Imputing Away the Ladder: Implications of Changes in National Accounting Standards for Assessing Inter-country Inequalities

Over the last half century, a large literature has developed on both the nature and the drivers of uneven development. While different methodologies and theoretical approaches to the issue of convergence abound, the use of GDP growth as a measure of economic growth has, remarkably, gone unquestioned. This paper reviews the convergence debates to date, and examines what the changes to the System of National Accounts (SNA) - the international standard for constructing macroeconomic indicators such as GDP - imply for assessing economic convergence. The 1993 and 2008 revisions to the SNA include several major changes to how production is measured - including the reclassification of financial intermediation services, R&D, weapons systems and owner-occupied dwellings as productive activities - all areas in which developed countries have had an advantage in recent decades. We argue that these changes to the production boundary constitute a form of ‘kicking away the ladder,’ i.e. redefining the yardstick of development to fit the new strengths of developed economies. We analyze data series for a range of countries concurrently available under the 1968 SNA, 1993 SNA and 2008 SNA standards. The earlier measure shows a larger and faster convergence of most countries in ‘the Rest’ with those of ‘the West’. Going a step further, we build on Basu and Foley’s (2013) Measured Value-Added concept as a proxy of ‘Core GDP’. This indicator omits any sector for which value-added is imputed based on net incomes, in the absence of an independent measure of output. This allows us to examine more countries and a longer, more consistent time series than concurrent SNA data, but the conclusions are the same - developing countries have caught up more in Core-GDP terms than the contemporary imputation-heavy measure of GDP would suggest. These findings suggest that the current measure of GDP has become decoupled from core employment-generating activities, and is therefore a misleading measure of growth in an economy. Furthermore, it is inconsistent with the understanding the Sustainable Development Goals of inclusive and sustainable growth. Finally, the paper considers the political economy implications of the changes in GDP methodology, such as the justification of voting shares in international financial institutions, epistemological consequences, and domestic political economy considerations.