China And The Revenge Of The Index Number Problem

Within recent months observers around the world have been in a complete muddle over what is going on with the Chinese economy.  Official Chinese stats say that GDP is growing at a 7 percent annual rate.  Most official observers from places like the World Bank and OECD do not  differ strongly with these numbers and are forecasting a small slowdown of this to somewhere between 6 and 7 percent for 2016.  OTOH, less official sources are all over the place with forecasts and even what the current rate really is, with some even claiming that the Chinese economy is actually in recession, although this certainly seems highly unlikely, even if the 6-7 percent rate forecast is overly optimistic.

Among the reasons for all the controversy and differences in forecasts has to do with apparently wildly different growth rates in different sectors of the Chinese economy.  Now it might be that the underlying microeconomic numbers are being fudged, but whether they are or not, they are indeed wildly diverging.  So, industrial production in July was supposedly down from a year before with other series clearly related to that also  down or performing very poorly.  However, retail sales have supposedly risen over 10 percent in the past year, and various reports have services rising rapidly.  These kinds of divergences are not at all common in most economies most of the time.

Indeed, what this resembles to me is another period of time which there remains great controversy over how rapidly an aggregate economy grew.  I am thinking of the old controversy about how rapidly the Soviet economy grew during the 1930s, the period when Stalin's command plans were initially implemented, marked by a simultaneous rapid growth of industry and a decline of agriculture as it was forcibly collectivized and millions died of starvation in associated famines.  Official Soviet stats had the annual growth rate between 1928 and 1940 was 13.8 percent.  At the opposite extreme we have the estimate of V.I. Khanin that it was more like 3.2 percent, with a full range in between, including what the CIA long believed, and a long and large literature on this.  While there have long been allegations of misreported basic micro data, an often cited culprit in this dispute has been the old index number problem.

Now most economists in western market capitalist economists mostly think about this when thinking about measuring inflation.  Given that in recent years not only has inflation been low in much of the world, but there have also not been wildly different price paths across different sectors, the index number has simply fallen off the radar screens of most observers.  But now it is back with a vengeance in the case of China.  Supposedly China is a market economy of sorts, but it also remains a nominally socialist economy with substantial amounts of government intervention into those markets.  As output paths across sectors are apparently going in strongly different directions, what prices are or would be under other circumstances, we do not know,

I doubt that the underlying micro numbers we are seeing reported from China are as questionable as what was reported in the USSR in the 1930s, but the index number problems in China now with wildly different output trajectories in different sectors, what may have played a major  role in the wildly varying estimates of Soviet growth then may also be playing a factor now in the disagreements over what the current Chinese growth rates are.  If the past is any prologue, we may never have any resolution to what current Chinese GDP growth rates really are.

Barkley Rosser