Governments are losing monopoly over

economic statistics; it means markets better-

informed now
October 13, 2014
Ofering a yielding handto politicians
Politicians love to show better economic performance pictures to their
voters !he statistics"producing bodies of governments love to please
politicians by generating e#actly the reports which the latter would
welcome
!his $oint manoeuvring should be chec%ed by private sector institutions
which have to act as a counter force &ut in many countries, trade
chambers love to endorse such massaged"up reports possibly they are
more interested in winning favours from politicians than having credible
economic numbers
!hus, the game ploy continues without interruption until things become
totally unmanageable 't that stage, the systems do not answer to ordinary
policies (f they are to be remedied, e#traordinarily painful harsh policies
have to be adopted
'rgentina is not alone in the economic data manipulation game 'rgentine
President )hristina *ernande+ has resorted to a ,conspiracy theory,-
accusing international mar%ets of being terrorists bent on destroying her
country

'rgentina. /assaging in0ation and growth numbers
One such recent e#ample has been 'rgentina !his country
had been producing an in0ation report and growth numbers
for decades which had been far from reality 1hat were the
reasons for it to do so2 't least two. one was to retain the
loyalty of the party faithfuls by showing them that the
government was doing well with regard to its economic policy
(t boosted the morale of the party men to support those in
power
!he other was to attract international investors and mobilise
cheap funding for its massive e#penditure programs (/*, the global
disciplining agency responsible for promoting credible and accurate
statistics compilation among government agencies too did not notice the
game plan which 'rgentina had been playing secretly
Or it may be that it noticed the ploy but did not wish to embarrass the
government by doubting the numbers produced by it !hat is because (/*
cannot run the ris% of earning the wrath of 'rgentina which is one of its
owners &ut when it started to act in 2013, it was too late
't that time, 'rgentina had been on the verge of defaulting the servicing of
the loans it had borrowed from international mar%ets 3available at.
http.44wwwimforg4e#ternal4np4sec4pr420134pr13456htm7 (n this press
release, the (/*-s 8#ecutive &oard had given 'rgentina the deadline of 25
9eptember 2013 before which it had to correct both :;P and in0ation
numbers <ater in 2014, (/* had e#pressed its satisfaction about the
progress made by 'rgentina in ful=lling its obligations 3available at.
http.44wwwimforg4e#ternal4np4sec4pr420144pr142>6htm7 &ut the mar%ets
did not buy the assurance given by (/* about the good behaviour of
'rgentina and the 'rgentine economy continued a downward $ourney
descending to a critical level
'rgentine President )hristina *ernande+ showed her desperation by
resorting to a common tactic used by developing country political leaders
on such occasions !hat was to shoot a ,conspiracy theory- accusing
international mar%ets of being terrorists bent on destroying her country
!hus, in the eyes of 'rgentines, the mar%ets have been portrayed as deadly
as popular ,economic hitmen- 3available at. http.44blogsftcom4beyond"
brics4tag4argentina"economy47


!he world is full of economic data manipulators
'rgentina is not alone in this economic data manipulation game !he former
9oviet ?nion had practised it for decades to showcase its economic miracle
through central planning
(n the 9oviet ?nion, plant managers had
created bogus numbers and reported
higher outputs to the 9oviet Planning
&ureau, the :osplan !he latter had $ust
added up those bogus numbers and
reported a higher national output in the
country @owever, that much publicised
increased output had not been
physically available for consumers to
buy in shop shelves 3available at.
https.44wwwciagov4library4center"for"
the"study"of"intelligence4%ent"
csi4vol4no34html4v04i3a01pA0001htm7
/ore recently, :reece had been coo%ing
its economic data so that the 8uropean
9tatistical OBce, %nown as 8uro9tat,
e#pressed its doubt about their veracity
3available at.
http.44euobservercom4economic42CC617 8ven the data released by the
Dational &ureau of 9tatistics of )hina, the oBcial statistics agency of that
country, have come under serious doubt because of the anomalies in the
data systems 3available at. http.44euobservercom4economic42CC617 (n ?9',
it is widely alleged that growth data are overestimated, while in0ation data
are underestimated 3available at. http.44wwwshadowstatscom47
(n 9ri <an%a too, there had been a controversy in the oBcial statistics
agency, ;epartment of )ensus and 9tatistics or ;)9, about an alleged
attempt at massaging the growth numbers recently 3available at.
http.44wwwftl%420134124304alleged"massaging"of"growth"numbers"should"
a"credibility"restoration"e#ercise"be"launched"for"sri"lan%as"statistics"
agency47

:overnments get monopoly over economic data by default
@ow have the governments been able to practice this game plan2 !hat was
because the governments had the monopoly power in producing economic
statistics at least at national levels !hey had got this power not through
any legislation !hey had got it by default because no private sector entity
had the resources or processing capability to estimate economic statistics
at national levels

!he @erculean tas% of producing :;P numbers
!a%e for e#ample the estimation of the total economic output of a country
%nown as the :ross ;omestic Product or :;P !hat is a massive e#ercise
involving diferent sets of data from thousands of agencies and sources
9ince the total output cannot be e#actly calculated, it has to be estimated
*or the estimation of the total output, the estimating agency has to use a
number of appro#imations which it has to develop by conducting diferent
types of surveys *or instance, the total coconut output has to be estimated
by ta%ing into account the amount e#ported, changes in the stoc%s and an
estimation of the domestic consumption !o generate these data, a
statistical agency has to continuously conduct =eld surveys and update
those =eld survey results from time to time !hat involves money, labour
and time @ence, only a government agency with a suBcient budget could
do the $ob
9ince economic statistics are merit goods, governments can produce them
by raising funds through ta#ation @ence, historically, a private sector entity
was unli%ely to use its resources to produce the %ey economic statistics 's
such, by default, the responsibility for producing economic statistics fell on
governments assigning them monopoly power as well

8ssential attributes of good statistics producer
' government statistics agency is supposed to function as an impartial
body when it does its $ob !hough it gets funding from allocations made by
politicians, it is not supposed to favour them or even to wor% against them
@ence, a government statistics agency should always maintain an arms"
length relationship with politicians
Eesponsible politicians respect that independence, as was highlighted by
9ri <an%a-s *inance /inister D/ Perera in a speech delivered to )entral
&an%-s senior oBcers in 1561 3available at.
http.44wwwftl%4201341141C4central"ban%"as"advisor"to"the"govt"how"and"
what"it"should"advise47 (n many countries, this noble relationship has been
bro%en and statistics agencies simply become mouthpieces of politicians in
power
(n authoritarian regimes, such a relationship is unavoidable (n democracies,
self"interested politicians and managers of statistics agencies always have
incentives to wor% in collusion !hat is because such a collusive behaviour
pays both parties well Politicians can pro$ect to the electorate that their
economic management has been a success and canvass for their votes
/anagers of statistics agencies could win better per%s and ensure faster
career advancement by colluding with politicians (t is only the presence of
a strong institutional set up that can efectively chec% on this collusive
behaviour by the two parties
Private sector trade chambers have an important role to play in this regard
!heir $ob is to e#amine the outputs of statistics agencies critically and raise
doubts about the veracity of such outputs whenever there are reasons to do
so (f they fail to do their $ob, then, a disastrous conseFuence such as the
one that hit 'rgentina and :reece recently cannot be avoided

!he demand for correct economic data
&ut mar%ets demand correct, credible and timely information (f the
government agencies fail to supply the reFuired information, mar%ets as
consumers of information cannot be prevented from ta%ing action to
produce such information Previously, they could not do so because of the
high costs involved and the constraints relating to information processing
capabilities
&oth these issues have now been reduced to a virtually +ero level by the
advancements in ()! and the facility to get a vast array of information from
around the world than%s to the wiring of the globe through a common
digital networ% 'ccordingly, information processing and dissemination
power available with private hands today is unparalleled !hey also can hire
better analysts than government agencies by paying them competitive
salaries @ence, they can successfully compete with the statistics"producing
governmental bodies by producing alternative sets of economic statistics
'lternative data producers in ?9'
?sing the advanced ()!, two private entities in ?9' have ventured into
producing alternative national statistics One is the 9hadow :overnment
9tatistics 3available at. http.44wwwshadowstatscom47 which ta%es pride in
presenting ,analyses behind and beyond government economic reporting-
!his agency produces shadow in0ation, employment and :;P numbers for
?9'
!he other agency is the 9tate 9treet 'ssociates which operates the
Price9tats data dissemination service 3available at.
http.44wwwpricestatscom47 (t produces up to date in0ation numbers for 1C
countries which are demanded by global investors and lenders as a
counter"chec% of the in0ation numbers produced by oBcial statistics
agencies !he list is e#panding and within a few years, it will cover almost
the entire world
*or ?9', 9hadow9tats uses the same methodology as the ?9 &ureau of
8conomic 'nalysis or &8' to estimate its national level statistics but has
found that &8' has constantly overestimated :;P and employment and
underestimated in0ation Price9tats uses prices of products purchased by
consumers in retail supermar%ets, collected online simultaneously, to
prepare instant in0ation numbers for the 1C countries it has covered at
present
&oth these series are available to interested mar%et participants on
payment of a fee 'ccordingly, a merit good produced by the government
has been converted to a private good in the mar%et @ence, the ?9
government monopoly in producing national level statistics has been
bro%en in ?9' today (t has forced the ?9 &8' to be careful when publishing
economics statistics

'lternative D88E and E88E estimation
' similar development has now ta%en place in 9ri <an%a too ' private
securities =rm, G& 9ecurities or G&9, has produced an up to date Dominal
8fective 8#change Eate or D88E and Eeal 8fective 8#change Eate or E88E
by using the same methodology as the )entral &an% 3available at.
https.44www$bsl%4pub4<HE)ompetitiveness'nalysispdf7 !hese two indices
are necessary in order to assess the competitiveness of the 9ri <an%an
rupee
!he )entral &an% calculates both D88E and E88E with respect to 24 trading
partners by using the importance of each partner to 9ri <an%a as measured
by the share of the import and e#port trade which 9ri <an%a has with each
country (t releases these numbers to public domain through its website
3wwwcbslgovl%7 and its 'nnual Eeport, which is made public at the end of
/arch of each year !he mar%et demands a deeper analysis of these two
numbers !he )entral &an% web $ust publishes these numbers, while the
'nnual Eeport ma%es a routine description of the change in the indices
G&9 has gone three steps further than the )entral &an% (ts numbers are
available up to the latest month so that in October it publishes numbers
relevant to 9eptember !he )entral &an% is one month behind, but could
catch up it easily G&9 has used Ganuary 2012, a more recent year, as the
base year of the inde# as against the base year of 2010 used by the )entral
&an%
G&9 has also disaggregated the change in E88E into two useful components.
the change due to e#change rate changes and the change due to 9ri
<an%a-s in0ation being higher than its trading partners !hese two
components are necessary to decide on the status of the competitiveness
of the 9ri <an%an rupee as against the currencies of her trading partners
9ri <an%a loses its competitiveness if other currencies depreciate faster
than the 9ri <an%an rupee against the dollar and4or if 9ri <an%a-s in0ation
rate is, on average, higher than the in0ation rates of its trading partners (f
9ri <an%a is to use the e#change rate as a barometer of competitiveness,
both these factors have to be ta%en into account

<osing competitiveness due to appreciation of a currency
!he nominal efective e#change rate inde# is calculated to assess how the
9ri <an%an rupee has fared on average against diferent currencies !his is
because it may have appreciated against one currency and depreciated
against another currency @ence, in order to assess what has happened to
the rupee on average, it is necessary to convert the changes in the rates
into an inde# weighted by trade shares
E88E is a derivation from D88E by ta%ing into account the in0ation
diference between 9ri <an%a and the particular trading partner under
reference /onetary theory suggests that in order to maintain the
purchasing power of the rupee in a competitive world, the rupee has to be
depreciated when 9ri <an%a-s in0ation is higher than other countries (n the
reverse, the rupee has to be appreciated when 9ri <an%a-s in0ation is lower
than other countries
1hen the nominal e#change rate does not suBciently depreciate when 9ri
<an%a-s in0ation is higher, E88E value goes up indicating an appreciation of
the rupee in real terms and thereby eroding the country-s global
competitiveness (f this real appreciation accumulates over a period of time,
the country-s loss of competitiveness becomes so severe that it becomes
diBcult to restore the competitiveness to previous level unless a massive
depreciation of the rupee is made 9ri <an%a had to go for this in 2000,
2001, 2005 and 2012

Eeversing the competitiveness gains
G&9 has found an interesting result in its calculation of D88E and E88E ;ue
to the depreciation of the rupee against the ?9 dollar in early 2012, in 'pril,
E88E too depreciated to a level of 5216 improving 9ri <an%a-s
competitiveness @owever, since then, the rupee had been %ept constant
despite the fact that 9ri <an%a-s in0ation has been higher than most of the
important trading partners 's a result, E88E has continued to appreciate
reaching a level of 10326 in 9eptember 2014 recording an increase by 111
inde# units
!he brea%"down of this change by G&9 shows that I4 inde# units have been
due to other currencies depreciating faster than the rupee and I6 inde#
units due to 9ri <an%a-s in0ation being higher than that in other trading
partners ;ue to both these reasons, 9ri <an%a has now completely lost the
gain of competitiveness which it commanded for some time when the rupee
was massively depreciated in early 2012

9ingle digit in0ation alone is not suBcient
!he learning outcome out of this e#ercise is that the single digit in0ation
about which 9ri <an%a has ta%en pride does not help the country when it
comes to maintaining its e#ternal competitiveness 1hat matters is not
whether the in0ation is single"digit or not but whether the in0ation in other
countries is higher or lower than that single digit, on one hand, and whether
other currencies have depreciated or appreciated against the ?9 dollar, on
the other &oth these factors have wor%ed against 9ri <an%a between 'pril
2012 and 9eptember 2014
!hus, the rupee has appreciated in real terms by 12J during this period
eroding 9ri <an%a-s competitiveness (f this is allowed to be accumulated as
it has happened in the past, it is inevitable that the country will have to go
for a massive depreciation in order to restore its competitiveness
!hat is the source of the pressure being built for e#change rate to fall in the
9pot /ar%et today despite the assurances given to the contrary 1hen the
9pot Eate is held tightly by authorities, the impact has been felt in the ne#t
available mar%et 9pot De#t where the rupee has started to fall !hus, when
mar%ets are better informed, the authorities get a reduced leeway in
manipulating the mar%ets as well
31' 1i$ewardena, a former ;eputy :overnor of the )entral &an% of 9ri
<an%a, can be reached at waw1545Kgmailcom7