Deciding on government policy in a large and complex economy is no easy task at the best of times. Policymakers must keep a keen eye on economic indicators and statistics at home and abroad. Since adjusting policy reactively after an undesired situation has begun to develop is less effective, they must use these measures to try and predict accurately in which direction things are moving. Having achieved this, government decision-makers must then try and close the gap between the expected situation and their desired outcome by calculating the effects that certain policies will have given prevailing conditions, and then execute the policies in a timely manner. Of course, complicating this is always the temptation for any government to try and manipulate or “massage” data to increase its own popularity.
“The best of times” would be during a period when the economy was facing no fundamental or structural problems involving imminent dramatic change or difficult reforms. Without such deep changes to an economy’s fundamentals, data and indicators are usually more reliable, since conditions remain fairly constant.
During more difficult times, when large-scale shifts in the global economic and financial landscape or within the domestic economy are pressing or underway, statistics become more difficult to use. Short-term fluctuations could be just that, or they could be the start of a trend. Stresses and change in an economy can lead to knock-on effects or vicious spirals, while the policy responses become more short term as political will and economic stress affect social conditions and thus political stability. In other words, seeing economic data accurately becomes at once more difficult but also more important.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Any statistics or indicator forms part of a whole bank of measures that can inform policymakers as to what should be done. However, economic history provides many examples of governments targeting a single data point and then finding that distortions and dishonesty prevent policy from being effective. This is especially true when the economy has less than perfect information flows (i.e. independent media and information that can serve as an alternative to what is often government controlled economic data).
In China, GDP growth was made a key metric by which performance and promotions are determined for local-level officials. In fact, GDP growth became the main government target, almost to a fanatical degree. Being on post for only a couple of years means there is often little motivation for local officials to build an accurate picture of the economy in their area; instead, there is motivation to massage (or just falsify) the data to gain promotion, often to more senior positions in other geographic areas.
Hence, for years there have been irregularities in GDP growth data, acknowledged even by China’s state media and the government itself. Often these involve higher level or more central “independent” data being seriously at odds with the sum of local level growth statistics. China’s political system created the motivation and opportunity for there to be serious irregularities between local government produced data and reality.
Most recently, Guangdong Province’s Finance Office openly criticized the province’s GDP data as being unreliable, due to discrepancies between electricity figures and GDP growth figures. Whilst the former fell during the January-May period, GDP growth jumped by 12.9%. Increased energy efficiency of growth cannot explain such a large difference, absent a world-changing secret breakthrough.
Statistical problems such as these are compounded by China’s corruption-ridden economy and serious accounting and recording issues. The recent discovery that Chinese exporters had been mis-invoicing their exports and actually using the system to take part in a carry trade is just one example of how unreliable data is. It seems so far that Chinese statistical authorities have decided not to adjust previous export figures downwards, and have instead let export data collapse as adjustments are realized.
When it emerged in 2010 (via Wikileaks) that now Premier Li Keqiang did not trust China’s own GDP data and instead monitored electricity consumption, freight haulage figures and bank loans, there was some surprise, despite previous problems with Chinese GDP data being widely known.
Since then, the reliability of Li’s alternative indicators has been brought in question. Once everyone knew that he was watching electricity data, then the motivation to manipulate data for personal gain switched from GDP figures to electricity figures.
As China’s economic reforms get underway, the reliability of the data being used by Beijing will become that much more of an issue. Without better data, Beijing will be swimming in the semi-dark – making its already unenviable situation all the more difficult.