Northern Province Growth and the “Base Effect”: Was Minister Amunugama Correct?

At the recent launch of the 2nd National Human Development Report (NHDR) 2012 of the UNDP, the Chief Guest at the occasion  Dr. Sarath Amunugama (Senior Minister for Int’l Monetary Cooperation) was unusually dismissive about such a report. He remarked that there are many reports that have come out by many entities and they must be looked at carefully and objectively. He pointed to research and reports done by the Central Bank, think tanks, and research divisions of banks. This was somewhat in response to the main findings of the NHDR 2012 (theme is ‘Bridging Regional Disparities’) which noted significant gaps in human development that Sri Lanka must address, particularly in war torn Northern and Eastern Provinces where indicators were quite weak. In the midst of this, one of his remarks was most curious. “the Central Bank is doing a lot of research studies. One of these studies has looked at the growth of the regions in Sri Lanka. Their analysis has shown that the growth rate of the Northern Province last year was WAY AHEAD of the rest of the country”. Yes, much has happened in terms of reconstruction and recovery in the North that would certainly translate into enhanced provincial income of the Province. Yet, his assertion was quite a strong one – and it turns out, is somewhat misleading. What the Hon. Senior Minister didn’t tell the audience about was the “base effect”.

First, lets look at the growth numbers. Yes, the Northern Province showed the fasted growth rate in GDP when we look at the Provincial GDP statistics released by CBSL in August. Clearly, the Northern Province grew its GDP by 27.1% – the highest growth rate among all the other regions. One could compare this to the growth rate of another, more prosperous province, lets say the Western Province – which grew at just 15.6% and say “wa-hey! the war torn North grew even faster than the capital province”. But what we miss here is the “base effect”.

Lets illustrate this with a different example – inflation. If the Colombo Consumer Price Index (CCPI) was extremely low last October, even a modest rise this October will arithmetically give a high rate of inflation year-on-year. If the CCPI which was at 100 goes to 150, and then to 200, the initial increase of 50 gives the percentage increase as 50% but the subsequent increase of 50 gives the percentage increase as 33.33%. This happens arithmetically as the base on which the percentage is calculated has increased from 100 to 150.

The same argument is true of the Northern Province growth figures. In 2010, NP GDP was a low Rs. 190 Bn (the lowest GDP among all the provinces). In 2011, it was Rs. 241 Bn. The increase was of Rs. Rs. 51 bn. So an increase of Rs. 51 Bn in 2011, from the low “base” of Rs. 190 Bn, gives a growth rate of 27%.  But lets now take the Western Province. In 2010, WP GDP was a whopping Rs. 2,513 Bn. In 2011, it was Rs. 2,905 Bn. The increase was of Rs. 392 Bn. The absolute increase of the WP is over 7 times that of the NP. But because the WP started off (in 2010) with a high “base”, the actual growth rate you see (year-on-year) is a modest 15.6%. Lest assume that this year (20120), Northern Province GDP increases to Rs. 300 Bn, it is an increase of Rs. 59 Bn from 2011. Even though the absolute increase is more than between 2010 and 2011 (which was Rs. 51 Bn), the 2012 vs 2011 growth rate would be at about 24.5% – lower than the 27.1% observed earlier.

So going back to the main point of all of this – the “base effect” matters. And as a fellow social scientist, the Hon. Minister should not have made such a sweeping assertion without pointing out the critical analytical caveat in it.

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