ISQ Blog

Christopher S. P. Magee and John A. Doces; posted on July 29, 2014 13:21
China’s economic growth is impressive yet many wonder if it’s overstated and not as substantial as they claim.  Indeed, media commentators and others say that the economic data reported by China is fabricated and not as impressive as they report.  We believe that countries like China, and in general those with political systems that are authoritarian, heavy-handed and controlling, have the ability and incentive to overstate rates of growth.  In authoritarian political systems, there are no checks-and-balances as there are in democratic countries like the U.S., Europe, and Canada, which increases the likelihood that these governments can and will report rates of growth beyond the true rate.  

In contrast, in a democracy if the administration in power reports, say, an inflated rate of growth at 5% the independent governing bodies can alternatively report that the true rate is closer to 3%.  Moreover, non-state actors, like the press, universities, or think-tanks, can contest the inflated rate of growth too.  These checks prevent democratic governments from overstating growth to begin with.  Authoritarian governments, however, do not face as many political constraints as do their democratic counterparts and they can thus freely report inflated rates of growth.  Yes, while all governments have incentives to report inflated rates, relatively democratic political systems have institutional constraints preventing them from doing so in the first place.  The question is how we can test this logic and see if authoritarian regimes are in fact overstating their rates of growth more than are democratic countries.  

We develop a novel approach to this issue and use satellite imaging of nighttime lights and calculate the rate of growth based on these images and compare these with the reported rates of growth to the World Bank.  Our statistical findings show that authoritarian regimes, like China’s, overstate reported rates of growth by about 0.5 to 1.5 percentage points.  In fact, China’s is one of the worst offenders which is important given their population size and political significance. Several case studies exhibit striking deviations in reported rates of growth compared to those calculated by nighttime lights when political systems like Ethiopia are more authoritarian.   Our findings carry many implications for a variety of actors but especially for foreign investors seeking relatively high returns in emerging markets many of which are governed by authoritarian regimes.  Relatively high returns in these places are likely to not be as high as advertised which should cause investors, policymakers, and other to reconsider their perceptions of economic growth in the developing world.          

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