- [Narrator] China is one of the most important economies
in the world, not only because of its sheer size
but also because of the influence it has over its region,
the way it conducts business
with other economies around the world,
its immense currency reserves,
problematic foreign policies
and, of course, its population that represents 1/5
of all people living in the world.
Even if China wasn't the second largest economy
in the world, it would still get a lot
of attention for how much
of a tangible impact it has on our everyday lives.
Look around you right now, and I'm sure there are dozens
of items that were made in Chinese factories
that are materially improving your standard of living,
probably including the device
that you're watching this video on right now.
The economic dependency that we may
or may not like to admit that we have
on China is starting to wane, but it's still there,
and that's why the validity and reliability
of their economic data is something
that has a very real impact
on the way that we manage our own economies.
Anytime I've made a video that looks
at the economy of China on this channel,
I normally give a brief disclaimer that economic figures
from Chinese agencies are potentially altered
by different levels of government
to present a more positive image
of Chinese economic prosperity.
This could include anything from inflating output figures
to misrepresenting employment data.
There are very logical reasons that different levels
of government within China would try to do this,
whether it be more funding for local projects,
gaining favor with party leaders for delivering good results
and, on an international level, presenting a strong face
to potential allies and adversaries alike.
Misrepresenting economic figures can do a lot more harm
than bruising a few egos
and allocating credit where it's not really due.
It can seriously impact the quality of life of,
in China's case, billions of people.
Beyond that, I think it's also important to recognize
that misrepresenting economic statistics is not
a problem unique to China by any means,
but it is the second largest economy in the world,
and it does have the reputation
more than any other country for this practice.
So it makes a great case study to learn what to look for
to see if any other economy is doing the same thing.
So what evidence is there to suggest
that China is misrepresenting their economic figures,
what problems do these figures cause in the real economy,
and finally, what metrics can we look at
to determine the true prosperity of an economy
if the official figures are unreliable?
After we've done all of that and, just for fun,
we can put China
on the "Economics Explained" national leaderboard
using figures that were collected independently
of official outlets to see how it stacks up
against its current position.
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When assessing information, every type of scientist,
including social scientists like economists,
must consider the accuracy, precision, and relevance
of the data and information that they are working with.
The classic way this is explained is by imagining
a dart board.
If points of data are accurate and precise,
they will be grouped around the bullseye very tightly.
If the data is precise but not accurate,
they will still be tightly grouped,
but they will be in one corner of the board,
and if the data is accurate but not precise,
they will be grouped around the bullseye
with a lot of spacing in between each shot.
The relevance of data can be a little bit harder
to determine, but to stretch this example,
if you were actually playing a game of golf,
the grouping of your darts on a dart board
is kind of meaningless.
I actually don't like this example
because it's very easy to confuse accuracy with precision.
So let's use an example
that actual economists might work with in the real world.
Consider the GDP of a country like Australia.
The World Bank estimates that
in 2021 Australia's output was $1,542,660,000,000.
That figure is precise down to the closest million dollars,
but it's accuracy might not be that great
because the IMF says
that Australia's total output was $1,724,787,000,000,
and the United Nations says it was $1,423,473,000,000.
These estimates can't all be accurate.
There is a variance of more than $300 billion here,
which is roughly the economy of Portugal.
The reason for this is that all
of these organizations use very different techniques
to collect and process the data needed
to estimate GDP figures,
which goes to show that there is a lot
of wiggle room to interpret information like this,
even when dealing with a very transparent
and reliable country like Australia.
What's more is that these figures
actually make another mistake
that economists should look out for.
They have oversold their precision.
There is no way that an organization
would be able to measure the total output
of any national economy down to the closest $1 million.
Yet, they've expressed their figures down to this point,
which could give the reader the wrong impression
of how precise these figures really are.
Economists actually make mistakes like this all the time,
and people making big decisions based off this data
definitely know that it's not precise
down to the nearest million dollars,
but if you're ever making calculations like this yourself,
make sure to round it to the factor of 10
that you can be confident of, and you can say
that you're making better economic figures than the UN.
Now, the relevancy of Australia's GDP figures depends
on what you are trying to achieve.
If you want a snapshot
of the general size of the Australian economy,
yeah, GDP figures are great for that,
but if you wanna understand living standards
in Australia or the size of the German economy,
well, then these figures are not really relevant at all,
at least not without additional information.
Now, apart from tricking you
into learning something about statistics,
it's really important to understand the accuracy,
precision, and relevance of any figures you see
because, even if they're not outright cooking their books,
there is a chance that they can be carefully selected
to give you the wrong impression.
If the people collecting
and processing this data have no specific bias,
then small errors
like this can balance themselves out,
especially if data points are collected broadly
and in large numbers,
but in China, there is a very real incentive
for all levels of government to pick figures
that present a more positive image.
If those points of biased data get passed up the ranks
to be aggregated into national figures,
the errors can compound
on one another to produce net results that are off
in a very big way.
Beyond that, collecting GDP data is hard.
I think it's worth recognizing
that the World Bank tracks the ability
of all countries to produce accurate economic figures
using the Statistical Capacity Score.
In the past, China's score has been below the medium.
It scored in the 38 percentile
of low and middle income countries
in 2004 and the 52nd percentile in 2015.
However, in the 2016 rankings,
China was placed in the 83rd percentile,
meaning only 17% of low and middle income countries
were able to produce more accurate aggregate figures
than it was.
That's still not great because low
and middle income countries tend to produce
much worse economic figures than advanced countries,
but it does make sense that poorer countries
have a harder time producing high-quality economic data.
The actual formula for economic output is quite easy,
consumption plus investment plus government spending
plus exports, no problems there,
but if I gave you all of the resources
at the disposal of an average national statistics bureau,
where would you start on working out the actual numbers
to plug into this equation?
It's theoretically possible to sit an economist at the end
of every production line and service being provided
in the country, but that's obviously wildly impractical
because, well, at that point,
a significant portion of your economic output
would be measuring your economic output.
In advanced economies
with very formalized financial systems,
the government agencies in charge
of producing economic figures can use data collected
by other agencies to track things
that they might be interested in.
The US Bureau of Economic Analysis is responsible
for producing the GDP estimates
for all the American states, as well as the US as a whole,
and they mostly use data collected from the IRS and customs.
You should be able to look up the methodology
that your own government uses to produce economic estimates,
as most of 'em want to make the process
as transparent as possible.
The problem this creates for a country like China
is that a large portion of its economy
is still very informal.
We have already explored in a recent video
that only around 2% of China's population
actually pays regular taxes,
so getting a clear economic picture
using tax records just isn't feasible.
This means that they have no other option
than to rely on more firsthand data collection.
We also have to address the elephant in the room.
Corruption in China, it's been known to happen,
so when a massive economy like China is dealing
with a very complex set of figures that have been collected
and interpreted by many layers of government employees,
all with a vested interest
in presenting a positive message to their superiors,
it's no wonder that the figures become unreliable.
We also have to consider
the compounding effective figures
that are reported every year.
Carsten Holz is a researcher
at Stanford University that published a paper on the quality
of China's GDP statistics called
"The quality of China's GDP statistics."
It's an old paper now, but it argued that,
after fabricating one report,
leaders struggled to go back to accurate numbers
because they would have to report lower
than actual growth to rebalance the level of output.
If you are a local government leader that has accidentally
or willfully overestimated their output figures
by 1% in a year, you are gonna need to add an extra 1%
to next year's figures, or else that's going to make it look
like you've gone backwards.
Do this for long enough,
and the gap between the correct figures
and last year's figures will be so large
that reporting correct figures would cause
such a drastic drop
that it would spark an investigation.
At that point,
even if the officials didn't want to blatantly report
false figures, it would be
in their best interest to keep doing it
because the punishment would likely be severe.
Now, this is the important part.
The Chinese government recognized this problem
as early as the 1990s.
Famously, a leaked comment
by a top Chinese government official openly admitted
that GDP figures were purely manmade.
Because of this systemic problem,
international organizations and even
the Chinese government itself no longer users data collected
by provincial governments to create national output figures
without first making corrections to account
for the trend of overinflated figures.
The problem then is that the National Bureau
of Statistics of China is freely admitting
to making discretionary adjustments to its data
and providing no further transparency
on what those adjustments are.
The research division
of the American Federal Reserve has argued
that this lack of transparency is actually worse
than the blatantly false figures
because it's harder to know what those adjustments were.
So it's fairly obvious to most economists that, yes,
through a combination of data collection difficulties,
incompetence, corruption, and willful manipulation,
that, yes, Chinese economic figures are unreliable,
and they are overestimated, rather than underestimated.
So the next question is, "How do we make better estimates?"
The output of an economy is highly correlated
with a lot of other data points that can be observed
without the help, or more importantly, the interference
of government organizations.
Li Keqiang, the Communist Party official who admitted
that their GDP figures were manmade,
very candidly discussed that the only three things
he looked at to evaluate the economy
was electricity consumption, rail cargo volume,
and bank lending.
If an economy is using more electricity,
moving more cargo via rail,
and lending more money to various projects,
it's almost certainly creating more output.
The benefit of using these data points
is that they are centralized, so they're easy to gather,
and they're also very hard to manipulate.
Electricity consumption is measured directly from the grid.
Rail yards need to keep track of containers coming
and going, and banks obviously wanna make sure
they're keeping reliable records of who owes them money.
Now, this is great stuff
if you are a high-ranking official from the CCP.
A foreign economist isn't going to have much luck
asking a Chinese state-owned bank
for a comprehensive breakdown
of their new domestic lending activities.
This means that these figures are still prone
to being manipulated
before anybody outside the party gets to see them,
but there are other sources of data
that are admittedly worse but are much easier to collect.
One popular method is to measure the light emitted
from a country at night using satellite imagery.
The theory is that a country will emit more light
when it has more economic activity happening.
Road lights, factory lights, car lights,
even stadium lights are all direct results
of some type of economic output.
So the more light, the higher the GDP.
This is a really fun theory because we can roughly test it
by looking at different imagery.
This is South Korea with a GDP of 1.8 trillion dollars,
and then this is North Korea
with a GDP of roughly 29 billion.
Now, while this is a fun theory, I'm sure a lot
of you are already thinking of problems with this system.
For example, there are many other factors
that determine light output,
aside from pure economic activity.
A country with a larger population
will naturally use more lights.
A country with more heavy industry will use more light
when compared to a country that mostly produces value
in the service sector.
Even cultural differences
around how bright residents want their cities to be
can change light output.
For example, compare Shanghai to Paris.
One is much more lit up than the other,
but Paris is actually the larger economic center.
Of course, you can add balances for these factors,
but then you run into the same problem
of changing outputs based on some level of discretion.
Luis Martinez, an economist at the University of Chicago,
published a paper on this theory that suggested
that the growth in China's light output
over previous decades was not sufficient to be in line
with their claimed growth in overall economic output.
You also found that autocratic governments
in general tend to overstate their actual economic figures
by an average of 35% when measured using light output
as an indicator of growth.
The same paper went on to argue
that China's growth may have been overestimated
by more than double in the years between 1993 and 2012.
Martinez did account for the differences
in the countries he studied
in a way that has held up to widespread peer review,
but don't get too excited
because that just means that he drew rational conclusions
from reliable data.
Autocracies, especially those with a communist focus,
tend to put a heavy emphasis on heavy industry,
even when they are very poor.
This means that their baseline light output
would already be very high,
and the change in total light output
wouldn't be as heavily affected
by households growing wealthier
as it would in a typical economy
that takes the standard route of going from agrarian farmers
to factory laborers to service sector workers.
Lennon himself famously said in one
of his speeches that, "Communism is Soviet power
plus the electrification of the whole country."
So communist nations obviously have a propensity
to supply electricity as a priority.
You could think of this like trying to work out
how rich your neighbors are
by how many times they have food delivered
to them every month.
The general theory is is that, as people earn more money,
they can afford more restaurant food
to be delivered to them,
but if you just happen to live next door
to neighbors that are total foodies,
then they might order restaurant meals every night already.
If they get a big promotion at work,
they aren't going to order any more food
because there's only so much you can eat in a day,
but if you're basing your estimate
of how much their income has grown
off how much extra food they're ordering,
you're unlikely to pick up
on the fact that they did get that promotion.
Martinez did recognize this problem,
and he wasn't seriously advocating
for the idea that international organizations
should use telescopes
instead of government supplied figures,
but he did offer it up
as a surprisingly viable verification check.
Now, just quickly,
I wanna mention that "Money and Macro,"
a smaller economics channel, beat me to the punch once again
on this particular paper when he made quite a detailed video
on the methodology of this research.
We covered different details,
but he definitely deserves another shoutout.
Now, the important part here is that all
of these alternative ways to measure GDP growth can be used
to verify or raise doubts over different figures,
but they struggle to come up
with accurate estimates themselves.
For the most part, that's actually good enough.
To actual decision makers and even the economies themselves,
GDP figures don't matter nearly as much
as you might think they do.
GDP growth is so highly coveted
because it can directly lead to improvements
in living standards for average people in the economy.
So GDP growth pays over a lot of other problems.
People are willing to put up with a lot
if they think they're getting richer,
but of course, we know that GDP figures are just the ones
that get the headlines, and it's definitely possible
for living standards and economic influence to decrease,
even when output is increasing.
If you need to see this counterintuitive trend in action,
well, look no further than China.
Okay, now just for fun, I wanted to try something out.
I took the estimates from the various research papers
and reports that we explored in this video
and used them to reevaluate China's position
on the "Economics Explained" national leaderboard.
So starting with size,
most of the papers don't actually take the bold step
of proposing their own GDP estimates
for China's national economy but just provide guidance
on how much the official figures were overestimated.
We can still work backwards from this, though,
and find that even the most damning estimates
give it a national output of around 9 trillion dollars,
as compared with the official estimates of 17.7 trillion.
This still makes it the second largest economy in the world,
so it still gets a 10 out of 10.
GDP per capita is the interesting one here
because it's really the reason
that the Chinese government would feel compelled to lie
about these figures in the first place.
A large part of what has allowed their authoritarian antics
to continue is the idea
that people are forgoing certain freedoms, but in exchange,
they're getting a ticket
aboard the fastest-growing economy in the world.
If the headline figures were more
in line with the mediocre estimates
of the papers that we've looked at in this video,
the people might not see this as a very good trade anymore.
According to official figures, China has a GDP
per capita of just over $10,000,
but if we apply the recommended adjustments,
that could be as low as $4,500.
That would push a large part of the nation
back under the international poverty line,
so it gets a three out of 10.
Stability and confidence is mostly based
on non-output factors like political stability,
fair legal systems, militaristic ambitions,
and dependence on single industries.
This would remain unchanged at six out of 10.
Growth is the mechanism by which these figures
have arguably become so divorced from reality.
If you lie about growth figures one year,
you need to keep on lying about them,
and a few decades down the track, the nation finds itself
in a position where some economists are estimating
that their output is overstated by as much as double.
The sad part is that China doesn't need to lie
about these figures.
They would be impressive either way.
Even when taking the most conservative estimates,
their growth score goes from a 10 out of 10
to an eight out of 10.
Industry is also unchanged
because one thing that all economists can agree on
is that China's capacity for manufacturing, construction,
and even service-based industries is only surpassed
by the USA on a global scale.
So yeah, it still gets a 10 out of 10.
All together, that gives China an adjusted score
of 7.4 out of 10, which is still incredibly impressive,
as is the economy of China itself.
It's also not the score I'm going to use going forward.
Even if a lot of very smart people have made
some very compelling arguments that these figures
might be more accurate than the official figures,
it would hurt the precision of this leaderboard because,
well, we've used World Bank estimates for every country,
and there are plenty on this list that probably tweak
their figures even more than China does,
but they get away with it because they don't attract
as much attention or interest as the second largest economy
in the world.
Hi, guys.
One last thing before I go.
I know that a lot of you prefer to listen to these videos,
so I want to let you know
that the entire EE library is up on Spotify
so you can listen to it on the go without ads.
Thanks for watching, mate.
Bye.
(no audio)