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So here’s a question for you... who calculates a country’s GDP?
I mean... where do they get the data to measure how a country’s economy is going?
How do they get it?
What do we really mean when we say that China’s GDP is growing at a rate of, say, 7%?
I’m sure you’ve already come up with an answer.
GDP is measured with statistics and surveys.
Right!
But who commissions those reports?
Of course!
The government of each country!
And... who governs China?
Yes, that would be the Chinese Communist Party!
And here comes the real question...
What if they were fudging their numbers?
At the end of the day, we know Beijing spends lots of money on propaganda.
At the end of the day, they need their citizens to believe that they live in the best of countries
and that the Xi Jinping government couldn’t be doing any better.
So why not use the propaganda machine on their macro- economic figures too?
What if we’ve been crunching the wrong numbers this whole time?
OK, OK, Hear me out!
Nobody can deny China’s growth.
You just need to see a photo of Shenzhen 20 years ago and compare it to the city it is
now.
But not only that!
The best proof that China is actually growing like crazy is the fact that many Western businesses
are starting to sell on the Chinese mainland.
Listen, a company like LEGO is not an NGO and they wouldn’t consider this market if
it didn’t have more and more consumers every year.
So yes, China is growing but...
How fast?
Here is where we get to the wonderful world of nuance.
And, believe me, it won’t be the first time that a country has lied about their figures.
In fact, it is much more common than you’d expect.
Satellite images reveal which countries cheat on their economic statistics
As you can imagine, authoritarian governments are much more likely to lie.
At the end of the day, these countries have no legal opposition, no investigative media
and no watchdogs that can do independent research.
This was our initial hypothesis.
Here at VisualPolitik we thought that it made sense that China was lying.
So we started our research and...
Voila!
We stumbled upon this...
China ‘exaggerated’ GDP data by 2 percentage points for at least nine years, new study
says
Yes, this is what we call ‘being bang on’ because this study was published in spring
2019, just a few months before we did this video.
So, we read the study carefully, we compared it with other similar studies and we came
up with this video you are watching.
So today’s question is...
Is China lying about their GDP?
If this is the case...
Why?
Why would they want to lie?
And... of course, the most important question of all...
What is the real definition of GDP?
Today we are going to answer all of these questions but, before we do, let’s take
a look back at the history of GDP.
WHO MEASURES GDP?
The Gross Domestic Product is a concept created by a Russian-American economist named SIMON
KUZNETS in 1932.
After World War II it was used as a base for calculating money transfers for the Marshall
Plan.
This is how it became the standard measure... but hang on...
What does the GDP actually measure?
Come on, I’m sure you know it!
... Or maybe you don’t!
Don’t worry, you’re not alone.
But never fear!
We are going to tell you right now.
In fact, Erik is going to tell us.
GDP is the sum of all the final goods produced in a country or region during a period of
time: usually, a year.
This means that, beyond wealth, it measures economic movement.
For example, if you have oil fields but you don’t exploit them... it doesn’t account
for your GDP.
Also, if you have a factory that stops production for a year... the factory doesn’t account
to GDP either.
But if that factory produces one car, then the market price for that car would be considered
for the Gross Domestic Product.
So, in other words... more than money and assets, the GDP indicates the health of an
economy.
It doesn’t care about what you have but instead about what you produce.
And yes, we are always talking about final goods.
So, for example, let’s say that we have a restaurant and we are making a salad.
We use lettuce, tomato and onion.
Each of those ingredients costs 1 dollar and we sell the salad for five dollars.
Only those 5 dollars are taken to account for GDP because the salad is the final product
that consumers are going to buy.
Another very important thing we need to know about GDP is that it only takes into account
new products.
This is why when you buy a pre-owned house, the transaction doesn’t count.
But if you build a brand new dwelling and you sell it, then the market price for that
will be taken into account.
That said... is GDP the ultimate figure for economics?
Of course not!
If you want to analyze a country’s economic wealth, you need to consider many other figures
too.
But, so far it’s one of the best tools that we have.
And again... where does the data come from?
Do they go to all the companies and families to ask them what they produce?
Of course not!
They take samples!
In most countries, there are laws that force companies to disclose their numbers to the
statistics departments.
With those figures, they do estimations.
Then, other international organizations take the same numbers and do their own estimations
as well.
For example, the CIA has its own fact book.
The World Bank or the International Monetary Fund has something similar as well.
And you might wonder...
Why do we need so many people measuring the same thing?
Well... it’s because, throughout history, we’ve had lots of cases where different
governments were cheating.
And this includes several democracies like Greece or Argentina.
But wait a minute because there are many other ways to make sure GDP is accurately measured!
We can compare the import and export figures or the tax collection.
Also, some years ago, satellite pictures started to be used.
It turns out it can be a very accurate system for measuring a country’s growth.
And one thing is certain: pictures like this one are extremely revealing.
But OK, this is all theory.
Now let’s get into the facts.
What exactly is going on in China?
Are they lying?
Are their figures accurate?
Let’s take a look.
THE IDEAL POLITICAL SYSTEM
Imagine a country where only the best educated citizens can get into politics.
Yes, a political system with no voting and democracy but where, instead of rewarding
empty promises made by politicians, they reward talent and results.
I’m sure many of you wouldn’t mind living in a place like this, right?
So this country has a name, it’s called the Democratic People’s Republic of China!
Introducing the so-called CADRE system!
In China, politics is just another professional career.
Since they have no elections, the only way you can start is from the very bottom.
Then, you can work your way up the ladder.
In this regard, the system is very similar to working for the Big Four: you start as
an analyst and climb up until you become a partner.
In fact, this political system was created by DENG XIAOPING, the architect of modern-day
China.
Yes, here in the West, we know Deng Xiaoping as the man who opened up China’s economy.
But there, he is also regarded as the man who brought meritocracy to China.
Prior to him, during the times of MAO ZEDONG, Chinese politicians were promoted based on
their compliments to the leader and their praise of communism as a religion.
Nevertheless, things changed in the 1980s.
Politicians started being judged based on their ability to meet goals.
Furthermore, in 1978, only 26% of Chinese leaders had studied at University.
In 1990, that figure jumped to more than 90%.
But, without a doubt, the turning point in this story is 1998.
That was when the Chinese Communist Party changed the law that regulated the evaluation
system.
After that, China would never be the same.
Since then, leaders have been judged based on comparative performance indicators . For
example, if the governor of a province goes to the Central Committee with much worse results
than his neighbors... he is going to have problems!
The goals are realistic but so is the punishment if you don’t meet them.
In 2005, the mayor of the town where the XINGNING mine is, was demoted.
Why?
He didn’t do everything he could to avoid an accident.
What’s more, there are many anti-corruption investigations.
If they catch one of those leaders doing something fishy... that leader can pay with his own
life.
I know, I know...
Chinese Communism doesn’t sound all that bad now, right?
Well… hold on a minute because, as we always say here on VisualPolitik, the devil is in
the details.
CHEATING AT SOLITAIRE
I’m going to ask you again...
Who compiles the numbers in order to calculate China’s GDP?
What?
Did you say Beijing?
Nope!
In such a huge country, statistics have to be done by local governments.
And, of course, the local leaders cannot present worse figures than what the Central Committee
expects from them.
So what do they do?
I’m sure you already guessed it.
They tell them what they want to hear.
This is such a well-known fact that even Beijing is aware of it!
And you might wonder...
But Simon!
How do you know what Beijing knows or doesn’t know?
Well... because if we add up all the local GDPs we get a different number than the official
one provided by China’s government!
Yes, you heard that correctly.
Year after year, Beijing has been correcting their local estimations.
In other words... in China, leaders pretend to tell the truth and the Central Government
pretends they believe it.
Everyone lies and everyone pretends to be happy!
Just look at this chart.
Here you can see the comparison.
The blue line represents the official figure in each year.
The red line represents the aggregate figure we would get if we add up all the local GDPs.
Of course, if the numbers were accurate, both lines would be overlapping.
But, as you can see, they never do.
In fact, we can see a pattern here.
Until 2006, local GDP was lower than the official one.
After that year, it is the other way around.
This could be an unintended consequence of this meritocracy policy that was coming into
effect by that time.
Now the local leaders are expected to do as well as possible to get promoted so they inflate
their figures.
But there is still one more question...
How does Beijing know the degree to which they have to adjust those figures?
The truth is... we have no idea.
What we do know is how the guys from the American think tank, the Brookings Institution did
it.
For example, one of the ways they did it was by comparing those official numbers with tax
collection.
It is harder to cheat on tax collection because this is not an estimation but actual money
coming into the Government’s pocket.
And we can always track back to where each of the money streams come from: this is from
the VAT, this is from this special tax on this particular industry... and so on.
After that, we can see if both numbers match.
If China says that their industrial output has grown by 10%, then the tax collection
for industries should grow accordingly.
And, of course, the tax figures don’t show that.
On this chart you can see, by industry, the deviation between tax collections and official
data.
If you look closely, you will realize that the deviation between both numbers is completely
random.
So it is easy to believe that China might be playing with their own numbers out of sheer
convenience.
And now, let’s hear the final conclusion of the study.
This is going to blow your mind.
Our best estimate is that the true growth rate of GDP is probably overstated by almost
2 percentage points from 2008 to 2016.
Two percent...
Year after year!
If this were true, it would mean that China’s GDP is 10% lower than what we’ve been lead
to believe.
Again, this does not mean China hasn’t grown during all this time.
But chances are this growth is slower than what we always thought.
And this opens the door to many other investigations.
If they have been lying about these figures... what about the others?
In fact, this is not the first time we’ve found something dodgy in this country’s
finances.
In 2008, many Chinese companies committed fraud when they wanted to enter the American
stock market.
We’re talking about non-existing factories, fake accounting books and inflated numbers.
It took a team of researchers, working like something out of a spy movie to unmask those
scams.
In fact, you can find out more about their work in a documentary movie called ‘The
China Hustle’.
The movie makers are not a sponsor: it is just a recommendation.If you’re interested,
I’ll leave the link in the description below.
So now I leave you with this question...
Do you really think China has been cheating on their accounting?
Could they have other frauds we don’t know about yet?
What consequences does this all have to the World’s economy?
Please, leave your answers in the comment section below.
Also visit RECONSIDER MEDIA.COM, the podcast that provided the vocals in this episode that
were not mine.
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