During the late 1980s, Judy Shelton, a researcher at the Hoover Institution, began an examination of the public documents on the Soviet Union’s budget.[1] Communism’s centrally-planned economy had spent decades setting unreachable production targets and then hiding the failure to achieve those targets. The huge Soviet arms build-up after the humiliation suffered at the hands of the Americans in the Cuban Missile Crisis had long term effects. The military (the “metal-eaters” as they were called) creamed off resources that could have been devoted to either civilian consumption or investment in production. Economic stagnation went hand in hand with mounting popular discontent behind a veneer of great military power. Shelton concluded that massive inflationary forces were being held back by controls, but eventually the dam would burst. In the meantime, she argued, Mikhail Gorbachev sought to stave off the disaster by obtaining Western credits and technology.[2] As Shelton predicted, collapse followed.
Twenty years on another financial crisis arose in Greece.[3] Following a historical pattern, Greece had borrowed a lot of money from foreign lenders, spent the money on a higher standard of living in the short-term without investing in higher productivity in the long-term, cooked the books to cover what they were doing for as long as possible, and then loudly bemoaned their unjust fate when the sheriff finally showed up.
The common thread here is that reality and perception differed widely. Both the Soviet Union and Greece worked hard to project an image that concealed grave problems. Only a handful of budget experts could—with much labor—discern the truth. The reason these historical cases matter is because not everyone today is happy with the state of data from China.
In the eyes of one analyst,[4] it is necessary to do a lot of digging to figure out what is going on. On the one hand, Chinese government officials and managers are under continual pressure to meet certain quantitative standards. In this situation, “real” growth (adjusted for inflation) is more important to managers than is actual new output. So they may tend to overstate “real” growth. Calculating inflation is a coarse art in China when compared to Western industrial countries. This facilitates overstating “real” growth. In addition, the government suppresses existing, reliable data reports when they diverge too much from the government’s line. In 2016, the government halted publication of lending to public versus private borrowers; in 2018, it halted publication of purchasing managers indexes in Guangdong province.
On the other hand, this manipulation of data can makes things really difficult for people who are just trying to do productive things. Obviously, it hinders the work of foreign observers who are trying to understand and anticipate the performance of the world’s second largest economy. However, it can have the same effect on Chinese managers struggling to run their firms. If uncertainty about economic performance piles up year after year, there’s going to be a reckoning. Also, this isn’t public finance, but it may be true there as well.
[1] On Shelton, now a controversial figure and notable spoil-sport, see: https://en.wikipedia.org/wiki/Judy_Shelton
[2] Judy Shelton, The Coming Soviet Crash: Gorbachev’s Desperate Pursuit of Credit in Western Financial Markets (1989).
[3] Carmen M. Reinhart and Christoph Trebesch, The Pitfalls of External Dependence: Greece, 1829-2015 (2015), Brookings Papers on Economic Activity, https://www.brookings.edu/wp-content/uploads/2015/09/ReinhartTextFall15BPEA.pdf
[4] Nathaniel Taplin, “China’s Growth Data Dazes and Confuses,” WSJ, 5 January 2021.
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