparing with the US and Europe?

In Newcastle-upon-Tyne, property prices are racing ahead. Over the last year it ranks as Britain's top performing city, with an 11% jump in the cost of buying a home.

London lags behind the capital of the north-east with a 5.2% increase, though it remains the most expensive region.

The forecast is that prices will soar over the next couple of years as the turnaround in Britain's economic fortunes begins to feed into the property market.

In the last month, the economy has stepped up a gear. Manufacturing and construction industries have fallen in step with the already resurgent service sector to push the UK well ahead of Germany, France and the rest of the eurozone in the growth stakes.

When the latest GDP figures appear next month, the UK could outstrip the US, which has propped up the world economy since the financial crash of 2008.

Economists are now asking whether George Osborne has found a magic formula. Such is the confidence in Britain's new-found vigour that some experts are questioning the Bank of England's low-interest policy, which Threadneedle Street said only last month should last until 2016, such is the underlying weakness of key sectors in the economy.

So is the UK recovery real? Is it just a short-term burst in property dealing before the longer-term realities of a slow decline reassert themselves? And how does the UK compare with other countries?

UK unemployment. Credit: Guardian graphics

Employment/pay

Since the financial crash, workers across the developed world have been forced to price themselves back into work. Workers in Spain, Ireland, Germany and the UK have accepted the equivalent of zero-hour contracts that come with low pay and few benefits.

Britain's unemployment rate is now below 8% – although still above the 7% level being targeted by the Bank of England. As a result of immigration, there are almost 2m more people in the UK than in 2008, and many have found jobs.

However, this expansion in activity has not fed through into wage packets. The TUC has calculated that in the last five years average pay has fallen by 6.3% in real terms. A worker putting in 40 hours a week is £30.30 a week worse off, taking inflation into account, than in 2008.

Studies shows that four in every five jobs created since 2010 have been in low-pay sectors.

Wage rises in 2013 are averaging 2%, while inflation is running at 2.8%. A report on Monday by the Recruitment and Employment Confederation (REC) and KPMG shows the sharpest rise in salaries for full-time staff since 2008, but the REC also found that short-term appointments are at their highest since July 1998 – showing that employers are still seeking a flexible workforce.

A surge in the number of new jobs in the last 18 months has cut the US unemployment rate to 7.3%, its lowest for four years. But much of the fall is due to people leaving the job market altogether, mainly due to baby boomers retiring, younger people staying in college, and poorer workers claiming disability benefits. The US employment rate is 63.2% compared with 71.5% in the UK. In July a lacklustre 169,000 extra jobs were created, less than the 400,000 needed before the unemployment rate falls meaningfully.

In July, EU unemployment was at 11% , with the eurozone at 12.1% – both up half a percentage point on July 2012. That meant 26.6 million unemployed – roughly equal to the entire population of the Netherlands and Belgium combined.

The situation is much more concentrated among young people, with 5.5 million under-25-year-olds jobless.

Despite the crisis, salary levels have risen everywhere in the EU in recent years, with the notable exception of Britain and the bailed-out countries of Greece, Ireland and Portugal.

The EU's highest earners, the Danes, enjoyed gross average earnings of €60,000. Its poorest, the Bulgarians, get €4,668.

Exports

The financial crash of 2008 brought with it an inbuilt spur for recovery – a low exchange rate. While the indebted countries of the eurozone were tied to an exchange rate dictated by Germany, the UK could cash in on a 25% decline in the value of sterling.

Exports of goods are up, but the rise has disappointed ministers, who believed manufacturers would grab a golden opportunity to win market share in fast-growing countries such as Brazil, China and Turkey. Manufacturers have increased their output in response to an increase in domestic demand and turned away from cultivating export orders.

Without the revenues from North Sea oil and gas production, which have proved insufficient to counter energy imports since 2004, the UK's industrial position looks weak.

The service sector, which includes the City, the advertising industry and £9bn education export business, has maintained a surplus over imports throughout the last five years. However, exports of services have remained flat.

Maintaining Washington's spending budgets between 2009 and 2012 against attacks from conservative forces in Congress kept the economy growing. That is the Keynesian view inside the White House and among liberal commentators, who argue that the reason the US economy is larger than it was in 2008 (the UK economy is still 2.7% smaller) is the result of government spending and investment.

Like Germany, the US has benefited from huge demand from China and the far east for industrial equipment and cars. As a result, exports have grown steadily and proved a major impetus to growth.

Germany, along with China, is the global export champion, and while the crisis has hurt purchases of German goods in parts of the EU, its performance continues to excel, helping the EU to a rising exports record.

German exports grew 4.3% last year to over €1tn, according to the federal statistics office, with a more than 10% increase in sales to non-EU countries compensating for stagnation in European exports.

EU exports collapsed by more than €200bn in 2009 compared with the previous year, but have since recovered.

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CBI doubles George Osborne's economic growth forecast

Business lobby group cites growing confidence, forecasting UK growth of 1.2% this year and 2.3% in 2014

The CBI has raised its forecast for UK economic growth this year to 1.2% – double the pace predicted by George Osborne in his March budget – as the business lobbying group cited mounting confidence across the British economy.

It becomes the latest organisation to raise its outlook for the UK after a series of surveys and official data have suggested green shoots of recovery are taking hold, prompting the CBI to raise its 2013 growth estimate from 1%. However, the CBI, which has long been a supporter of the government's austerity drive and promises to cut the deficit, sounded a note of caution as it warned that ministers' push for a rebalancing away from consumption is taking longer than expected.

"The economy has started to gain momentum and confidence is picking up, but it's still early days," said John Cridland, the CBI's director general. "We need to see a full-blown rebalancing of our economy, with stronger business investment and trade before we can call a sustainable recovery. We hope that will begin to emerge next year, as the eurozone starts growing again." Government statistics published today show signs of a rebalancing, or at least the impact of austerity measures on public sector jobs, with private sector employment at its highest in 15 years at 24.1 million people.

The CBI said there were "signs of a pick-up in confidence across a broad range of sectors, including services, construction and manufacturing".

For 2014, the group is now pencilling 2.3% growth, up from May's forecast of 2%. Leading thinktank, the National Institute for Economic and Social Research, and forecasters Fathom Consulting both upgraded their outlook for the UK economy earlier this month to 1.2%. That growth is based on a rise in disposable incomes and some support from exports as the eurozone continues to recover following a protracted recession that was finally confirmed over last week.

Official UK data on Friday is expected to add to the tentatively optimistic tone, confirming economic growth accelerated in the second quarter to 0.6%, double the pace in the first three months of this year. That would be unchanged from the number the Office for National Statistics estimated in its first take on GDP for the quarter, which was welcomed by the chancellor as showing the economy has moved "out of intensive care".

A handful of economists believe growth could be revised higher on Friday to 0.7%. Among them, Philip Shaw at Investec, notes that numbers from the construction sector have been revised up since that first estimate on growth and that the performance of the dominant services is also likely to be nudged up.

"Our 2013 GDP forecast is still +1.2%, but we are tempted to upgrade this modestly given the positive data dynamics recorded recently," he added.

But many economists share the CBI's concern that the economy remains overly dependent on consumers, who account for around two-thirds of all spending. They say consumers are not in a strong position to drive a recovery as they grapple with the biggest squeeze on household budgets for decades.

There is fresh evidence of that pressure on Monday. The latest Asda Income Tracker suggests disposable household incomes fell last month as wages failed to keep pace with living costs.

The supermarket chain says the average UK household had £160 a week of disposable income in July, down £1 a week from a year earlier and £5 a week from a peak in February 2010. It blamed energy bills for burning a hole in household budgets after they rose by 8.2% over the past year.

"A 'feel-good' summer has contributed to a boost in retail sales, but we can't ignore the fact that the squeeze on income growth and rising cost of living continue to pull at consumer purse strings," said Asda chief executive Andy Clarke.

But he noted a rise in consumer optimism, nonetheless. That chimes with a separate survey suggesting households spent more in August as they reported that access to unsecured loans improved and they were relatively upbeat about their finances.

Data company Markit, said the measure of financial wellbeing in its Household Finance Index dipped "only slightly" from July's record high. It stood at 40.8 in August, down from 41.5 in July, the highest since the survey was launch in early 2009.

Still, there were contrasting feelings around the country.

"The strains on finances are receding fastest among those in private sector service jobs, while those working in construction, retail and the public sector trail behind. On a regional basis, familiar trends continued in August as people in Scotland and the south of England were the least downbeat about their finances, while those in Wales and the north of England were among the most pessimistic," said Tim Moore, senior economist at Markit.

Growing evidence of a renewed pick-up in house prices has also boosted sentiment among homeowners but at the same time prompted warnings that Britain could be headed for a damaging property boom and bust.

The CBI's director general, John Cridland, said: 'The economy has started to gain momentum and confidence is picking up, but it's still early days.Property website Rightmove is the latest to report rising house price inflation on Monday, adding to a flurry of recent surveys that reignited criticism of government schemes to kickstart the housing market. Average asking prices are up by more than £20,000 so far in 2013 and stood at £249,199 in August, Rightmove said. As is typical for August, that marked a slight dip from July but at 1.8% the holiday season fall was less than in previous years. In annual terms house price inflation accelerated to 5.5% from 4.8% growth in July.

The average asking price for flats hit a record high of £209,652 in August, Rightmove said, as it joined the chorus of warnings over government schemes.

"Flats are most in demand by first-time buyers and buy-to-let investors and we have seen prices for this property type hit their highest ever level as supply fails to keep up with an increase in demand at the bottom of the market," said Rightmove director Miles Shipside.

"Demand is already on the up, and that's before the roll-out of phase two of the Help to Buy stimulus. It is now critical that the supply of property improves so that the goal of a significant increase in transaction numbers is not over-shadowed by an unsustainable boom in property prices."

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UK GDP growth of 0.6% shows 'Britain is on the mend,' says George Osborne

The pace of second-quarter economic growth doubled from the first three months of 2013, ONS data shows

Britain's recovery picked up pace in the second quarter, official figures have confirmed, with GDP expanding by 0.6%.

George Osborne, the chancellor, welcomed the fresh evidence that the economy has moved, as he has put it, "out of intensive care".

"Britain is holding its nerve, we are sticking to our plan, and the British economy is on the mend," he said, "but there is still a long way to go and I know things are still tough for families. Unlike the unbalanced economy before the crisis, we are going to make sure that everyone benefits from this recovery."

Labour's shadow chancellor, Ed Balls, speaking from the US, said the stronger growth was "both welcome and long overdue" – but he stressed that for most families, living standards are still falling. "While millionaires have been given a huge tax cut, for everyone else life is getting harder with prices still rising much faster than wages." Balls added that the US economy has grown almost three times as fast as the UK's since mid-2010.

George Osborne meets workers on a section of the M6 motorway near Birmingham on Wednesday night.The 0.6% quarterly rate of growth was twice the pace of the first three months of 2013, and exactly as predicted by economists, after signs of a pickup in retail sales and strong readings in business surveys.

"The economy is coming out of the shadows, with a doubling in its quarterly growth rate from 0.3% in Q1 to 0.6% in Q2. The recovery is not quite on dry land yet, but at least it is a step in the right direction," said David Brown, of consultancy New View Economics.

The Office for National Statistics (ONS) said that all sectors of the economy recorded growth between April and June. Both industrial production, and the key services sector, expanded by 0.6%, the ONS said, with construction – which has been a heavy drag on the economy in recent quarters – picking up by a healthier than expected 0.9%.

Within services, which makes up almost 78% of economic output, the ONS said there was "widespread growth" with retail and hotels, transport and communications, and business and government services ,all showing an improvement.

John Longworth, director-general of the British Chambers of Commerce, said its members had become more optimistic in recent months. "Firms are feeling upbeat and are capable of expanding. More and more are adopting a 'have a go' attitude when it comes to exporting, which is really encouraging as this will go a long way to driving growth further still."

Measured at an annual rate, GDP was 1.4% higher than the same quarter a year ago, but the ONS stressed that the extra working day, after 2012 output was trimmed by the jubilee bank holiday, had flattered the calculation.

Despite the modest upturn, the economy still has not recovered the output that was lost during the deep recession of 2008-09: the ONS said GDP remains 3.3% below its pre-crisis peak.

The Treasury hopes that with the eurozone crisis in remission, the economy is now poised for a more solid recovery, after almost three years of flatlining. As recently as April, there were fears that after shrinking in the final quarter of 2012, the UK could have slipped into a renewed recession.

Chris Williamson, chief economist at City data provider Markit, said: "Prospects look good for a continuation of the recovery in the third quarter, with consumers and businesses both helping drive the upturn. There are even signs that exporters will see improved sales, helping drive the long-awaited re-balancing of the economy.

The relatively firm growth figure is also likely to influence the Bank of England's thinking, as it prepares to decide whether to deliver renewed stimulus to the economy in August. The new governor, Mark Carney, favours giving growth an extra fillip through so-called "forward guidance", which reassures financial markets and consumers that interest rates will remain low for a prolonged period; but other members of the Bank's monetary policy committee are known to be more sceptical.

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Treasury keen to boost John Lewis-style ownership

Consultation on tax break for worker shares follows evidence businesses owned by staff are up to 19% more productive

The Treasury is hoping to encourage a wave of John Lewis-style businesses by launching a consultation on £50m worth of tax breaks for employee-owned companies.

The government wants to make it easier for entrepreneurs to hand ownership of their companies to employees amid evidence that businesses owned and influenced by workers, such as the department store group, have proved more resilient during the economic downturn.

Chief secretary to the Treasury Danny Alexander said: "The employee ownership sector has huge potential and the government wants to support it as much as possible. Employee ownership is of significant benefit to the wider economy, through increased growth and business success and this business model will also add greater diversity to our economy."

Employee-owned businesses outperformed the UK economy in 2012 as they benefited from a measured approach that led to more investment, greater productivity and lower staff turnover. The Cass Business School concluded in 2010 that employee-owned businesses are up to 19% more productive than traditionally structured companies.

The John Lewis Partnership (JLP) is owned via thousands of employees through a trust.Chancellor George Osborne announced in this year's budget that the government would provide £50m in 2014, and the same amount in 2015, to support employee ownership. Alexander will say on Thursday that the government will provide tax relief that is "supportive and effective".

The Treasury will consult on offering capital gains tax relief when a controlling stake in a business is sold to employees collectively, rather than to individual shareholders.

A second tax break would allow employee-owned companies to pay staff a tax- and national insurance-free bonus each year. At present, payments such as the annual John Lewis staff bonus are taxed at up to 40%, the same level as the rest of their pay, whereas dividend payments to shareholders in publicly listed companies are taxed at 20% and are not subject to National Insurance. Alongside the Treasury consultation, the department for business, innovation and skills is launching national employee ownership day.

The recent success of The John Lewis Partnership (JLP), which is owned via thousands of employees through a special trust, has helped drive new interest in employee ownership with a 10% increase in the amount of companies converting last year.

Sir Charlie Mayfield, chairman of JLP and president of the Employee Ownership Association (EOA) which represents over 150 businesses controlled by their staff, welcomed the government support. He said: "Employee ownership is not just a nice thing to do but a better way of doing business." Mayfield added that the business model could help solve "some of the biggest issues in society and some of the biggest economic problems."

An independent review of employee ownership carried out last year found that growth in the sector was hindered by poor awareness of the potential for employee ownership and the complexity involved in handing a business over to staff.

At the moment, employee-owned businesses make up just 3% of the UK's GDP but the EOA believes this could be built up to 10%.

The EOA says a tax incentive might help combat concerns about potentially lower valuations for sellers and the complexity of converting to employee ownership, which can take several years to complete.

"The government's fantastic and welcome support for employee ownership has yet to be reflected in incentives for companies to move from family ownership to employee ownership. It seems logical to make a mild bit of tax reform to achieve that," said Iain Hasdell, chief executive of the EOA.

Mike Warburton, tax director at accountancy firm Grant Thornton, warned that the government would have to set a minimum level of staff ownership in order to avoid abuse of employee benefit trusts, which are often used as vehicles for staff ownership. In the past, these trusts have been used as a means to avoid tax by unscrupulous business bosses.

However, he said: "This is a very interesting idea and shows the government is thinking about ways to stimulate the economy."

Mayfield said that employee ownership would allow the UK to develop more medium-sized businesses by adding an alternative option to being acquired by private equity firms or taking the stock market flotation route.

Article Source : http://www.guardian.co.uk

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Concerns over underlying health of UK economy as 0.3% growth confirmed

ONS says Britain avoided a triple-dip recession because businesses replenished stocks – rather than from surging sales

Britain suffered one of the biggest falls in investment among the G8 last year, adding to concerns that UK businesses are losing competitiveness by refusing to spend on new equipment.

According to an analysis by the House of Commons library, Britain invests a lower percentage of GDP than any other of the leading western industrial nations. The figures, obtained by Labour, show that while most G8 countries have increased investment as a proportion of national income since 2010, Britain suffered the biggest fall of any G8 country apart from Italy.

In France and Germany, capital investment has remained largely stable at 19.9% and 17.2% of GDP respectively. In Britain it fell 0.8 percentage points between 2010 and 2012, to 14.3% of GDP. The US, Japan, Canada, Italy and Russia have higher levels of capital investment than the UK.

The ONS said UK consumer spending rose a meagre 0.1% while business investment fell 0.4%

David Cameron hosts the G8 countries in County Fermanagh in July and is expected to stress the need for the world's leading economies to make greater efforts to generate growth.

The Treasury's independent economic forecaster, the Office for Budget Responsibility, has pencilled in a strong rise in business investment next year in response to growing optimism that the UK recovery will be gathering strength in 2014. However, the OBR has been forecasting a bounce in business investment for each year of this parliament only to see its targets missed.

Ed Balls, Labour's shadow chancellor, said: "Britain has a poor historical record on investing for the long term but things have got worse not better over the last three years. Since 2010 we've seen the biggest fall in investment as a share of national income of any G8 country other than Italy."

"Alongside action now to ensure we have a strong and sustained recovery, we need long-term reforms to make our economy stronger, more balanced and better able to attract new investment and create skilled jobs for the future."

In March Labour published a report by former Institute of Directors boss Sir George Cox, who found businesses wanted the government to play a constructive part in fostering long-term investment.

Figures from the Office for National Statistics showed that business investment was a significant drag on growth in the first three months of the year. The ONS confirmed that Britain avoided a triple dip recession with growth of 0.3% in the first quarter, but a breakdown of the figures showed that investment dropped 0.4%, mainly offset by stockpiling by British businesses.

A Treasury official said several surveys highlighted a nascent recovery in business confidence and activity leading to the expected increase in investment next year. "There are positive signs that activity is picking up across the economy."

The chancellor, George Osborne, is keen to move away from Britain's traditional dependence on the City and government spending as the chief drivers of economic activity. In the first two years of the coalition he focused on providing support for manufacturers and increasing the amount of credit available to firms for investment.

However, separate ONS figures showed that a 0.2% increase in activity across the services sector in March relied heavily on a buoyant banking sector and a modest rise in government spending.

David Tinsley, UK economist at BNP Paribas, described the reliance on stockpiling as "unimpressive". Capital Economics analyst Martin Beck said talk of rebalancing the economy looked "forlorn".

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Bill Gates: how GDP understates economic growth

GDP may be an inaccurate indicator in sub-Saharan Africa, which is a concern for those who want to use statistics to help the world's poorest people

Even in good financial times, development aid budgets are hardly overflowing. Government leaders and donors must make hard decisions about where to focus their limited resources. How do you decide which countries should get low-cost loans or cheaper vaccines, and which can afford to fund their own development programmes?

The answer depends, in part, on how we measure growth and improvements in people's lives. Traditionally, one of the guiding factors has been per capita GDP – the value of goods and services produced by a country in a year divided by the country's population. Yet GDP may be an inaccurate indicator in the poorest countries, which is a concern not only for policymakers or people like me who read lots of World Bank reports, but also for anyone who wants to use statistics to make the case for helping the world's poorest people.

I have long believed that GDP understates growth even in rich countries, where its measurement is quite sophisticated, because it is very difficult to compare the value of baskets of goods across different time periods. In the United States, for example, a set of encyclopedias in 1960 was expensive but held great value for families with studious kids. (I can speak from experience, having spent many hours poring over the multi-volume World Book Encyclopedia that my parents bought for my sisters and me.) Now, thanks to the internet, kids have access to far more information for free. How do you factor that into GDP?

The challenges of calculating GDP are particularly acute in sub-Saharan Africa, owing to weak national statistics offices and historical biases that muddy crucial measurements. Bothered by what he regarded as problems in Zambia's national statistics, Morten Jerven, an assistant professor at Simon Fraser University, spent four years examining how African countries obtain their data and the challenges they face in turning them into GDP estimates. His new book, Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It, makes a strong case that a lot of GDP measurements that we thought were accurate are far from it.

Jerven notes that many African countries have trouble measuring the size of their relatively large subsistence economies and unrecorded economic activity. How do you account for the production of a farmer who grows and eats his own food? If subsistence farming is systematically underestimated, some of what looks like growth as an economy moves out of subsistence may merely reflect a shift to something that is easier to capture statistically.

There are other problems with poor countries' GDP data. For example, many countries in sub-Saharan Africa do not update their reporting often enough, so their GDP numbers may miss large and fast-growing economic sectors, like cell phones. When Ghana updated its reporting a few years ago, its GDP jumped by 60%. But many people didn't understand that this was just a statistical anomaly, not an actual change in Ghanaians' standard of living.

Ghanaian youths learn new skills on computers. When Ghana updated its reporting a few years ago, its GDP jumped by 60%

In addition, there are several ways to calculate GDP, and they can produce wildly different results. Jerven mentions three: the World Development Indicators, published by the World Bank (by far the most commonly used dataset); the Penn World Table, released by the University of Pennsylvania; and the Maddison Project at the University of Groningen, which is based on work by the late economist Angus Maddison.

These sources rely on the same basic data, but they modify it in different ways to account for inflation and other factors. As a result, their rankings of different countries' economies can vary widely. Liberia is sub-Saharan Africa's second-poorest, seventh-poorest, or 22nd-poorest country in terms of GDP, depending on which authority you consult.

It is not only the relative rankings that differ. Sometimes, one source will show a country growing by several percentage points, and another source will show it shrinking over the same time period.

Jerven cites these discrepancies to argue that we cannot be certain whether one poor country's GDP is higher than another's, and that we should not use GDP alone to make judgments about which economic policies lead to growth.

Does that mean that we really don't know anything about what works (and what doesn't) in development?

Not at all. Researchers have long used techniques like periodic household surveys to collect data. For example, the Demographic and Health Survey is conducted regularly to determine things like childhood and maternal death rates. Moreover, economists are using new techniques like satellite mapping of light sources to inform their estimates of economic growth. Although such methods are not perfect, they also are not susceptible to the same problems as GDP.

Other ways to measure overall living standards in a country are similarly imperfect; but they nonetheless provide additional ways to understand poverty. One, called the Human Development Index, uses health and education statistics in addition to GDP. Another, the Multidimensional Poverty Index, uses 10 indicators, including nutrition, sanitation, and access to cooking fuel and water. And, by using purchasing power parity, which measures the cost of the same basket of goods and services in different countries, economists can adjust GDP to gain better insight into living standards.

Yet it is clear to me that we need to devote greater resources to getting basic GDP numbers right. As Jerven argues, national statistics offices across Africa need more support so that they can obtain and report timelier and more accurate data. Donor governments and international organisations such as the World Bank need to do more to help African authorities produce a clearer picture of their economies. And African policymakers need to be more consistent about demanding better statistics and using them to inform decisions.

I'm a big advocate for investing in health and development around the world. The better tools we have for measuring progress, the more we can ensure that those investments reach the people who need them the most.

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Article source : http://www.guardian.co.uk