Rethinking GDP in Centralized Economies
GDP is the gold standard for measuring economic health, but can we trust it in autocratic regimes like Russia and China?
By MD.Capital
Gross Domestic Product (GDP) is widely accepted as the definitive measurement of economic health, but what if the numbers we trust most are built on shaky ground? If a centralized government has a reason to lie, it WILL. When inflation data varies wildly or is unknown to the factor of multiple points, any discussion of GDP figures being 2% or 3% becomes completely meaningless.
Recent analyses reveal that GDP figures from centralized economies like Russia and China often obscure more than they illuminate. By controlling critical economic inputs—such as inflation rates, production metrics and currency values—these regimes create data that may mislead even the most astute analysts. When policy decisions and public discourse rely on such flawed metrics, the consequences can be severe.
Lies, Damn Lies and Statistics
A review of recent article headlines reveals some concerning trends in how major publications treat GDP data from autocratic regimes:
“Russia’s GDP growth slows to 3.1% y/y in Q3, statistics service says”
(SOURCE: Reuters | Published: November 13, 2024)
“Russia’s ‘overheating’ economy to slow sharply next year, says central bank”
(SOURCE: The Financial Times | Published: September 1, 2024)
“Goldman Sachs raises China’s GDP forecast to 4.9% in 2024”
(SOURCE: Reuters | Published: October 14, 2024)
The articles that present Russian GDP growth as 3.1% or even “overheating” at a forecasted 3.9% contain no acknowledgment of the inherent uncertainties in production statistics or inflation adjustments. Currently those uncertainties are larger than the quantities they describe. Similarly, analyses of China’s GDP growth—raised to 4.9% by Goldman Sachs—fail to consider systemic biases in reported inflation figures. These oversights perpetuate groupthink, a phenomenon where even seasoned economists fail to question the very foundation of the data on which they base their analysis.
Contrary to the headlines, the official statistics are NOT fully endorsed (suspicion around China data goes back decades) and some analyses now acknowledge that these figures may be overstated. As early as 2019, a study by the Brookings Institution estimated that China’s GDP growth has been inflated by about 2 percentage points annually since 2008, implying that the economy could be nearly 12% smaller than official reports indicate.
We should allow that some economic data may be incorrect simply due to data “smoothing” by well meaning if ill-advised administrators. Sceptics have often criticised the use of Hedonistic price adjustments to the U.S. CPI Data that governs policy such as the Fed’s interest rate decisions. In strong, liberal democratic economies biased smoothing is corrected via auditing and accountability—two items that are sorely missing in centrally controlled economies.
A 2017 analysis by the Federal Reserve Bank of New York raised doubts about the accuracy of China’s GDP data, noting that official statistics often show consistent growth rates that may not reflect actual economic volatility. Unfortunately, both production and inflation data become more volatile during periods of economic stress, decreasing the value of these statistics when we rely on them the most. The lack of auditing oversight and administrative accountability during the rise of China as a global power means cumulative errors are compiled and its impressive growth overshadowed many potential problems.
With enough time, systematic bias can corrupt the accuracy of our most basic statistical data. Alarmingly, a report by the UN Population Division posits that China’s population figures may have been inflated for decades, further compounding errors in GDP calculations. Demographer Yi Fuxian from the University of Wisconsin-Madison points to discrepancies in census data and suggests that the actual population could be as much as 130 million people lower than official figures indicate, greater than the the population of Mexico or Japan.
Understanding GDP and Inflation Adjustments
1—What is GDP? | Gross Domestic Product (GDP) measures the total value of goods and services a country produces. It comes in two forms:
- What we measure—Nominal GDP: Based on current prices, sales and economic data
- What we discuss in the news—Real GDP: Adjusted to remove inflation effects, showing true economic growth
2—How is Real GDP Calculated? | To adjust for inflation, we use the formula:
Real GDP=(Nominal GDP/Price Index)×100
Example: If Nominal GDP is $10 trillion and prices have risen 20% (Price Index = 120):
Real GDP=(10,000/120)×100=$8.33 trillion
3—Why Inflation Accuracy Matters | If inflation data is wrong or manipulated:
- Too Low Inflation #: Overstates Real GDP, making growth look better than it is
- Too High Inflation #: Understates Real GDP, hiding actual progress
4—The Problem in Practice | Imagine GDP is $12 trillion, and inflation is reported as 2% (Price Index = 102), giving Real GDP of $11.76 trillion. If real inflation is actually 5% (Price Index = 105), Real GDP drops to $11.43 trillion.
5—Why This is Important | When inflation is inaccurate, GDP numbers become unreliable, making it hard to understand a country’s true economic health. This is a common concern for centralized economies like China or Russia, where data may be influenced by politics.
The Broader Issue of Centralized Economies
Centralized economies exhibit a core moral dilemma when it comes to state actors and official data—by design they are uniquely susceptible to data manipulation. For the leadership it is a feature, not a flaw. As “Ponzi schemes who control their own auditor” they control both the generation and interpretation of economic statistics. By exerting influence by under-reporting inflation rates—the linchpin of real GDP calculations—these governments can create the illusion of growth while concealing economic fragility.
When engaging with small economies we may be willing to write it off as bravado or national pride but this manipulation is not just theoretical; it has real-world implications. An article from Foreign Policy discusses how reliance on opaque Chinese and Russian economic data has influenced global policy, from trade negotiations to defense spending. One notable example is the U.S.-China Phase One Trade Agreement. The agreement included calculations and quantities which assumed robust Chinese economic growth as a baseline for its terms. However, subsequent revelations of over-reported GDP figures have cast doubt on the agreement’s effectiveness.
Healthy Skepticism: Estimates and Factchecking
Academic critiques of GDP and inflation metrics acknowledge these concerns, even if the subject is too complicated to fit on the nightly news. The Federal Reserve Bank of New York’s study on inflation volatility demonstrates how even minor inaccuracies in inflation adjustments can create significant distortions in real GDP figures. In centralized economies, where inflation is not just volatile but intentionally manipulated, these distortions can render GDP comparisons meaningless.
The International Monetary Fund (IMF) has also flagged these issues, particularly in its 2024 World Economic Outlook. The report stresses that unreliable data from autocratic regimes hampers accurate global economic forecasting. If inflation data varies wildly or is unknown to the factor of 2 to 3 points, any discussion of GDP figures being 2% or 3% becomes completely meaningless.
Alternatives to “Official” GDP Measurements
Alternative methods of estimating economic activity exist such as direct production measures or independent inflation assessments, but they all suffer from the fatal flaw of not being ‘official.’ Relying on correlated data—such as electricity consumption, rail freight volume, bank loan disbursements and satellite-recorded nighttime lights—what do these metrics say about China?
Electricity Consumption (DOWN)
Electricity usage is a direct indicator of industrial and residential activity. A study published in Computational Economics (2018) found a long-term relationship between China’s electricity consumption and GDP, suggesting that electricity data can serve as a reliable proxy for economic performance. Yet during certain periods, such as between 1997 and 2000,official figures reported a 24.7% real GDP growth, while energy consumption decreased by 12.8%, indicating potential overstatement in official GDP figures.
Rail Freight Volume (DOWN)
The volume of goods transported by rail reflects the movement of raw materials and finished products. Former Premier Li Keqiang reportedly used rail freight volume as one of three indicators to assess economic health, due to its tangible nature and resistance to manipulation. Analyses have shown that during periods of reported high GDP growth, rail freight volumes did not increase proportionally, suggesting that official GDP figures may not fully capture economic slowdowns.
Satellite-Recorded Nighttime Lights (UP)
Satellite imagery capturing nighttime illumination provides an unbiased measure of economic activity. A 2017 study by the National Bureau of Economic Research utilized this data to estimate China’s GDP growth and found that official statistics might understate growth, particularly in service-oriented regions where traditional metrics are less effective.
Infrastructure spending on power projects continued apace as one would expect if policy makers are attempting to influence GDP via government investment projects. We should reserve judgement until we better understand their energy policy impact and if it is being executed efficiently.
Bank Loan Disbursement data (Policy Muddle)
In September 2024, China’s new yuan loans were projected to have increased significantly, with estimates of 1.87 trillion yuan—more than doubling the 900 billion yuan recorded in August. This surge is attributed to aggressive monetary and property market support measures introduced by the central bank to stimulate the sluggish economy.
Despite these efforts, household and corporate confidence remained weak, indicating that increased lending alone may not be sufficient to drive economic growth without corresponding demand.
For China at the moment, metrics which represent direct government intervention are indicated stronger measuring the immediate impact of the current stimulus packages, while those which represent more diverse or grassroots measures of economic activity show a more nuanced picture. We are left to choose between highly exact but fundamentally corrupt GDP data or transparent but only weakly correlated public data.
Flawed Metrics: Garbage In = Garbage Out
The stakes of faulty data extend beyond academic debates. When global policy relies on flawed statistics, the repercussions can be profound. A recent example is NATO’s decision to recalibrate its defense spending goals, partly influenced by overestimated Russian economic strength. Similarly, investment flows into China have been skewed by GDP figures that fail to account for economic distortions caused by state intervention.
Manipulated data can also lead to vastly misplaced investment theories and catering to individuals, organizations or governments in ways that allow them to “fake it til they make it”—which is fine for small businesses but less so for nuclear-powered autocracies.
Hyperbole doesn’t help. Here are some examples from the past decade:
- When China Rules the World (June 2009)
- China Seen Overtaking U.S. as Global Superpower (July 13, 2011)
Unfortunately what begins as bravado or an attempt to strengthen a negotiating position can directly influence Economic and Defense policy in ways that promote conflict and certainly do not serve the national interest.
For example, a recent detailed report on the growth of Chinese power was released in April 2021 that predicts a growth in rivalry that “will affect most domains, straining and in some cases reshaping existing alliances and international organizations that have underpinned the international order for decades.”
This generated an appropriate countervailing response from U.S. policymakers to the perceived threat and has certainly contributed to the global shift against China in recent years: “In response to China’s resurgence, U.S. officials and lawmakers have sought to hit their top rival with sanctions and other tools intended to punish Beijing for defying what they see as an ‘international rules-based order’ with Washington at the helm.”
By exaggerating their economic strength they exaggerated their threat to Western economies—who are responding with increased trade restrictions. The economic impact of that disastrous ‘own goal’ is weakening an economy that is already not actually as vibrant as its own leaders represented or themselves assumed. This brings us to the problem of believing your own lies.
It’s bad enough lying to the public while carrying out a master plan. But acting on a plan that is itself based on bad information can create some real disasters. Chinese policymakers must be quite shocked when suddenly realizing their tax base and demographic pyramid might be 10% smaller than they believed. What that means for the financial health of their Social Safety system is yet to be fully comprehended. Or consider a direct life and death outcome and what bad data meant for the Russian invasion of Ukraine.
The Truth is Out There
One prosaic solution is to encourage transparency and auditing rigor. As Winston Churchill once quipped, “However beautiful the strategy, you should occasionally look at the results.”
And to the extent that we can encourage transparency and engender an ecosystem that rewards proven outcomes over speculative claims, that sounds like a great idea. In the meantime when dealing with any individual, company or government body, simply obey one rule: If it is in their interest to lie and they can maintain the lie, they WILL.
Trusting manipulated data not only misguides policy but risks anchoring the global economy to flawed assumptions. Analysts, policymakers and the media must embrace skepticism and demand transparency, lest they make decisions based on a mirage.
Which tees up our very last quote: “Fool me once…shame on you. Ya fool me [twice]… you can’t get fooled again.”—Former President George W. Bush on how Saddam Hussein deceived the world into believing Iraq had no ties to terrorism or weapons of mass destruction. [It turns out he probably thought he had the weapons or at least wanted the CIA to think he did. Strong bluff, unanticipated outcome. Ooops….]. More on that: When the CIA Messes Up.
MORE READING:
The Chinese government definitely cares about perception and control of economic data. They recently briefly allowed the truth to get out, before deleting it. Renowned economist Gao Shanwen “…claimed that GDP growth had been overestimated by 3 per cent points annually, totaling a 10 per cent point discrepancy, which he said corresponds to a loss of 47 million jobs in urban areas.” Shanwen “also cautioned that government economic growth figures likely did not accurately reflect the true economic situation in China since the real estate bubble burst.”
MD.Capital provides financial consulting, services and fundraising support for early stage health care companies. Like Prognosis:Innovation, we derive our content and our primary audience from the clinicians, researchers and entrepreneurs that drive innovation. As part of a long-term partnership we will be occasionally sharing some of our financially focused content. If you would like to learn more about MD.Capital or receive more finance and capital markets coverage, contact us here.
