Take economic data with a grain of salt

Take economic data with a grain of salt

Originally, I planned to write an article titled "Albert Einstein and baht exchange rate". Then I said to myself, "Nope, let's not write another serious article this week". So, I decided to go for a lighter one about international rankings and ratings which the government often cites to reiterate that the Thai economy is in good shape. I never have understood why governments like to do this. Nobody cares about these figures. They care about their businesses, their jobs and their debts.

But before I start, let me advise you that there is no need to rush out and buy foreign currencies just now. The Thai baht will get even stronger and will likely break the 30 baht/dollar level soon after Thanksgiving. My Albert Einstein article, if written, will help you understand the logic.

Newspapers, research houses and international organisations love to publish rankings and ratings -- the top 10 of this, top 20 of that. Of course, they want to generate news and call attention to their organisations. And of course, some have noble motives, like warning countries with bad scores to fix their economic problems.

However, one should not believe the numbers without understanding the methodology behind the ranking or rating.

A good example is Standard Chartered's Trade 20 index, where Thailand ranks eighth in the world. The index is meant to measure international trade growth potential. Sounds great, doesn't it?

But guess which country is ranked number one for trade potential? The Ivory Coast. Most of us would have trouble finding it on a map, never mind naming its traded goods.

Also featured in the world top 20 trade potential ranking are Oman, Ghana, Bahrain and Kenya. Moreover, the top 50 list is populated by small African countries.

One quickly realises that "trade potential" does not refer to sophisticated industrialised countries with high levels of competitiveness, but to countries which rely on international trade to survive and/or have only just entered the global market. If the world lifts sanctions against North Korea, the country will take top spot in the Trade 20 index, as it hasn't (legally) traded for years. Not a meaningful ranking, I would say.

The US News's "Best Countries to Invest In" list is another funny one. The top three is made up of Uruguay, Saudi Arabia and Costa Rica. I doubt these names are on the minds of international investors looking for new places to park their money.

By the way, Chile is ranked the world's 10th best place to invest. Investors there may well be cancelling their US News subscriptions as I type.

Without a doubt, the rankings and ratings are generated by experts. But what is to be doubted are the criteria they use. For instance, if Standard Chartered adjusts its criterion from "any country which trades" to "any country with significant trading volume which trades", its top 20 list would be more meaningful.

Similarly, the Best to Invest ranking might want to include criteria such as per-capita income, size of economy, economic diversification, and political stability. The latter criteria could send Thailand plunging in world rankings.

Now, the most debated ranking is the wealth gap between rich and poor. Like measures of many other issues in Thailand, there are two clearly opposing sides.

One side, using data from Credit Suisse's Global Wealth Reports, claims that Thailand has among the biggest wealth gaps in the world. According to its 2016 report, Thailand ranked number 3, since the top 1% of the population controlled 58% of the wealth. Thailand trailed only Russia and India in the rankings. But in the 2019 report, the wealth of Thailand's richest 1% grew fastest in the world, at 17.47%, putting the country top of the rankings for wealth inequality. Of course, when wealth of the richest 1% grows 4.3 times faster than GDP, the other 99% are left behind and the economic gap widens.

The other side, the government has a totally different wealth picture. Its measurement of the economic gap is based on World Bank reports and a method called the GINI coefficient. In 2018, Thailand's GINI stood at 43.70, or 25th in a ranking of world income inequality. Not that bad. Moreover, Thailand's GINI coefficient has improved consistently over time, which means the gap is closing, not widening. Japan currently has the world's narrowest GINI-measured wealth gap, with a score of 29.90, while South Africa has the widest with a score of 57.70. The lower the number, the more equality of income. A country with no income inequality would receive a perfect zero score. In terms of the GINI coefficient, Thailand is far better than China (51.00) and India (47.90).

Both sides are technically right. Credit Suisse and the World Bank's scores are of high professional standard. But one has to take the numbers with a pinch of salt. Credit Suisse's Global Wealth Report, as the name suggests, measures "wealth" disparity between the rich and the poor, while the World Bank's GINI coefficient measures "income" disparity between the rich and the poor. Do you get it? Wealth versus income. An example might help.

Two friends work in the same government office, in the same job grade and receive the same salary.

Using the GINI coefficient, their income disparity is zero because they get exactly the same pay. But one is the son of a business tycoon while the other comes from a poor farming family. The rich one's wealth consists of a billion baht worth of savings and investments, three condos, one Lamborghini, one Ferrari and a Porsche. The other has nothing but debts: a student loan, a housing loan, a credit union loan and credit card debts. Though they have zero income disparity, their wealth disparity is a world apart.

The moral of the story is simple: Why are we arguing about numbers and rankings? They are meaningless until we use them. Instead of arguing, we should be concerned about the future of these two kids -- the rich one and the poor one. Ninety-nine percent of Thai people are like the poor kid: owning less than 50% of the country's wealth but shouldering household debts equivalent to 80% of GDP.

Something has to be done, and quickly, before they collapse. And when 99% of the people collapse, the economy collapses with them.

Did I just say I wouldn't write a serious column?

Chartchai Parasuk, PhD, is a freelance economist.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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