LAST week’s news that government statisticians have made a massive adjustment to the trade statistics of the last three years provoked various reactions, both warranted and unwarranted. The 2004 trade deficit - i.e. the excess of imports over exports - was updated to $4.36 billion from the previously reported $713 million, or more than six times the original figure. The 2003 deficit was revised to $4.24 billion from $1.27 billion, or 3.3 times the original. And the 2002 trade deficit was revised to $4.03 billion from $218 million, or a whopping 18.5 times the earlier reported figure.
The news promptly raised two types of concerns. First, how does this affect the credibility and reliability of government statistics? Had the government been misleading us into thinking that our trade balance had been much better than it actually was? Second, how does this affect the actual state of the economy? Is the health and stability of the economy actually worse that it appears? Does this provide even more ammunition for government critics and political oppositionists to call for a change in leadership?
This prompted me do some quick research on the matter by talking to the people most directly concerned. Let me say at the outset that we can all rest easy, because this announced adjustment ultimately represents good news for all of us. Here’s the full story.
Why the adjustment
Newly appointed Deputy Governor of the Bangko Sentral ng Pilipinas (BSP) and fellow economists Diwa Guingundo tells me that the adjustment had its origins three years ago. At that time, government economists from BSP, Neda, DOF and DTI decided to look closely into a persistent seeming inconsistency in the external economic data. They were troubled at how the data appeared to show too much capital flight, showing up as "short term capital outflows" in the BSP’s balance-of-payments accounts. At the same time, they were suspicious about how export earnings were not being matched by enough imports, resulting in trade balance figures that even our economic managers felt was too good to be true.
The import numbers appeared too low to them because they knew our single biggest export earner is electronic components, accounting for about two-thirds of our export earnings. But they also know that inputs for these products are all imported, and that the only added value the domestic economy contributes to these exports is labor for assembling the components into chips or circuit boards. Thus, they felt that there must be something wrong with the trade data reported by the National Statistics Office. A technical task force that included the above agencies and NSO was formed to look more closely into the matter.
In company transactions
Through a firm-level survey of major export sectors, the task force found that when multinational electronics firms’ mother companies abroad send electronic components to them for further assembly and subsequent re-export to the mother unit or another sister unit, the value of imported components do not get reported to NSO. But the full value of the exported product does.
With the new information unearthed with this special survey, an upward adjustment in imports had to be made, leading to the massive revisions recently reported. National Statistical Coordination Board (NSCB) secretary general Romulo Virola tells me that the multinational companies concerned have expressed reluctance to undergo the same survey every year henceforth. But government economists and statisticians are making sure there intra-company import transactions are captured henceforth. Apart from these previously unrecorded import transactions previously unrecorded export transactions from companies in the Subic free port are now also incorporated in the corrected trade accounts. Both Guinigundo and Virola tell me that the latest data reporting a $71 million trade deficit for May 2005 now incorporates the appropriate correction on the data.
The good news
Even before talking to Guinigundo and Virola, I knew the "missing imports" must have already been in the accounts somewhere. Thus, the data adjustment itself could not have any real impact on the economy. Economic theory holds that the current account gap (i.e. the gap between current foreign outflows and inflows) is intimately related to the fiscal gap (between government expenditures and revenues), and the gap between investments and domestic savings in the economy. With this inherent property that provides a way of cross-checking across the measured gaps, the economic accounts cannot possibly balance with an error as large as $3 billion, or more than P165 billion-unless it was showing up in unusually large entries in the "errors in omissions" line of the accounts. But it was not. Errors and omissions continued to be below 1 percent of total value of trade (exports plus imports), says Guinigundo, when up to five percent is considered acceptable internationally. It was, instead, showing up as higher short-term capital outflows in the accounts, making it look like there was more capital flight than there really was in 2002-2004. That’s one good news coming out of this clarification of the data.
All this tells also us that our government economists and statisticians are doing their job thoughtfully, and should reassure us that the quality of economic data we're getting keeps improving over time. This was the good news my Ateneo colleague Louie Dumlao was quoted last week about.
The bad news? The better quality data nonetheless belie claims that our economy is on the verge of taking off (see last week's column). Now if only it was the reverse!
Comments welcome at chabito@ateneo.edu
