Can Emerging Market Economic Data Be Trusted?

In previous decades, the global economy was dominated by developed economies that published relatively reliable and trustworthy economic data, making it easy for businesses and investors to compare the performance of the world’s leading economies.  However, as a greater share of global economic growth is now being generated by emerging markets, comparing the health and performance of leading economies is becoming much more difficult.  This is due to the fact that many of the world’s leading emerging markets are publishing economic data that is neither accurate nor trustworthy.  For businesses and investors, this poses new challenges in doing business outside of their home markets, as confidence in the economic data being released by many key economies is sorely lacking.

The country most to blame (though not solely) for this crisis of confidence regarding economic data is China.  Moreover, as China now accounts for nearly 30% of global economic growth, the fact that its economic data often does not reflect reality is now a major cause of global economic uncertainty.  It should be pointed out that the data released by China is not always exaggerated, including the incredible rates of economic growth recorded in China over the past 35 years.  Instead, the Chinese government appears to be more interested in smoothing growth data (boosting it when growth is weak and holding it down when growth is too strong).  This is likely the result of Beijing’s desire to show its citizens, as well as the rest of the world, that it is in control of the vast Chinese economy and that China’s economic resurgence is one that is steady and manageable.  To obtain a more accurate assessment of China’s actual economic performance, it is more useful to look at statistics indicating electricity usage, rail freight or other such figures that are harder to manipulate.  In fact, based on these types of data, it appears that economic growth in China slowed to somewhere between 3% and 5% in 2015, rather than the official GDP growth rate of 6.9%.

While China’s official economic data has long been questioned, that of the world’s other giant emerging market, India, was, for a long time, highly respected.  However, last year’s implementation of a new calculation of India’s economic output led to widespread confusion, as the methods used to develop this recalculation were never adequately explained.  What did happen was that the economic growth rates recorded in recent years in India were dramatically revised upwards following this recalculation, giving the impression that India’s recent economy slowdown was a just a minor inconvenience.  Moreover, in the wake of this recalculation, the Indian economy has grown by an average of 7.5%, allowing India to overtake China in terms of economic growth for the first time this century.  However, as in China, when one looks at more reliable economic statistics, one sees that the Indian economy is likely not growing as fast as official statistics would suggest.  While India’s actual growth rates are likely still above China’s actual growth rates, it is unlikely that the Indian economy is growing by more than 7%.

The fact that the world’s two largest emerging markets are manipulating their economic data to such a degree is a worrying sign for those businesses and investors that value transparency and consistency in global economic data.  Moreover, many other emerging markets are also suspected of manipulating their official economic statistics, and, with China and India leading the way, many more are likely to be tempted to do the same in order to attract more trade and investment.  As emerging markets gain in power and influence, this trend will result in a declining level of trust in official economic statistics around the world, sowing confusion and increasing risk levels un-necessarily.  Moreover, it will become more difficult to assess the health of many of the world’s leading economies, raising the risks of global economic crises driven by a lack of understanding of many of the risks facing these economies.  As such, it is in the interest of all economies to work together to restore faith and trust in economic data.  However, the recent trends in China and India bode ill for the future of global economic data accuracy.