In an extract from his new book, The Wall Street Journal’s Tom Orlik examines “the political and technical challenges facing statisticians measuring the size and growth rate of the world’s second largest economy“:
In 1998, the Asian Financial Crisis brought the region’s economy grinding to a halt …. China was not immune to the effects …. But if the economy was indeed sliding into recession, it was not evident to the National Bureau of Statistics. Official data for the year shows GDP growth of 7.8%, down only slightly from 8.8% in 1997 and within spitting distance of the magic 8% that is believed to be the minimum required to maintain social stability in China.
The 1998 GDP data has generated a storm of controversy. Academic economists have expended much energy in either defending the NBS calculation or, more common, attacking it and offering their own alternative estimates. Professor Harry Wu of Hitotsubashi University in Tokyo and the late Professor Angus Maddison were among the most stern, concluding on the basis of their own index of industrial production that China’s GDP grew just 0.3% in 1998 (minus-0.1% in Professor Wu’s recent updated results) ….
The government has never admitted any problem with the data. Indeed, in a revision to the historical GDP data as a result of the 2004 Economic Census, the 1998 figure was the only one that was left untouched. But it has come close. The story that has trickled out in speeches and articles in the official press points the finger of blame at an excess of enthusiasm from local officials. Caught between the reality of an economy in crisis and the dream of career progression that depends on delivering growth hitting the 8% mark, officials engaged in rampant falsification of production data. Premier Zhu Rongji spoke of a ‘wind of embellishment and falsification’ that swept through the statistical system ….
Suspicions about the reliability of China’s data continue to focus on lying officials ‘adding water’ to bias the GDP numbers upward. But the more real risk is that that a large chunk of a rapidly changing economy has again been overlooked by the statisticians, and the official data understates the true size of the Chinese economy.”