China's Fish Story
Even Li Keqiang, the Chinese prime minister, has said he doesn't trust his country's official GDP figures. To keep tabs on China's growth, Keqiang famously watches three numbers that are harder to fake: electricity consumption, railroad cargo traffic, and bank lending.
His skepticism echoed many similar comments from small industry of experts who try to estimate Chinese GDP growth from other data points. But why does China have a data-quality problem at all?
It's not a Chinese conspiracy to keep its growth secret. If that were the case, Keqiang would surely be among those in the know. Yet he is as in the dark about China's growth as you or I am. Instead, the story is one of weak political institutions.
To explain the fish story of China's GDP data, in fact, it helps to turn to an actual fish story -- the story about how, for most of the 1990s, China likely reported fake data on fishing in its territorial waters to the Food and Agriculture Organization of the United Nations.
Reg Watson and Daniel Pauly, who have spent their lives studying global fisheries, found back in 2001 that something strange was going on in Chinese waters: They had become vastly more productive over the last decade and were now far more productive than a statistical model, one that fit the rest of the world's fisheries well, said they should have been.
Where were all those extra fish coming from? China, Watson and Pauly concluded, was just making them up. They were overstating their annual catch by some 5 million tons, which was half of the official figures.
Usually fishing data is underreported, as fishermen conceal some of their catch and governments lowball with the numbers to meet quotas. Why, then, the overstatement? Watson and Pauly:
We believe that explanation lies in China's socialist economy, in which the state entities that monitor the economy are also given the task of increasing its output. Until recently, Chinese officials, at all levels, have tended to be promoted on the basis of production increases from their areas or production units. This practice, which originated with the founding of the People's Republic of China in 1949, became more widespread since the onset of agricultural reforms that freed the agricultural sector from state directives in the late 1970s.This, to me, sounds much like what could be going on in Chinese GDP data today. Like Chinese officials promoted on fishy data about, well, fish, others are being judged on the basis of economic statistics: GDP growth, unemployment, and industrial output.
And we see the same pattern in Chinese GDP data as we did in the old fish data -- growth that looks both too strong and too smooth. It should be an important precedent for Christopher Balding and other skeptics who argue China might be overstating its GDP by more than 10 percent.
If China wants reliable economic data, it must stop judging its officials on their regions' economic track records and establish real independence for its statistical agencies. Letting officials control their own information and then judging them on it is a recipe for fraud and ignorance. And China's current crisis should teach its leaders that the costs of ignorance are far too high.