March 08, 2005

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Invented the abacus but can't add up

Yesterday I looked at China's annual economic report delivered by Premier Wen Jiabao. A major problem, mentioned in that post, for the Premier and the central Government is the lack of reliable economic data. Today's SCMP reports:

Statistics chief Li Deshui yesterday lashed out at local authorities for inflating their GDP growth, noting that the sum of figures submitted by the 31 provinces was 3.9% higher than the national figure compiled by his bureau last year...Yesterday Xinhua also attributed the inflated local figures to the common practice of auhtorities setting unrealistic targets at the start of the year. To meet their projections, authorities then had to inflate their GDP figures...

Some local statistics bureaus were under pressure, Xinhua said, as economic figures were often used as a benchmark for evaluating cadres and local leaders. It is often recognised that "officials creat figures and figures create officials".

In economics the rule is simple. People respond to the rewards and incentives on offer. If the same people generate the benchmarks by which they are evaluated and promoted there is a clear incentive to cheat. The solution is simple: make the benchmarks independent of those they measure. It's time for China to live up to its Communist ideals and nationalise its statistics. Its ironic that reliable economic data can only come from a nationalised Government enterprise. That said even capitalist America has at its heart an interest rate fixed by a small group of unelected Government technocrats (sometimes called the Federal Reserve Open Markets Committee). There's a little central planning in all of us.

posted by Simon on 03.08.05 at 10:39 AM in the China economy category.


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China seeks slower growth
Excerpt: China has announced it is aiming to slow economic growth this year to 8%. Official growth was 9.5% in 2004, an eight year high. This helped sustain global growth and fueled a surge in commodity prices, but there are doubts such a pace is sustainable. A...
Weblog: New Economist
Tracked: March 12, 2005 04:47 AM



Good info on Chinese economic data and the incentive for cheating. With respect to the Federal Reserve Board, while centralized it is still a part of America's democratic process requiring a Presidential appointment and confirmation by the Senate.

From the Wiki Encyclopedia:
"The Federal Reserve is comprised of a board of governors. The 7 members of the board are appointed by the President and confirmed by the Senate. Members are elected to terms of 14 years, with the ability to serve for no more than one term. A governor may serve the remainder of another governor's term in addition to their own full term. The Federal Open Market Committee (FOMC) comprises the 7 members of the board of governors and 5 representatives selected from the Federal Reserve Banks. The representative from the 2nd District, New York, is a permanent member, while the rest of the banks rotate on two and three year intervals"

Not quite the same as the Soviet or Chinese system, though federal, it still represents the regional Banks and is subject to regular Congressional scrutiny. Like Judges, it is best if the "politics" is as much removed from the decision making as possible.

Kind regards,


posted by: Bill on 03.09.05 at 09:12 AM [permalink]

Bill, China also appoints its top leaders. It doesn't make it democratic. The main point is the same: the Fed sets the rate, not the market. It's pure Government intervention.

posted by: Simon on 03.09.05 at 12:49 PM [permalink]

Simon -

The market sets the interest rate, not the Fed. The Fed tries to influence the rate by buying and selling government securities. As long as the government doesn't do anything too crazy, and under normal conditions, it is such a big player it can do that successfully (like OPEC and oil prices). Under President Carter I do not think the Fed was aiming to have 17 per cent interest rates! The Fed and Alan Greenspan have done a magnificent job of marketing themselves as the fount of macroeconomic control. But whether it is the US or China, at the end of the day the market rules.

Congrats on the web site...


posted by: Paul on 03.12.05 at 01:47 AM [permalink]


These days the Fed has de facto control of the overnight rate. It is not a market controlled rate. The Fed sets the target and conducts open market operations to reach the target. The market has learnt not to screw with the target. So the Fed has a monopoly on setting that rate. As I said, de facto control.

Thanks for the kind words.

posted by: Simon on 03.14.05 at 01:46 PM [permalink]

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