It’s a commonplace

that statistics lie. But how much they lie and in whose favor depends very much

on which statistics you care to use.

Naturally,

governments tend to choose the most flattering. Some also work to ensure that

the statistics themselves deliver the required message. Consumer price indices,

being politically the most sensitive, are especially subject to manipulation

through devices such as arbitrarily changing the weightings. The US has

even added an extra dimension to CPI manipulation through what is termed

“hedonic” pricing. Thus if this year basic desk top computer costs the same but

is 20 percent more powerful than last year’s model, it is 20 percent cheaper.

The fact that last year’s model is unavailable is ignored. The same process is

applied to cars, even medical treatment.

Hong Kong’s Census

and Statistics department still has some reputation for impartiality despite

its grotesque manipulation back in 1999 of estimates of numbers of

mainland-born children who had right of abode in Hong Kong. The politically-inspired

numbers trashed previous ones by the same department and were used to justify

reinterpretation of the Basic Law to keep such children out of Hong Kong. The estimates were obviously garbage at the

time and have subsequently been proven to be.

No such accusation

of deliberate creation of fanciful numbers applies to Hong

Kong’s income statistics. Nonetheless, the variations in income

growth are so wide that they must raise serious questions about the methodology

used by the department, however much it may be approved by that lover of

templates and garbage-in/garbage-out data, the International Monetary Fund.

According to the

official figures, in the nine full years since 1997, the year both of the

handover by the British government and the beginning of the Asian crisis, the

“real” GDP of the territory has risen by 37 percent (using the aggregate of

annual changes). This is a formidable increase given modest population growth

and the difficult periods of the Asian crisis, SARS and the 2001 recession.

Yet it is achieved

largely as a result of the curious way in which Hong Kong’s

gross domestic product deflator works. For during this nine-year period the GDP

in current price (actual incomes and prices) terms rose just 8 percent. The

difference is supposedly accounted for by a cumulative 27 percent fall in the

deflator.

Look at some of the

other statistics and it begins to become apparent how grossly exaggerated this

is when viewed realistically. The Consumer Price Index over that same period

fell only a cumulative 8.5 percent. And even that decline was skewed by the

exaggerated impact on the index of private sector rentals, which constitute 24

percent of the Composite CPI, which plummeted after 1998. In practice most

people live either in owner-occupied or publicly-owned apartments, not in

private rental ones.

Another index of

deflation sits roughly half way between the GDP deflator and the CPI. That is

the Domestic Demand Deflator, which fell an aggregate 16 percent over the

period. It is a far more accurate reflector of local conditions than the

trade-skewed overall deflator.

Related to the

Domestic Demand Deflator is yet another way of looking at the situation, the

“real income” gauge. This takes the “real” GDP number as given by the GDP

deflator but adjusts it for changes in Hong Kong’s

terms of trade (the difference between export prices and retained import

prices). This gives an overall gain in real income terms for the period of, in

aggregate, 26.6 percent or an average of 1.1 percent a year less than the

headline GDP number.

The impact of the

terms of trade was particularly evident in 2006 when headline “real” GDP growth

was 6.8 percent but the “real income” gain was just 4.7 percent. Quite a

difference and one clearly reflected in consumer buying power.

The overall GDP

deflator is in fact a ridiculously skewed number, skewed both by the volume of

trade relative to the size of the economy and the manner of its calculation.

Thus in 2006 the decline in the terms of trade actually produced a GDP

increase! To quote the government’s own report: The 0.4 percent decline in the

overall deflator at a time when consumer prices and the domestic demand deflator

rose 2 percent “was mainly due to the continued deterioration in the terms of

trade” reflecting HK depreciation and the rise in energy prices. In 2006 all

components of the deflator were well into positive territory except export

prices. In other words, less equals more -- and is magnified by the size of

trade relative to the overall economy!

This gap between

reality and the official GDP number is even expected to widen further in 2007

when the government forecast the GDP deflator to fall another 0.5 percent even

as consumer prices and the domestic demand deflator rise by 1.5 percent.

So if you want to

decide how the Hong Kong economy has fared

since 1997, you can take your pick from the following:

• Actual GDP in current HK$ terms +8

  percent

• GDP as deflated by the CPI +16 percent

• GDP as per Domestic demand deflator +24

  percent

• GDP as per overall deflator (and the

  government’s headline number) +37 percent (Before anybody quibbles too

  much about these numbers, note that changes in the constant price and CPI

  base in 2000 make some rounding and aggregation of annual numbers, rather

  use of single series, unavoidable).

If the different

methods of calculation produced varying year to year pluses and minuses, it

would not matter much. But the manner in which the official GDP number is being

persistently inflated by a dubious formula does matter.

The government is

clearly in no hurry to change its methods of calculation while it results in

such a rosy headline numbers. But it is about time the private sector economists,

not least those mega-salaried ones at the big investment houses, did some real

work rather than parroting the official numbers.