China Data Suspected Says 75-Year-Old Theory: Cutting ResearchSimon Kennedy and Steve Matthews
A mathematical tool devised by an American physicist in the 1930s underscores doubts about the quality and reliability of Chinese economic data, according to research by Australia & New Zealand Banking Group Ltd.
The results are based on “Benford’s Law,” which holds that in any series of numbers, certain patterns will be found only if the statistics are naturally generated. The rule, created by former General Electric Co. engineer Frank Benford, suggests patterns for the first and second digits in a numeric series and can be used to detect phony data, Li-Gang Liu, ANZ’s chief economist for Greater China, and colleague Louis Lam said in a Jan. 8 report.
Benford’s work has already been adapted to show Greece should have been suspected of manipulating its data before the European debt crisis and that now-jailed financier Bernard Madoff was overstating investment returns.
The ANZ economists studied China’s annual nominal gross domestic product data from 1952 to 2011 to measure how frequently numbers from one to nine appeared as the first digit. While the 24 occurrences of “one” is higher than the 18 suggested by the rule, the economists said the statistics largely abide by what Benford’s Law allows. The same is true of industrial production data.
Suspicions emerged when the data was probed more deeply and reported in percentage terms, the ANZ report said, adding that the guilty party was often the second digit. An examination of the quarterly GDP growth rate from December 1991 to September 2012 shows zero occurred as the second digit 21 times, much higher than what Benford would calculate and suggesting a rounding-up to achieve a bigger leading digit. One through four also appeared more regularly than the law reckons, while seven through nine featured less.
Inflation reported on a percentage basis also failed to fit the law.
“Non-conformity to the Benford’s law does not always indicate data manipulation, but nevertheless it raises doubts about the quality of Chinese data,” the authors said. “Our statistical analysis seems to have confirmed the long-rooted suspicion on quality and reliability of Chinese data.”
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Central banks may need to allow a dilution of their independence during periods of economic stress.
That’s according to a paper titled “Helicopter Money: Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation,” released this week by Paul McCulley, a former managing director at Pacific Investment Management Co. and Zoltan Pozsar from the Federal Reserve Bank of New York.
In a map of different economic situations that they call the “Global Macro Chessboard,” the authors show when companies and households are cutting back, monetary policy will flop if it’s aimed at boosting private demand for credit. The solution is to embrace fiscal stimulus and have the central bank communicate that such measures should be encouraged until the deleveraging finishes.
Signs of overlapping of fiscal and monetary policies have drawn criticism recently from central bankers including St. Louis Fed President James Bullard and Bundesbank President Jens Weidmann.
“The lesson here is that central bank independence is not a static state of being,” said McCulley and Pozsar in their report published by the Global Society of Fellows. “Rather, it is dynamic and highly circumstance dependent: during times of war, deflation and private deleveraging, fiscal policy will inevitably grow to dominate monetary policy.”
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The rise of emerging markets is prompting economists to ask how long their growth spurts can last.
The answer is until per-capita income reaches $10,000 to $11,000 and, once growth resumes, about $15,000 to $16,000 as measured in 2005 dollars, according to three economists including Barry Eichengreen of the University of California, Berkeley.
In an update to a 2012 paper published this week by the Cambridge, Massachusetts-based National Bureau of Economic Research, the economists found countries tend to experience slowdowns at two different income levels.
The effort to quantify the current level of the so-called middle income trap -- where economic development tends to stall -- shows emerging economies often slow in several steps. They may be more at risk of weakening at lower levels of income than the previous research suggested, meaning more countries are vulnerable to the trap.
“Middle-income countries may find themselves slowing down at lower income levels than implied by our earlier estimates,” said Eichengreen, Kwanho Shin of Korea University and Donghyun Park of the Asian Development Bank.
Slowdowns are most likely in emerging markets with high old-age dependency ratios, strong investment rates and undervalued currencies that lower incentives to move up the technology ladder, the study said.
“These patterns will presumably remind readers of current conditions and recent policies in China,” it said. China’s per capita GDP was $7,129 in 2010.
Still, the study also finds China has slightly higher average years of secondary schooling than the median and a greater share of high-tech goods to exports, suggesting less risk of a slowdown.
“Countries accumulating high quality human capital and moving into the production of higher tech exports stand a better chance of avoiding the middle income trap,” Eichengreen and co-writers said.
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Economies that suffer civil conflict can bear lingering scars through the risk that hostilities might break out again.
A paper published this month by the International Monetary Fund found that a one percent increase in the probability of conflict recurrence lowers real gross domestic product per capita by 10 percent over the next five years.
The report, by Serhan Cevik of the IMF and Mohammad Rahmati of University of Texas, calculated a postwar economy will record average economic growth of 1.5 percent per year over the subsequent five years, which they say is very weak.
Of the 94 countries studied between 1960 and 2010, 20 percent relapsed into fighting in the first year after a civil war and 40 percent within five years.
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A finance minister’s career history may determine how fast a country’s debt falls.
A study of 15 European countries from 1980 to 2010 by Marc-Daniel Moessinger of the ZEW Center for European Economic Research in Mannheim, Germany found the longer time a finance chief spends in cabinet before taking the post, the smaller the rise in debt to gross domestic product on his or her watch.
“This implies that either budget deficits decrease or budget surpluses increase if the finance minister is a political heavyweight,” said Moessinger.
The likely reason is the traditional role of a finance chief in resisting the spending pressures of cabinet colleagues. A minister who has been on the other side of the discussion is more likely to have negotiating skills.
“A finance minister who was a national cabinet member before becoming minister of finance has shown his ability to survive in politics,” the report said. “This demonstrates decisiveness and self-assertion which then also reflects in his new position as minister of finance.”
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John Taylor, the Stanford University economist who created a rule for guiding monetary policy given inflation and growth projections, says the Federal Reserve and other central banks may need to coordinate their movement away from record monetary stimulus.
Central banks from around the world have departed from policy guidelines such as the eponymous rule by holding rates at record lows and with bond purchases known as quantitative easing, Taylor said in a paper presented at the American Economic Association meeting in San Diego Jan. 5.
“An unusually low interest rate at one central bank puts pressures on central banks in other countries to also choose unusually low interest rates,” said Taylor, a U.S. Treasury official in President George W. Bush’s administration. “Many central banks will tend to resist large appreciations of their currency, and one way to do so is to cut their own policy rate.”
Taylor said there has been a “spillover” from the Fed’s low rates starting from 2003 to 2005, when the U.S. central bank kept rates “too low for too long.” That prompted other central banks to lower their rates more than they should have, he said.
“The adverse effects on economic performance suggest the need for international monetary rebalancing in which central banks return to a more balanced rules-based policy,” Taylor said. “International coordination might be quite useful in this rebalancing.”
One skeptic of coordination was Martin Feldstein, former president of the National Bureau of Economic Research, who previously served as chief economic adviser to President Ronald Reagan.
“As a general rule, attempts at policy coordination among countries have not succeeded,” Feldstein said, speaking on the same panel as Taylor. “Macroeconomic coordination only appears to work when it is clearly in the self-interest of each country taken individually to do what is good for the group as a whole.”