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.
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
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
GDP as deflated by the CPI +16 percent
GDP as per Domestic demand deflator +24
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.