February 8, 2013
On Monday, The Washington Post published an article about the poor quality of China’s economic statistics. This may seem like an issue that is only of interest to the Chinese, but with the growing interconnectedness of the global economy, it is a problem for everyone. Trillions of dollars of capital flows and investments depend on good quality data.
Economists have been complaining about the quality of Chinese data for at least 20 years. Many numbers were literally too good to be true and appeared to have been based mainly on political considerations. Private economists learned to get raw data directly from key businesses, such as electric power companies, from which to generate economic growth numbers. What they lacked in precision they made up for in accuracy.
Of course, China had special problems because of the many decades of Communist Party control. In the communist system, there were no prices; only quantities. Figures were collected on, say, steel production and consumption, but determining quality or whether it was being used efficiently was difficult to determine.
There is an old joke from the old Soviet Union about a commissar who insisted that a nail factory increase its production. But the data were collected only in terms of kilograms; one kilo was the same as another regardless of the size or number or quality of nails. So the factory made some nails that weighed a ton each in order to meet its quota.
In 2006, Greece boosted GDP by 25 percent by including prostitution as an economic activity.
When caught manipulating data, politicians often react by shooting the messenger, so to speak. The nation of Greece, for example, has long been criticized by the European Union for the poor quality of its data on national indebtedness, as well the size of its economy. In 2006, it boosted the size of its gross domestic product by 25 percent to take account of underground economic activity such as prostitution. This adjustment appears to have been motivated by a desire to reduce Greece’s debt-to-GDP ratio by artificially increasing GDP.
It is not known to what extent lenders were fooled by Greece’s data, but there is no question that the country ended up being ground zero for much of Europe’s debt problem, which continues to hamper growth on the continent, which in turn has slowed growth in the United States due to slower exports to Europe.
Rather than simply admit that it was wrong and fess up, Greek politicians have attempted to scapegoat the head of its statistical agency, Andreas Georgiou, a respected statistician who previously had a long career at the International Monetary Fund and was brought in to clean up the national statistics office in 2011.
In an extraordinary action that shocked the international community, Greek prosecutors have charged Georgiou with a felony for making false statements about the nation’s budget deficit. His “crime,” apparently, was telling the truth; saying that it was much bigger than the government asserted that it was.
An editorial in London’s Financial Times says that politicians are simply trying to blame Georgiou for the austerity they have been forced to impose on the nation to gets its finances in order. Said the newspaper, “Mr. Georgiou’s role was to tell the unpleasant truth. Shooting the messenger will not make that truth disappear.”
Argentina is another country long suspected of fudging its official data, especially for inflation. A recent Bloomberg report accused the nation’s president, Cristina Fernandez de Kirchner, of creating a “parallel economic universe” to rival the fantastic stories of Argentina’s great writer Jorge Luis Borges.
In Argentina, charges were filed against a private research company for estimating a higher inflation rate than the official data indicated.
Like the Greeks, the Argentinians have been known to criminalize the release of politically inconvenient data. According to Bloomberg, charges were filed against a private research company in 2011 for estimating a higher inflation rate than the official data indicated.
Politicians routinely pressured government statisticians in Argentina to arbitrarily reduce the measured rate of inflation and poverty, according to a2009 Washington Post report. Among those alleging harm by this action were American investors in Argentine bonds with automatic inflation adjustments.
According to a report in Wednesday’s New York Times, investors are increasingly concerned about other nations that appear to have misreported data on the foreign indebtedness, including Slovenia and Malta.
Investors remain concerned that the rating companies responsible for evaluating the quality of international bonds, based in part on official government data, may have underestimated their risk, as was the case with mortgage-backed securities in the U.S., which was a major cause of the financial crisis. This week, the Department of Justice charged Standard and Poor’s with fraud for misstating the risk on such securities.
The unwillingness of politicians to accept data that doesn’t suit their purposes extends to the political realm as well. During the 2012 campaign, Republicans, including their presidential nominee Mitt Romney, refused to believe polls showing them losing. They preferred to believe Republican cheerleaders such as former Fox News analyst Dick Morris, who assured Republicans they had it in the bag. On Wednesday, Fox announced that Morris’s contract with the network is not being renewed.
Also during the campaign, many Republicans refused to believe that the unemployment rate was falling, which was good news for Barack Obama. They accused the Bureau of Labor Statistics of doctoring the data – something that would be impossible, given the agency’s procedures and transparent methods, even if it were desired.
The temptation to manipulate data or close one’s mind to inconvenient facts is a strong one, but ultimately counterproductive. So is killing the messenger. Eventually, the data catch up with reality and those that deluded themselves pay the price. Better to live in the real world and do the best one can to find and produce the most reliable data and factual analysis possible and accept the truth, even if there is a cost for doing so.