September 7th, 2020
WASHINGTON – Economics is a very imperfect science. Still, it has some shot at credibility because calculations, assumptions, assessment and scenarios worked on and presented by economists are based on the analysis of hard data. I am talking about solid numbers on the size and variations of economic sectors, public spending, GDP growth, unemployment level, tax revenue, electricity consumption, balance of trade, and a lot more.
That said, what if this hard data at the foundation of economists’ calculations and, down the line, economic scenarios were not true? Imagine that some or maybe most data has been manipulated, cooked up, modified, or totally invented. Well, in that case any meaningful analysis about that particular economy is gone, because the economists would be working with fictitious numbers that have little or nothing to do with reality. There could be some useful anecdotal evidence derived from some observable phenomena, some data derived from calculations made by third parties. Still, all this would be fragmented and probably misleading or meaningless, at least in most cases.
There is manipulation
But why bring this up? Because economic data manipulation and fabrication may be more common than we think. Here is just one recent example. This is not about one particular country; but about what used to be a highly respected global index ranking countries on the easiness of doing business. I am talking about the Doing Business rankings compiled and updated every year by the supposedly neutral and intellectually unimpeachable World Bank, the large multilateral lending institution headquartered in Washington, DC.
Doing Business rankings
The Doing Business Index ranks all countries on several areas critical to assessing their “business climate“: beginning with setting up a business and then running it as smoothly as possible without the additional headaches caused by complex bureaucratic requirements and inefficient public services. For example, the Index looks at the time it takes to register a company in any given country; and then how long it takes to become operational, (purchasing land, renting space, hiring staff, getting basic services, resolve disputes, etc.). Those who compile the index look at how many procedures there are, and how long it takes to do be fully compliant. In other words, how many hurdles investors need to overcome, and a lot more. Relying on the same methodology applied to all countries, each index component gets a grade, and the country gets a final grade based on averaging the scores in all the sectors. Again, we should be reassured that everybody is treated in the same way. The same methodology is applied to all countries, big and small, rich an poor. The higher the overall score, the more business friendly and therefore investor friendly the country.
Overtime, the Doing Business rankings, updated every year, acquired a life of their own. Especially for developing countries, a good and year after year improving score was the equivalent of a “good conduct certification” provided by the most respected World Bank. A good score could be legitimately used as a marketing tool to attract foreign investors. “Come and invest here. The World Bank Doing Business Index says we are a good country, and we are getting better every year”.
But now the patina of credibility for the Doing Business index has been compromised. The World Bank suspended it in order to run an internal investigation. It seems that some countries mysteriously moved up the index ladder, without having carried out any meaningful reforms aimed at improving their domestic business climate. Others were pushed down for no clear reasons.
We do not know the facts, and therefore we should not jump to conclusions. Still, it is not impossible that some of the professionals compiling the Index may have been pressured to cook up some of the data in order to “improve” the outlook of one or more countries. There is no clear evidence about this, and therefore we have to be careful about assuming any wrong doing.
Still, this does not look good; and it may take a while before the Doing Business Index will regain its credibility and prestige. For all we know, if the integrity of the process cannot be guaranteed, the index may be discontinued.
As you can see, even the suspicion of data manipulation can have serious consequences, especially when it is about developing countries that desperately need to be taken seriously by potential investors. If confidence in the integrity of the Doing Business rankings cannot be fully restored, any investor looking at an impressive ranking improvement of any given country may conclude that this is not real, or may be somewhat unreal, and therefore not a useful tool to assess the viability of that country as an investment destination.
Argentina and Greece cooked the books
And this is not the only example. We also know that years ago official statistics in Argentina and Greece were cooked up by the government statistics agencies in charge of compiling and publishing economic data. The goal was to supply “friendly” data that would support government narratives about economic and fiscal trends. The officials in charge were ordered to present a rosy scenario, and so they did. As a result, the domestic public and the international community got a false picture. The bad data was hidden underneath fake numbers.
And then there is the real mystery of Chinese official economic statistics. There is no vetting, no independent calculation of anything regarding China. However, we do know that the impressive set of data coming out of the Chinese government is made public only after having been approved by the ruling Communist Party leadership. Which is to say that it is inconceivable that the Chinese government would allow the publication of data that would even minimally contradict official forecasts and goals approved by the party.
GDP always good
For instance, the Chinese Government has every interest to inflate GDP growth numbers. The power and prestige of the ruling Communist Party is based in large measure on its self-declared competence as top notch steward of the Chinese economy. Economic data that would even minimally challenge the official narrative of highly competent technocrats at the helm of the country would harm the prestige of the party.
In plain language, most of what comes out of China is molded to fit a preordained political narrative. And this means that the data released is probably untrue. Mostly false? Only a little bit false? This we cannot say for sure, simply because we have no access to the real data.
How bad is this?
Beyond these examples, how big is this problem across the world? We do not really know. In some cases, bad data can be the result of poor data collection systems and methodologies. In other words, it can be about human error, as opposed to deliberate manipulation. Still, it would be wise to assume that the problem of misleading or false numbers is more serious than we would think.
Sadly, we cannot hide from the fact that now live in a world of self-serving, often mutually exclusive, narratives. For people in power and their media and academic allies, the temptation to modify and then publicize the numbers so that they will fit their narrative is just too strong, especially in countries in which it is difficult if not impossible to independently verify what the government declares.
Problems in the US
And it gets worse. Even here in the US we have a problem. It may not be about deliberate official data manipulation. But it is about the deliberate distortions used to explain to the public what the official data really means. Taking this into account, we observe how good economic news can be presented as bad, and vice versa.
Take US GDP growth in the last couple of years, for example. Pre-Covid, it looked as if America under President Trump was doing great. Consistent GDP growth, historically low unemployment, sky high stock prices. No doubt this is data that would support the idea that, thanks to President Trump’s pro-business policies, first and foremost tax cuts and substantial deregulation affecting many economic activities, the US was powering ahead, with no end in sight.
And yet, most economists who have Democratic Party loyalties would argue that the economic trends under Trump, notwithstanding tax cuts and deregulation, did not improve that much compared to the GDP growth rate under President Obama. New business formation was unimpressive. The additional economic expansion under Trump was largely debt driven. Many US companies were alive, but not not profitable. They carried a huge debt load. They were seriously overleveraged, because they could issue bonds at almost zero interest. The stock market impressive rise was due largely to interest rate repression practiced by the US Federal Reserve. Zero interest rates made all other types of investments not attractive. Hence the concentrated focus on stocks which led to over appreciation. Finally, they would argue that at least some of this new US growth was driven by the spectacular expansion of US federal budget deficits. Indeed, pre-Covid, when everything was going super well, Uncle Sam was on course to run an annual deficit of about $ 1 trillion. This a monstrous figure in a growing economy, in peacetime, at full employment.
So, was the impressive growth under Trump real, or the result of the “steroids” provided by zero interests imposed by the Fed, and by the fiscal stimulus provided by an enormous federal budget deficit? It is really sad that in today’s America we cannot even begin to agree on any of this. In fact, we cannot even have a civil, non partisan, conversation about any of this.
Respected economists are on opposite sides of this divide, depending on their political leanings. Which is to say that, even assuming that the data everybody is looking at is genuine, we cannot agree on what it really means. And this is almost as bad as relying on cooked up figures.
The views and opinions expressed in this issue brief are those of the author.
|Paolo von Schirach is the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC. He is also the Editor of the Schirach Report.