The Political Economy of Gross Domestic Product Accounting and the Philippine Case

The NSCB, also instead of using the standard double deflation method of arriving at constant GDP, has resorted to the single deflation method, which makes use only of outputs at constant prices for all economic sectors, except for government services and construction, which include input deflators derived from the prices of intermediate goods. The lack of input deflators for all sectors due to inadequate price data, excepting for the two sectors mentioned, has adversely compromised the validity of the estimate of constant GVA for measuring GDP. This is because the single deflation method again arbitrarily assumes that prices of outputs and inputs move in a parallel direction which may not be the case, specially in sectors like agriculture where prices of inputs behave differently from prices of outputs. Since the NSCB relies on quarterly, semestral and annual surveys of and financial statements from firms doing business in the Philippines, these firms may be hiding their real costs of production by not including intermediate costs to unduly show a profit to entice investors in the Philippine stock market. Anyway, it is easy later on to fix their tax statements in the Philippines to show a loss this time. Local companies, especially the foreign oil companies in the Philippines, are notoriously adept in tax evasion, showing two books of account, one for tax purposes and one for the Securities and Exchange Commission and the NSCB. With the dire lack of coordination o and the rampancy of corruption in government agencies in the country, no one will be the wiser anyway, but when the NSCB reports the final GDP for a year, it may have unwarrantedly gone up since intermediate costs of firms have been inaccurately estimated. This is because the method of single deflation was used in determining constant price because no input costs in production were available.

Another defect of determining constant prices by the NSCB is that prices are not synchronized since the base years have been changed three times since 1955 in arriving at GDP. The present base year for the PSNA is 1985, but the consumer price index (CPI) is based in 1994 (the Arroyo government has changed it to 1994 ahead of all price indexes to show a lower rate of inflation for the succeeding years). On the other hand, the wholesale price index (WPI) from the point of view of sellers is based in 1985. This is the reason why the NSCB has attempted to escape from this dilemma by rebasing all price indexes to 1985 by what it calls the splicing technique. This rebasing problem has been confounded since there are times when no price surveys have been done in a particular period in the past raising issues of the validity of completing price series over a given time. For instance, to determine price deflators for agriculture, it is more accurate to get the producer’s price index (PPI), but since this is only available on a semestral basis, proxy prices for PPI on a quarterly basis is arrived at by the NSCB using farm gate prices. This is also true in manufacturing where the WPI is used as proxy price instead of the more preferable PPI. Besides the fact that PPI in agriculture and manufacturing only adopts the single deflation method, the use of substitute prices of farm gate price in agriculture and WPI in manufacturing, render determining annual GDP more dubious. Much more, when the splicing technique is used to link prices in a price series.

The choice of the base year is another big issue in the method of national income accounting in the Philippines. A base year, according to standard national accounting, should be a “normal year”, where there should not be any great turbulence in the economy or society in general, for example, high price increases, disruptions of production, political instability, etc. But the choices of 1972 and 1985 (the current base year) as base years are highly suspicious since it was in 1972 that martial law was declared and it was in 1985 that inflation reached up to 30% with thousands of local manufacturing firms closing shop. As we have mentioned, choosing a base year when inflation was high would lower inflation rates for the succeeding years. To make it worse, due to inadequate price data, the NSCB admits that all price indices are base year weighted instead of current year weighted (that is they take into account prices during the base year). This may unduly raise GDP since it may not show the changing commodity composition of a price index since the weights still follow the commodity composition of the index during the base year. For example, the export price index of exports like coconut, sugar, etc. takes into account the substantial contributions of such products during the base year (1985) but which have been significantly reduced at present.

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