China's numbers game

2002-05-03Asia Times

BEIJING - In the early 1990s, groups of researchers from China's Statistical Bureau were sent to Italy for training and seminars. The move was political as well as practical. Italy was more open than many other Western countries to contacts with China in the wake of the Tiananmen crackdown, and the Italian economy, with its vast gray areas, might have been the best model for China, which had similar problems. Senior researchers at ISTAT, Italy's national statistical bureau, were confident that they could teach the Chinese their methods for checking and improving the quality of data collection, which would take into account under-reporting or over-reporting.

However, despite the Italians' confidence, 10 years after those seminars many in the world remain skeptical about the numbers provided by China's statistics bureau. The figures might be cooked for propaganda purposes, some economists argue, as China needs to demonstrate high growth to draw in foreign investment and prevent capital flight. These critics point to some discrepancies in the official figures and come up with growth rates far below the official ones.

Talks with senior officials in charge of data collection, however, dispel the idea of data that are cooked on purpose. There are not two sets of account books in China, one for official use and one for propaganda use. It is true, however, that even officials in charge of the compilation of the data are not so sure about the numbers they are handling. Therefore, as China has a history of over-reporting to please top officials, everybody suspects there is in fact widespread over-reporting.

But the root issue is not that of over-reporting, but of reporting at all. In counties and districts scattered around the huge Chinese countryside, reported figures are produced in meetings. The local officials set the standards, a few points lower than the reported growth rate of some rich town nearby, but a couple of points higher than the poor village down the road. In sum, they have to agree roughly with the state-announced growth goal, and set the numbers at a level at which everybody is happy. Then everybody must be consistent: if state officials call in to check, they must be told the agreed figure. So the reality is not behind a screen, because the people attending those meetings are not trying to hide something. They simply do not know what the local production is, and so they try to cover their backsides, producing figures that won't have their superiors going after them.

The same is true with income taxes. In many places, the tax bureau has to come up with a certain amount of money at the end of the year. If it doesn't manage to do so, then it calls a meeting with the big local enterprises, which have to cough up the shortfall, in return for which they will get a piece of land or the permission to erect a new building.

These phenomena are widespread and from the foreign perspective they cast a bleak shadow on the reliability of all figures in China. To the officials in charge of numbers, in China and elsewhere, the fact that these incidents are common and well known gives them an opportunity to introduce adjustments, and look at marginal figures that could produce overall consistency. Some official figures give reason to suspect over-reporting (comparing electricity consumption with gross domestic product) or under-reporting (comparing the size of foreign trade with total GDP). So at the end of the day, taking into account all arguments, under the present circumstances, the official figures might well be the most accurate available, but perhaps this is not the point.

Over- or under-reporting, unlike the compass, is not a Chinese invention, it has been around for centuries. Ultimately, though, the most important yardsticks are the volume of foreign trade, which is impossible to fudge, taxes collected and state expenses, where the government ought to have a precise idea, and the visible welfare of society, which is certainly apparent in China. These are the historical requisites, and on all these accounts China is faring well. But now this is not enough, as China needs to sell, in theory and practice, its bonds overseas, it needs an international bank rating, it needs foreign trust and investment, it needs domestic trust and investment, for trade and even tax collection. If the local real-estate developer starts thinking he can't make money in Guilin, instead of coming up with the cash for the taxes in return for a new development, he can pack and run. Without trust, the country can collapse like a house of cards.

Niall Fergusson in The Cash Nexus traces the link between state revenues and the military in the West from 1700 to 2000. He arrays a vast scholarship to prove that the economy's and state expenses were moved by the necessity of defense until the past 50 years. He argues that the key to the French defeat by the British in the Napoleonic Wars was the fact that Britain had a superior and more transparent system of taxation and all the ensuing institutions that made the best use of available resources.

"The key difference between France and Britain in the 18th century then was not a matter of economic resources. France had more. Rather it was a matter of institutions. Britain had the superior revenue collecting system, the Excise. After the Glorious Revolution, Britain also had representative government, which not only tended to make budgets transparent, but also - more importantly - reduced the likelihood of default, since the bond-holders who had invested in the National Debt were among the interests best represented in Parliament. The National Debt itself was largely funded (long-term) and transparently managed (especially after the advent of the consol). And the Bank of England - which again had no French analog - also guaranteed the convertibility of the currency into gold (save in an extreme emergency), reducing if not eliminating the risk of default through inflation. It was these institutions which enabled Britain to sustain a much larger debt/GDP ratio than France because they ensured that the interest Britain paid on her debt was substantially less than France paid on hers. If one seeks a fiscal explanation for Britain's ultimate triumph over France in their global contest, it lies here.

"But the crucial point is that financial institutions depend for their effectiveness on credibility. It is highly significant, in this context, that each time the chances of a Stuart Restoration rose - for example during the 1745 Jacobite Rising - so too did the yield on government bonds. To contemporaries, there was no guarantee that the regime change brought about by the Glorious Revolution would endure, and that the lineal descendants of the Hanoverians would.still reign in Britain for more than three hundred years after the deposition of James II. The possibility could not wholly be dismissed. But by comparison with the risks of default facing investors in French bonds, the danger was remote."

In a similar fashion we can see that China is not transparent, its institutions are behind a wall of secrecy where is difficult to tell the difference between government desire to hide something and genuine lack of knowledge. Everybody knows that all crucial decisions will be made in secretive conclaves, where leaders are elected or demoted according to, again, secretive rules and compromises. And the leaders ultimately have total power not only over their subjects but also over their properties, which could be confiscated, shut down, brought to their knees, at will, without any possibility of defense. This is ultimately the reason for massive capital flight that some pessimistic foreigners calculate in the range of US$40 billion a year. This impoverishes China, weakens its ability to grow and thus also weakens its pride and its military, which, as Fergusson proves in his work, needs transparent financial instruments for its spending.

Institutional, political reform, as well as a civil code for full protection of private property rights, is thus necessary to pre-empt a possible domestic and foreign decline of confidence in China. Only this can make possible a real centralization and localization of control.

The urgency of this issue can be shown in the Ministry of Agriculture. France's agriculture ministry has some 5,000 personnel in Paris who have full knowledge of every piece of agricultural land in the country. In China, with a size some 30 times that of France and a population 20 times larger, the Ministry of Agriculture has only about 500 people. They are in charge of broad policies, and do not have a clue about how things are really run in a small village. That village thus does what it wants, levies its own taxes and fees, and is largely left to the unfettered honesty (or dishonesty) of the local officials.

It is certainly impossible to build a Ministry of Agriculture with a competence similar to that in France - simple arithmetic would demand 100,000 personnel, an absurdity. Instead, power needs to be concentrated at the provincial level, and not left with the villages. In other words, China urgently needs to retake control of its land and its people, to give them protection and efficiency and trust. In agriculture, for instance, there could be a coordination office at a central level and powerful provincial-level offices with large discretionary powers. A reform making China a confederation of states would in fact enhance Beijing's central power, which should keep crucial authority over, for instance, defense and diplomacy, but could release other powers to the provinces.

The reforms of institutions and the protection of private property are the two last reforms, short of complex political reform, that China faces. The period of economic reforms started by Deng Xiaoping has elapsed. The Chinese leadership under Jiang Zemin gave a final shove with the reform of state-owned enterprises and the ensuing process of de facto privatization. It is now time to tackle concrete issues, solve concrete problems - and there are many now in China - but to do that, law and institutions must also change. (2002-05-03 Asia Times)


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