china & india - when the numbers do not add up

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http://www.atimes.com/atimes/South_Asia/EE02Df01.html

China and India: When the figures don't add upBy Jayanthi Iyengar There are

three kinds of lies: lies, damned lies and statistics - Benjamin Disraeli NEW

DELHI - Statistics have earned the ignominy of being damned down the ages on

account of their ability to be manipulated in favor of a particular agenda.

Most countries, from the United States to China, have been accused of fudging

data to window-dress their economic performance. Yet India seems to have a

strange penchant: it tends to underestimate statistics, at least in some

areas.The tendency to cook the books generally occurs more in the developing

world, particularly those countries in transition from communism to capitalism,

which have a habit of overestimating statistics.But even among industrialized

nations, charges of inflation and other statistics being skewed have erupted

from time to time. European inflation statistics have been questioned by

Federal Reserve chairman Alan Greenspan. In 1998, the Bank of England was

forced to stop the publication of a major data series because the reliability

of the data was being questioned. Similar concerns have also been expressed

about US inflation data. In the developing world, for instance, Russia topped

gross domestic product (GDP) growth in 1997 with an expansion of its

underground economy. Inclusion of such estimates is in line with the United

Nations System of National Accounts (UNSNA). However, where Russia pulled a

fast one was that it failed to revise upward its 1996 figures similarly. The

net result was that it seemed as if the economy had zipped ahead in 1997,

instead of the growth actually falling as compared with previous years. Russia

subsequently justified the fudging on the grounds that it wanted to inspire

disheartened Russians into believing that the economy had turned around.If

that's one example of jump-starting the economy by massaging sentiment, Africa

abounds with such instances, resulting in the World Bank declaring the bulk of

the continent's trade data "virtually useless" a few years ago. Allegations of

the Chinese fudging data are also widespread. With heavy investment being

pumped into China, articles and books repeatedly appear on the "true" state of

the Chinese economy. One book that created quite a stir was The Coming Collapse

of China by Gordon Chang in 2001. Chang mocked the "wonderful statistics"

regularly churned out by Beijing. Instead, he painted a gloomy picture of

failing state-owned enterprises, a deteriorating banking system, a slowing

economy and frequent riots by peasants and strikes by workers. Many

commentators dismissed Chang's "extreme pessimism" (see The pessimist's case,

ATol Book Reviews, January 4), but total dismissals became difficult when

Melinda Liu took off in Newsweek where Chang had left off. "China is at once

the recipient of the most foreign investment of any country in Asia [nearly

US$47 billion last year], the sponsor of the world's biggest hydroelectric

project [the $27 billion Three Gorges Dam] and the site of the world's highest

railway, to Tibet [5,000 meters]. The parade of gloating statistics would seem

to portray a country that is larger than life - or at least larger and more

illustrious than nations that must rely on less quantifiable measures of worth,

like, say, France. Yet those figures are themselves hardly scientific," she

said. Liu made the point that the provincial leadership was under pressure to

show improved performance, forcing them to "cook" figures. The article quoted

Wang Xiaolu of China's National Economic Research as saying, "This criterion

has created the incentive for statistical falsification." The Chinese reacted

sharply. The People's Daily decried the tendency of the Western media to make

doomsday predictions about China. Qiu Xiaohua, deputy director of China's

National Bureau of Statistics, stoutly defended the veracity of Chinese

statistics. He conceded at a news conference last July while releasing China's

Q1 GDP figures that there were problems with the country's statistics in one or

two places, but if one viewed the overall situation objectively, one would

conclude, "China's current statistical data basically reflect the actual

condition." Interestingly, the Western media have not been alone in mounting an

attack on Chinese statistics. Asian commentators and experts have been equally

vociferous in their attacks. Mukul Asher of the National University of

Singapore, for instance, points outs several oddities in the manner in which

foreign direct investment (FDI) figures are reported. The Chinese show total

project costs as FDI, which inflates figures by as much as 60 percent. S R

Kasbekar noted in India's Financial Express, "It is a known fact that China's

economic statistics are politically doctored to suit the official dictum for

high growth. It is based on information sent by the provincial satraps

[rulers], who are forced to puff up growth figures to be politically correct.

China does not have a sample survey method, which is found to be more reliable

than the politically influenced provincial reporting system." More recently,

columnist T C A Srinvasa-Raghavan pointed out in the Business Standard that the

adoption of some features of the UNSNA in the early 1990s resulted in China's

GDP growth figures plunging dramatically. "They are down from over 12 percent

to a more likely 8 percent, probably even lower." India, on the other hand, is

a study in contrast. Like most developing countries, its statistics-collection

machinery leaves much to be desired - many developed countries, too, face such

problems - yet allegations of consciously cooking up figures are not rampant.

Part of the explanation is provided by A C Kulshreshtha, former director of the

Central Statistical Organization (CSO). "One of the reasons for this could

possibly be that the heads of National Accounts Division, CSO, have worked as

members of the expert groups of the UN to prepare UN guidelines since

beginning." Some of the underestimation in Indian statistics emerges from the

fact that India still follows UNSNA 1968, though the more recent UN norms,

known as UNSNA 1993, permit countries to capture GDP, or the value of goods and

services produced in a country, better. This is done by the adoption of the

time-use method of data collection (system of national accounting, or SNA)

instead of the traditional labor survey method known as the state domestic

product (SDP). India has thus far been able to implement UNSNA 1993 only

partially. As a result, the production of underground or illegal earnings - as

was done by Russia - continues to be ignored. Other heads that are yet to be

included are an underestimation of natural resources, livestock raised for

food, natural-resource accounting and expenditure on software. Similarly,

entertainment, literary and artistic originals are permitted to be captured,

but the government has been unable to do so. An equally crucial area is the

inability of the CSO to capture the contributions made by the unorganized

sector in manufacturing, the contribution of the household sector, including

housewives and unpaid family labor, and services. The last is a major lacuna,

given the burgeoning growth of the sector. Most researchers know there are

infirmities with Indian GDP figures, but everyone was taken by surprise when

the CSO director, Raghavendra Singh, announced recently that the

underestimation on this account was to the extent of 25-30 percent. Singh's

statements were based on a pilot study conducted by the CSO from July 1998 to

June 1999 covering 18,600 households in six states. It showed that the

contribution of unpaid workers worked out to be as high as 34 percent in

Meghalaya, 31 percent in Madhya Pradesh and 30 percent in Orissa. The

underestimation was the lowest at 20 percent for Tamil Nadu and 21 percent in

Gujarat.To illustrate, the study found that the result of the time-use survey

in India showed that in a week, on an average, males spend about 42 hours in

SNA activities (which are included in GDP) while females spend 19 hours.

However, in extended SNA activities (not included in GDP), males spend just 3.6

hours, whereas females spend 34.6 hours. In non-SNA activities (which pertain to

learning, leisure and personal care), males spend about eight hours more than

females. Singh's statements were endorsed by Vijay Goel, minister of state for

statistics and program implementation. However, what has stunned everyone is

the CSO director's statement that it would take another two years to move to

the new system. His hesitation comes from the fact that some technicalities,

such as income elasticity and valuation, have still to be dealt with.

Interestingly, no country is yet using the time-use data for calculating GDP,

though countries such as Australia, South Africa, Canada, Japan and New Zealand

had started work in this direction. The adoption of the new method of collating

data should help all countries, but it is generally concluded that it would

boost the GDP of developing countries such as India (with its large unorganized

sector) more than of developed countries. For them, calculations using

labor-force estimates would be close to those using time-use data.

Significantly, GDP is not the only area where India underreports. It also tends

to devalue its FDI figures, which would actually be in the range of $8 billion,

instead of the $3.4 billion now, had it followed International Monetary Fund

(IMF) classification. The government's annual survey, The Economic Survey

2002-03, released on February 27, for the first time officially conceded

underestimation. It stated that the Reserve Bank of India (RBI) is currently

evaluating modifications in the manner in which India measures its FDI. The

survey, which tends to underplay the difference in FDI garnered by India and

China, stated that the gap between the two estimates may be exaggerated "owing

to technical issues in measurement". China attracted $46.8 billion, followed by

Hong Kong with $22.8 billion and $3.8 billion by Thailand during the period. The

Indian government's claim is backed by an independent international institution,

the International Finance Corp. An IFC study some time ago showed that adoption

of international standards for computing FDI (IMF BPM 5) would raise India's

net annual FDI inflows from between $3 billion and $4 billion to about $8

billion. This is roughly 1.7 percent of GDP, which is not too far from China's

2 percent of GDP. Among the components currently not included by India in its

FDI calculations are:

Short-term loans between related entities. Long-term loans between related

entities. Issue of bonus shares. Financial leasing. Trade credits. Grants.

Bonds. Reinvested earnings. Non-cash acquisition of equity. Investment made by

foreign venture capital investors. Earnings data of indirectly held FDI

enterprises. After the release of this study report, the Indian government set

up an expert committee to look into the issue, and the RBI is contemplating its

implementation.

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