39TH Meeting of the Liberian Studies

Association

Forecasting Liberian GDP

Anthony Andrews, Ph.D.Global Trade Research Institute

University Park, IL

39TH Meeting of the Liberian Studies

Association

1. Introduction

2. The Problem

3. Model

4. Results

5. Summary

Introduction

• Liberia has been in non-accrual status with the World Bank since 1987 and as such, the country’s historically country-comparable socio-economic development indicators have not received annual updating and publication in the World Development Indicators.

Introduction

• The country currently has a Watching Brief Status (WBS), allowing the World Bank to carry out special activities at the government’s request.

Introduction

• In early 2003, the World Bank’s Board of Executive Directors endorsed the Liberia Country Re-engagement Note (CRN), which outlined a plan for World Bank reengagement within the Results Focused Transitional Framework (RFTF).

Introduction• As envisioned by the CRN, Bank

financing is provided by a $4 million Low Income Country Under Stress (LICUS), the Implementation Trust Fund, and a US$25 million grant from surplus established and administered by the International Development.

Introduction

• This led to establishment of the collection of data, but only for the most recent years, leaving a large gap in historical data, which is needed for long-term forecasting and, more important, policy issue developments.

Introduction

• The purpose of this paper is to forecast Gross Domestic Product using the PENN World Tables Database on Liberia for 1960 -1986, 27 years of data, to forecast to 2006.

Introduction

• The forecast exercise presented consist of estimating missing periods of GDP data and using actual and estimated data to develop “counterfactual” forecasts of a potential upturn in economic activity.

• A “counterfactual” is “contrary to fact” or “what if” scenario.

Introduction

• Economics has a long history of counterfactual argument. For example, Nobel Laureate Robert Fogel, in his 1964 book American Railroads and American Economic Growth, uses quantitative methods to imagine what the American economy would have been like in 1890 if there were no railroads.

Introduction

• We use counterfactuals to examine

three scenarios on the Liberian economy:

1. What would the Liberian Economy have looked like if there had been not war?

2. What was trend GDP per capita growth over the period 1960 – 1986?

3. What factors can cause an upturn in economic activity?

The Problem

• Historical time series data on Liberian GDP is available from the Penn World Tables, where the Purchasing Parity Series for International Comparison Data is developed.

• Purchasing Power Parity are rates of currency conversion that eliminate differences in price levels between countries. Per capita volume indices based on PPP converted data reflect only differences in the volume of goods and services produced

The Problem

• More importantly, PPP is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.

• This means that the exchange rate between two countries should equal the ratio of the two countries' price level of a fixed basket of goods and services. When a country's domestic price level is increasing (i.e., a country experiences inflation), that country's exchange rate must depreciated in order to return to PPP.

The Problem

• Socio-economic data for Liberia was not developed by the World bank for a number of years and, thus, the Penn World Tables (PWT) is the best available data for the country.

• We use the PWT data to develop our analysis and forecasts of our “counterfactual scenarios:

The Problem

• Figure 1 presents Real GDP for Liberia from 1960 – 1986 in US $.

• Viewing the data shows pre-war growth, instability, and decline in the Liberian economy over the period of analysis.

Figure 1:

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1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Real Gross Domestic Product

Source: PENN World Tables, Mark 5

(Purchasing Power Parity)

Figure 1:

700

800

900

1000

1100

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Real Gross Domestic Product

Source: PENN World Tables, Mark 5

(Purchasing Power Parity)

Figure 1:

700

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900

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1100

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Real Gross Domestic Product

Source: PENN World Tables, Mark 5

(Purchasing Power Parity)

700

800

900

1000

1100

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Real Gross Domestic Product

Source: PENN World Tables, Mark 5

(PPP)

I II III

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1100

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Real Gross Domestic Product

Source: PENN World Tables, Mark 5

(PPP)

I II III

AAG = 2.75%

Estimating GDP for Region I

• Estimating GDP for Region I shows the Liberian economy grew at an average annual rate of 2.75%

– Inflation, over the period was, 2.1%, so that average annual real growth was only .65%.

GDP Forecast = U$ 3000 in 2006

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3200

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GDP71_F GDP_71

19

85

US

$No War Forecast of Liberian GDP

GDP estimated for 2006 = US$ 3,000

Estimating GDP for Region I - III

• We now present the current and most up to date estimate of GDP, provided by the World Bank.

• The next figure shows the PPP GDP and the latest estimate.

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1960 1970 1980 1990 2000 2010

1955 - 1971 1986 -2006

Real PPP GDP

US$ 341

Updated GDP

• PPP GDP in 2006 was estimated to be $2.911 billion; however, rebased in 1985 figures yielded approximately US $341 million.

• Thus, the graph shows the impact of the political conflict on the production capacity of the economy.

Updated GDP

• We use the series from 1971 to 2006 to estimate the growth rate of the economy, which will provide estimates of GPD for the missing periods and allow us to develop a consistent GDP series from 1960 to 2006 in 1985 US$

• The results of this estimation is presented in the following graph.

Updated GDP

• We use the series from 1971 to 2006 to estimate the growth rate of the economy, which will provide estimates of GPD for the missing periods and allow us to develop a consistent GDP series from 1960 to 2006 in 1985 US$

• The results of this estimation is summarized in the following graph.

Updated GDP

•

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1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Real Gross Domestic Product

Source: PENN World Tables, Mark 5

(PPP)

I II III

+ 2.75%- 3.24%

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60 65 70 75 80 85 90 95 00 05 10

GDP_FNEG RGDPTT

Forecasted GDP with Actual 2006 GDP Estimate

2006 Actual = US$ 3412006 Estimated = US$ 407.5

Results

• Our counterfactual “no war” forecast shows that had there been no war, GDP for Liberia would be approximately UD$ 3 billion.

• This would be approximately 2.5 times the 1986 level.

• That is, the Liberian economy would possibly have more than doubled if there was not war.

Results

• Due to the war, the Liberian economy grew at -3.24% since 1971, resulting in a decline forecasted in 2006 of GDP at US$ 407 million.

• This was approximate half the value of GDP in 1960.

• The World Bank’s 2006 GDP estimate is US$ 341, which is US$66 billion below our estimate.

Policy Considerations

• What can be done to have an upturn in the Liberian economy?

• Liberia continues to be an agri-business based economy with 70% of the labor force engaged in agricultural production.

• Exports in 2004 were valued at US$ 910 million.

• However, there is 85% unemployment and 15% inflation

Policy Considerations

• What can be done to have an upturn in the Liberian economy?

• Liberia’s major exports are rubber, coffee, cocoa, rice, cassava, palm oil, sugarcane, bananas; sheep, goats; timber.

• Much interest has be been placed on concessions for extraction of diamonds and timber, both of which are inconsequential in world market share.

Policy Considerations

• What can be done to have an upturn in the Liberian economy?

• Thus, the critical short-run problem for Liberia is to increase productivity in the agriculture sector, especially with a focus on increasing the food security.

• This can be accomplished by focusing most of the resources in the country’s competitive advantage: agriculture.

Policy Considerations

• What can be done to have an upturn in the Liberian economy?

• Agriculture production for domestic consumption should be the country’s first priority.

• Mineral, Timer, and other revenues should be used to increase agricultural production.

Policy Considerations

• What can be done to have an upturn in the Liberian economy?

• Rather than focusing on developing unilateral extraction concession, Liberia should move to align with Botswana and Namibia.

• Expertise from these countries could assist in providing “lessons of experience” for domestic economic initiatives.

Policy Considerations

• What can be done to have an upturn in the Liberian economy?

• Liberia is not without resources to become self-sufficient in agricultural; however, the resources must be devoted to this sector of the economy.

Policy Considerations

• What can be done to have an upturn in the Liberian economy?

• A 2000 estimate of labor force occupation:– 70% agriculture– 18% Services– 8% Industry

Based on these allocations, we would expect the amount of investment in these sectors to proceed at the same levels.

Thank you for your attention