Really? Ireland/Iceland/Greece Outperform Germany?

Is it true that the three basket-case countries of Europe–Greece, Ireland, and Iceland–have outperformed Germany on real GDP and productivity growth? Or do the implausible official numbers demonstrate the bankruptcy of the global economic statistical system?

I was nosing through the just-released OECD Economic Outlook (top secret project, don’t ask), and I noticed something very interesting.  The Outlook includes forecasts through 2012 for all sorts of macroeconomic variables,  so we can now look at a 15-year time period (1997-2012) which includes the ten years of  tech+housing boom (1997-2007) and the five years of the financial bust. Here are two charts comparing the strongest economy in Europe, Germany, with the three basket cases, Greece, Ireland, and Iceland. We’re looking at real gdp growth and total economy labor productivity growth:

 and

These charts show that the three basket-case countries of Europe–Greece, Ireland, and Iceland–substantially outperform Germany during the boom years, which is to be expected (blue bars).  For example, Greece had productivity growth averaging 2.4% per year from 1997 to 2007, compared to only 1% per year for Germany.

What is more surprising is that  Greece, Ireland, and Iceland continue to outperform Germany, even when we factor in  the 5 years of the bust, including forecasts through 2012 (the red bar).  For  example, average real GDP growth in Iceland is projected to be 2.7% annually over the 1997-2012 time period, almost double the 1.4% growth rate of Germany.

What can we make of these disparities? After all, we economists have been trained to believe that productivity growth is an essential measure of the health of an economy. Here are four possible explanations:

  1. OECD forecasters have drunk too many bottles of wine, leading to overoptimistic forecasts
  2. Five years post-bust is too short: The basket-case countries will be suffering for many years.
  3. Boom-and-bust beats slow-and-steady in the long-run.
  4. The usual way of measuring Gross Domestic Product overestimates  both debt-fueled growth (Iceland, Greece) and growth fueled by supply chains (Ireland).

As anyone who has been reading me for a while knows, I lean towards #4.  I think there’s a first-order problem with the way we measure GDP growth, because trade–including flows of knowledge capital–is being incorrectly counted, or not counted at all.*   That’s a big gotcha, since bad macro data have and will distort decision-making by policymakers,corporate leaders, and investors.  

*I will recap the full set of statistical issues in a post soon. If anyone wants to be on my “alternative system of global economic statistics” mailing list, just drop me a note.

Comments

  1. “If anyone wants to be on my “alternative system of global economic statistics” mailing list, just drop me a note.”

    If this is a serious offer (?), I would love to take it up.

  2. Thanks for sharing the vague stats. We should definitely be checking the methodology to generate GDP figures.

    I would be glad if you added me to the mailing list of “an alternative system of global economic statistics”.

    Regards,

  3. Joe Cushing says:

    How about this: Less advanced countries that make moves to improve economic performance easily out perform more advanced countries because it is easier to implement things that have already been invented than it is to invent new things. Germany, like the U.S., can only grow when new technology is invented because we have already implemented all of the most productivity technology out there. This is why Japan grew faster than us, than slowed and why China is currently growing faster than us and will slow.

    If one race car is traveling 206mph and another just recovered from a spin out and is traveling 145mph, would you say the slower car is out performing the faster car because its acceleration rate is higher?

    • The better metaphor would be a car a lap ahead but going slower, or basicalyl the tortoise and hare story.

      • Joe Cushing says:

        You’re making the opposite point as me. I’m saying faster growth rates don’t, by themselves, mean countries are doing better: you are saying just because somebody zoomed ahead, it doesn’t mean they will finish ahead. I’m pointing out the difference between speed and acceleration. Germany’s economy is producing more per capita and in total and all the emerging economies mentioned above. They are the 206mph race car that is doing better than the one that spun out. It is possible that the growth rate of Ireland could cause it to pass Germany but that remains to be seen. We won’t know the results until Ireland catches Germany. It’s growth rate will slow but will it still be high enough for it to pass Germany? Can the car that is going 145mph get to 215mph before the one traveling 206mph does?

      • I was saying that I think growth rates are more akin to velocity than acceleration… (because much of an economy’s production is consumed immediately, and can’t be banked) although I suppose that a purist would prefer your interpretation.
        Otherwise yes, I would have to agree with you: the outcome remains to be seen.

  4. Nice post. Really strange to see the troubled economies still being portrayed as being better than the better managed Germany. Is the GDP figures really ‘real’?

    Mike: Pls add me to your “alternative system of global economic statistics” mailing list.

Trackbacks

  1. […] This piece is cross-posted at Mandel on Innovation and Growth […]

  2. […] Really? Ireland/Iceland/Greece Outperform Germany? […]

  3. […] piece is cross-posted at Mandel on Innovation and Growth Tagged […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Archives

%d bloggers like this: