Lies, damned lies, statistics, and GDP

On the train to Manchester this morning I finished a terrific book I should really have read long ago. I’m very glad I finally have. It’s Morten Jerven’s Poor Numbers: how we are misled by African development statistics and what to do about it. The title made me think it was only relevant to African statistics, when in fact anybody interested in GDP and national accounts should read it.

The book is short and non-technical, but includes a number of important arguments and examples. Here are the conclusions I take from it:

1. Statistics are the ‘facts’ “states collect to get knowledge about their own economic or social conditions.” Having reliable statistics is a marker of an effective state – “the ability to collect information and taxes are closely related” – and the statistics chosen reflect the power structures and political priorities of states. African states are not effective, their statistics are not reliable. (But this also made me reflect that there is a lot happening in the developed economies for which we have no statistics – and no ability of the state to understand or influence change.)

2. African GDP statistics in the key online databases used by economists – the World Bank, the Penn World Tables, the Maddison database – are inconsistent because of different interpretations of the underlyaing national data, different base years, different price indices. The sources even rank African countries differently in terms of GDP per capita. Econometric work will get different results depending which is used.” Jerven argues that economists need to have a much more detailed understanding of both the data they download and the specifics of individual countries’ circumstances to be able to interpret the numbers.

3. The underlying national level data are unreliable because of a lack of resources and statistical capacity. Surveys are rarely carried out, there is much guesswork, base year changes happen too infrequently, there is political influence.

4. 2 and 3 together mean little reliance can be placed on the standard cross-country regressions using the standard data sets. “These problems undermine any general conclusions drawn about what stimulates or hinders economic development in Africa.’

5. The standard national accounts concepts don’t apply well to developing economies with a large informal sector. The distinction between production and consumption or working and not-working is not as clear. (And may be becoming less clear in developed economies too, as technology blurs these boundaries and working patterns change.)

The book argues that the standard outline of African growth – a dismal 1970s, a better outcome post- structural adjustment remedies, and a recent acceleration in growth is largely ‘illusory’. The recent uplift in particular comes from the World Bank/IMF splicing recent rebased GDP figures onto an earlier series, as Jerven describes it. He argues that more data needs to be collected, in regular surveys, to enable both good statistics and an effective state knowing what is happening in the economy and to its tax base. He also argues strongly for greater transparency by national statistical offices but especially by the international agencies such as the World Bank and IMF, whose say-so determines the methods used to create the statistics and the world’s interpretation of what is happening in each economy.

“Accounting for the national economy is fundamental for government accountability. Without reliable macro data, political transparency is hard to imagine. …. Numbers are too important to be ignored and the problems surrounding the production and dissemination of numbers too serious to be dismissed.”

So don’t make my initial mistake of thinking this is a bit of a specialist book. It’s a fascinating and important read.

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Ephemeral value and everlasting rubbish

It’s been quite a week and as a reward I read a book I picked up a while ago, Findings by the poet Kathleen Jamie – another in the revived genre of nature writing, I suppose, along with books like H is for Hawk and Nature Cure. Not surprisingly for a poet, this book evokes amazingly sharply the places and times she visits – mainly the Scottish Highlands and islands, but Edinburgh too, and the way they feel in specific lights and weathers. I really enjoyed the book.

One passage set me thinking about value. On a remote island she wanders the beach looking at the washed up debris: “The islands are a 21st century midden of aerosols and plastic bottles, and I was thinking of what we’d valued enough to keep.” The party had collected a quartz pebble worn by the sea into an orb, a bleached whalebone. The things nobody valued, the plastic rubbish, thrown away and never gathered by beachcombers are, alas, indestructible.

There is a book whose title I’ve forgotten about a lost cargo of yellow plastic ducks carried half way around the world by ocean currents when their container fell overboard. There’s plenty of plastic in my life but I’m becoming increasingly disturbed by it. And why is it so cheap? Never mind a carbon tax, how about a plastic tax?

Aggregating is not adding up

I’m browsing through Alfred Marshall’s Elements of the Economics of Industry. He wrote that earlier economists:

“Paid almost exclusive attention to the motives of individual action, But it must not be forgotten that economists, like all other students of social science, are concerned with individuals chiefly as members of the social organism. As a cathedral is something more than the stones of which it is built, as a person is more than a series of thoughts and feelings, so the life of society is something more than the sum of the lives of its individual members. It is true that the action of the whole is made up of that of its constituent parts; and that in most economic problems the best starting point is to be found in the motives that affect the individual….. but it is also true that economics has a great and increasing concern in motives connected with the collective ownership of property and the collective pursuit of important aims.”

And still increasing, given the public good characteristics of digital goods. The problem of aggregation seems to me an important one, rarely discussed, and exactly where the rational expectations revolution and real business cycle theory went wrong. It isn’t only a question of heterogeneity. There’s the fundamental question raised here by Marshall, that you don’t simply add up individual preferences or outcomes to get aggregate versions.

Debt, no brainers and no-nos

Yesterday I attended the launch of a new CEPR (free) e-book, A New Start for the Eurozone: Dealing with Debt. Written by some of Europe’s most distinguished macroeconomists, it notes that a return to sustainability requires a reduction in the legacy debt burden. It proposes using the seigniorage revenues from the Euro to finance a one-time debt buyback for the most indebted Eurozone countries, reducing their debt-GDP ratios to a sustainable level. This would be combined with a stronger regulatory structure to prevent future debt build-ups (and mitigate the unavoidable moral hazard involved in the first step), and the creation of a safe asset, a synthetic European bond.

A New Start for the EurozoneThis is very far from my area of expertise, so it sounds a promising package of measures but I’m not in a good position to evaluate its details. Among the audience at the launch, the questions centred almost entirely on political economy questions: how could European governments be persuaded to do anything now the markets are calm? how would the new measures sit within the existing institutional framework? could northern Europe (Germany) be persuaded to allow the seigniorage revenues to be used in this way?

In short, an economic no-brainer – that the debt legacy has to be tackled – is a political no-no. The fact that the economic hurdles are huge but the barriers to reform are political was brought home by Gillian Tett’s Financial Times column this morning. She writes: “On the eastern side of the Atlantic, policy makers are now at pains to suggest that a Greek default, or even a eurozone exit, would not be disastrous; at last week’s International Monetary Fund meetings German officials argued that the chance of a Greek exit had already been priced into the markets, and that shocks could be contained.”

She argues – and I agree – that the Eurozone could yet go very pear shaped, and the dangers of renewed systemic financial crisis are non-zero. At least if the pessimistic view is correct, the political economy of reform along the CEPR or other lines will become more favourable.

Non-anachronistic inflation

An interesting-looking book has arrived – I’ve not yet had chance to read it but have paged through. It’s The Truth About Inflation by Paul Donovan. It looks like a very nice overview – historical trends, why it happens, why it matters, the issues with index numbers and when to use different price indices, inflation and debt, and inflation for different social groups. The author is an eminent City economist (UBS) and the book is aimed at investors, but would therefore work as well for students – it’s non-technical but intelligent.

The conclusion touches on the deflation question but says: “This does not mean inflation can now be pushed to one side by an investor as some kind of quaint anachronism of times past.” For one thing, in a low inflation world, small differences in inflation rates make for big differences in outcomes and returns. For another, not all groups of people in society are experiencing any deflation – it depends on your consumption pattern.

Like me, Donovan was marked by the British high inflation experience of the 1970s. He says, “I have long wanted to write a book on inflation.” Economists are indeed strange, he adds. Maybe I’m strange too, but I’m looking forward to reading this.