"The negative side of the issue is the demoralization and trivialization of forecasting that comes from the repeated missing of targets set too high."
"The negative side of the issue is the demoralization and trivialization of forecasting that comes from the repeated missing of targets set too high."Reading the report that the economy of this country posted a slightly lower GDP (gross domestic product) growth in 2018 got me thinking about the two most common approaches to forecast-making.
One approach, which is the more logical, is to try and arrive at a forecast that takes into account and synthesizes all the data and circumstances that have a significant bearing on the state of the economy. Though they realize the risk involved in forecast-making, forecasters who use this approach appreciate the value, from the professional standpoint, of being recognized for being able to make accurate forecasts. Their attitude, when their forecasts miss the mark, is that they gave the task their best professional shot.
Unlike the first approach to forecasting, which confines itself to the attendant facts and circumstances, the second approach brings in the element of aspiration. The data and circumstances point toward a certain projection, but a forecaster may set the projection at a higher level as a means of coaxing a result better than that which the data and circumstances warrant. Wonderment, even ridicule, may be provoked when the divergences between realistic and the aspirational is wide.
A good example of what I’m talking about is the continuing projection by successive administrations of the annual growth of this country’s economy. Except for one recent year, the Philippine economy has never posted annual GDP growth above 6 percent; the 2018 figure is 6.5 percent. Yet, year after year the government forecasts GDP growth of 7-to-8 percent. The most optimistic forecasts for Philippine GDP growth this year are the vicinity of 6.7 percent.
A 7-to-9 percent annual growth is not an impossibility for the Philippine economy. It is possible. But for a growth projection of that level to be considered plausible, there must be a showing of a difference in the environment for the operation of the economy—better policymaking, more infrastructure, improved implementation capability. It can no longer be business-as-usual; that must be replaced by business-as-it-should-be.
Sad to say, I don’t see these betterments coming to pass anytime soon.Policymaking by both the Legislative and the Executive Department remains flawed and slow, interpretation and enforcement of laws remain inconsistent, the bureaucracy continues to be visionless and corruption permeates all—repeat all—levels of the government.
That’s the bad news. The worse news is that there is no likelihood that the situation will improve soon.
So I go back to my discussion of the two approaches to forecasting in general and to economic forecasting in particular.
Why do the principal economic authorities of this country—NEDA (National Economic and Development Authority), BSP and DOF (Department of Finance)——continue, year after year, to speak of 7-to-8 percent annual GDP growth? I can only think that the economic managers are being aspirational when they make such a forecast. Given that dramatic changes in the national situation are unlikely in the near term, they must realize that if 7 percent GDP growth is very hard to achieve, attainment of 8 percent growth is a far more difficult proposition. But, they think, who knows, the economy—the public and the private sector together—might just clear a greater height if the bar of performance were set higher.
What I call aspirational forecasting has its positive and its negative side. The positive side is the extra effort that is elicited from the high bar-setting. The negative side of the issue is the demoralization and trivialization of forecasting that comes from the repeated missing of targets set too high.
Aspiration has its rightful place in the forecasting process. How to reconcile the positive and the negative side of aspirational forecasting? I suggest that the aspirational element of a forecast be set at a level that will bring it within the realm of realism. Under present and foreseeable conditions, a Philippine GDP growth-range projection is unrealistic if the upper end is 8 percent—as at present—but would be acceptable if it were around 7.3 percent. Demoralization would not be so great if the 7.3 percent upper end of the target range were not breached.