Finding Reliable Economic Indicators

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Economic indicators in emerging and frontier countries are notoriously unreliable. While the most underdeveloped countries may lack the government infrastructure to even release data on a reliable and consistent basis, even countries that issue economic reports may not be trustworthy.

Ghana is a prime example of this when they revised GDP by 60% last year due to changes in methodology to account for wide swaths of the economy that was being unreported. China is another country where data needs to be taken with a grain of salt since the government targets a specific economic growth rate (currently set at 7.5%), resulting in overstatements as government officials all embellish data to climb the political ladder.

Fortunately there are still types of data that are not subject to government manipulation and can be used to track an economy’s health. Li Ke Qiang, China’s current premier who admitted that “All other figures, especially GDP statistics, are ‘for reference only'”, outlined three such indicators in a leaked cable on Wikileaks last year.

Reliable Economic Indicators

1. Electricity Consumption

Electricity consumption is a more reliable method of estimating economic activity from factories than traditional production or output numbers that can be inflated. It also has the added benefit of considering consumer activity, especially useful in cities where population numbers are uncertain due to large number of transient workers. These numbers are also less prone to manipulation since it is not an indicator used to judge performance, and doing so would run counter to environmental mandates to save energy in many countries.

2. Volume of Rail Cargo

According to Li Ke Qiang, rail cargo volumes were reliable since fees were based on total amount/weight transported and so would be against officials’ or factories’ interests to inflate them.

3. Amount of Loans Disbursed

The amount of loans issued could be verified by referencing the amount of interest fees generated. While this measure is still vulnerable to inflated loan totals and varying interest rates, comparing loan amounts across previous quarters and years should prove more reliable.

4. Survey-based Indicators

Indicators based on surveys of private companies are subject to their own biases, but are usually immune from government manipulation. The Purchasing Managers Index (PMI) is a common indicator that polls only private companies and asks factual questions to keep data objective. Another survey-based indicator would be the ZEW Economic Sentiment for countries such as Germany. This differs from PMIs in that opinions are sought out, but the large pool of economists and analysts polled are also safe from government manipulation.

5. Cross-Referenced Export and Import Data

Export numbers can be manipulated by governments to show stronger trade surpluses, or by the exporters themselves to inflate their own numbers. However, by comparing the export numbers of one country with the import numbers of the receiving country, you can get a better idea of the scale of number inflation.

An example of this is comparing Chinese exports to Hong Kong, where exporters in Q1 of 2013 reported by China were over 60% higher than imports reported by Hong Kong. This has happened due to China’s need to show an improving economy to reach growth targets, but also to move capital across borders since the yuan is still tightly controlled and exporters need to have trade documents to substantiate cash flows.

Conclusion

Most economic indicators in less developed countries can be unreliable due to inadequate data collection methods, but also from outright manipulation by governments or firms. Despite these issues, these five economic indicators can still be used to get a glimpse at how certain economies are performing.

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