Breaking Free of GDP
For decades, the notion of GDP has taken on symbolic significance for the Chinese Communist Party. But the prominence of the measure may be faltering in the face of the country's changing economic and political climate.
In an article last month included in Echowall's series on "China Myths," analyst Wen Kejian looked at the challenges and inconsistencies involved in making sense of official numbers on economic performance. In particular, Wen discussed questions surrounding the accuracy of GDP figures in China, which have long been a source of national pride. He presented alternative pictures of the country's economic health through signs such as the growing gap between so-called “broad money,” or M2, and GDP growth — suggesting China may be "expending ever greater amounts of liquidity in order to sustain smaller and smaller GDP returns."
But beyond attempts to measure and direct the growth of China's economy, what has the role to GDP been over the past few decades?
In a recent paper published in Chinese Political Science Review, Joan van Heijster, a PhD Candidate at the University of Amsterdam focusing on the politics of macroeconomic indicators in China, looked at how GDP has taken on a "symbolic function" for the Chinese Communist Party as it was "embraced politically and integrated into the Chinese governance system" from the 1980s and through the 1990s. "Despite its power," van Heijster wrote, "we know almost nothing about how GDP gained such a politically prominent position in China."
Echowall reached out to van Heijster, who has a background in international relations with a focus on Asian political economy and the BRICS countries, to discuss the symbolic function of GDP in China and the role of the indicator in the country's current economic and political environment.
Is it time up for the obsessive focus on GDP numbers in China?
Echowall: In your paper you argue that the Chinese Communist Party leadership uses GDP as an "instrument of imagination" to support the political modernization narrative that forms the basis of its ruling legitimacy. Could you talk a bit about this? How and when, in your view, was this "symbolic function" of GDP integrated into China's policies?
van Heijster: The CCP started using the Gross Domestic Product (GDP) indicator as part of a new political narrative on China’s economic development ambitions in the post-Mao period. Deng Xiaoping first used the indicator in interaction with a foreign audience in the late 1970s to explain China’s development ambitions, specifically the idea of China’s "modernization."
It was very appealing to use the GDP indicator for three reasons. First, the indicator enabled Chinese policymakers and politicians to interact with an international audience and explain their development goals to them. Throughout the world politicians and policymakers were familiar with GDP because they used it as a measure of national income. Second, indicators such as GDP are characterized by their concreteness and air of objectivity. Conceptualizing the relatively vague term "modernization" in a concrete GDP goal provided a common objective for China’s future and clearly defined China’s political and economic priorities. In this way, the indicator took away some of the uncertainty within the Chinese bureaucracy caused by the fundamental political and economic shift during the early reform period. Finally, it was appealing to use the GDP indicator to legitimize the CCP's rule to the Chinese people. All around the world, GDP had become the symbol of prosperity and wealth. Stating China’s development goals in terms of the indicator displayed the ambition of the CCP to make China as wealthy as and more successful than Western capitalist countries.
Echowall: So beyond being an indicator, GDP was a symbol of what China hoped to achieve, and how it hoped to be perceived?
van Heijster: That's right. The indicator could be used to imagine a bright future for China. As Chinese politicians and policymakers continued using GDP goals discursively — for example in the interaction with the World Bank or in internal political meetings — the indicator itself became a symbolic representation of China’s development goals. GDP was tied to the development goals from which the CCP gained its legitimacy in the reform period and therefore reaching a specific GDP per capita target became an important political goal in itself.
The discursive embeddedness of GDP in the modernization narrative led to the incorporation of an official GDP target in the Five-Year Plans (FYP). The GDP targets in the Seventh, Eight and subsequent FYPs were derived from the GDP goals propagated in the late-1970s and 1980s, meaning a GDP per capita of 800 US dollars in the year 2000, and of 4,000 US dollars by the year 2050, and so on. This is how the symbolic function of GDP in the early reform period led to the integration of GDP in China’s policies.
Echowall: You talk about how GDP was developed as an indicator by capitalist countries in Western Europe and North America for their own economies. It is "less obvious," you say, why China chose to import this foreign indicator and build a governance system around it. Is it your view that in China GDP cannot serve as a statistical basis for macroeconomic analyses and policies as it does in Western capitalist economies?
van Heijster: I would argue that in the period in which Chinese politicians symbolically appropriated the GDP indicator there were serious limitations to using GDP as a statistical basis for macroeconomic analyses and policies in China. Most importantly because GDP statistics were widely distorted.
Officially, the National Bureau of Statistics (NBS) only started measuring GDP from 1985 onwards. As a result, until 1992 the statistical system measured national income within a communist statistical system and framework for national accounts, the Material Product System (MPS). That statistical system was not able to measure many concepts necessary to produce GDP statistics. For example, the statistical bureau had never measured service sector statistics because in the MPS service activities were considered as economically unproductive and thus not part of national income estimates. Because of the problems in the statistical system and the fact that China’s economy was in transition there were also grave statistical difficulties measuring the market price of a range of economic activities. As GDP requires measuring the economy in terms of market prices, this caused problems. These statistical problems meant China's GDP figures were heavily skewed.
The statistics the NBS produced in the mid-1980s and 1990s might have been able to offer an idea of trends in Chinese economic growth. But the information was very general and broad, and could not provide policymakers with concrete information about developments in the growing economy. There was very limited detailed statistical information on many economic concepts such as household consumption or private investment. The quality and availability of these statistics at the time were not sufficient to provide a reliable input into macroeconomic policymaking decisions.
The quality and availability of these statistics at the time were not sufficient to provide a reliable input into macroeconomic policymaking decisions.
Echowall: Are things very different now? Many still question the reliability of China's economic statistics, an issue one of our writers at Echowall dealt with recently.
van Heijster: Compared to the early days of measuring GDP in China, I think nowadays the Chinese statistical system has improved the quality of its GDP statistics and is able to capture more detailed information on the economy. There are still some differences between China’s GDP measurement and that of many Western countries — for example how the NBS values the housing market. Like China, some Western countries have also encountered challenges in using GDP statistics as input to macroeconomic policymaking. For example, GDP does not capture the sharing economy. Or it does not reflect the value of the digital economy.
But we have to understand that when GDP was developed in the 1930s and put into international statistical standards after World War II, the indicator was made by and for the Western developed economies. These countries therefore have had more time to shape their statistical systems around the System of National Accounts (SNA), which sets out the rules for measuring GDP. As a result, these countries often still provide more detailed macroeconomic statistics than the Chinese statistical system, which is an advantage when using statistics in the process of macroeconomic policymaking.
Echowall: The National Bureau of Statistics (NBS) publishes both quarterly and annual data of GDP development in China. What is your understanding of how these figures come about? How do the statistics correspond to political goals set out in government documents like China's five-year plans?
van Heijster: In general there are three ways to measure GDP — through the production, income or expenditure approaches. For the annual GDP figures, the NBS calculates the value added by kind of activity (in 19 separate industries). It uses a combination of the production approach (used for sectors such as agriculture, forestry, animal husbandry and fishery industries), which calculates GDP as the sum of value added across all sectors of the economy, and the income approach for the rest of the activities, which calculates GDP as the sum of payments to the original factors of production (such as wages paid to workers, profits earned by business, taxes on production, and the consumption of fixed capital).
For the quarterly GDP figures it uses the production approach. Although expenditure accounts of GDP are also published, the production/income estimates are the authoritative ones.
Echowall: In the Echowall article I noted previously, Wen Kejian mentions among the various distortions of Chinese GDP the fact that the numbers are often too perfect. For example, the GDP target is 6.9 percent, and when the numbers are released, lo and behold, GDP growth comes out at 6.9 percent.
van Heijster: Yes. Many scholars have identified and studied the fact that China’s official GDP statistics exhibit a remarkably smooth trend. Especially when we take into account that the figures correspond to official political GDP targets in Five Year Plans. The findings about what causes the smooth GDP figures are not conclusive. Research has identified a variety of factors that could lead to the smoothing of economic data. There is data manipulation by local officials, problems of double-counting and statistical capacity problems, but also the international statistical standards for measuring GDP allow for some flexibility. By choosing a combination of methods, one could have somewhat more stable GDP figures than large fluctuations — for example for the quarterly accounts.
To what extent the NBS uses this approach to smooth statistics is not clear to me. But we should be aware that statistical standards do allow for some smoothing of statistics. Whether this really counts as doctoring the stats is an open question. It is a legitimate strategy that has been used by statistical offices in other countries as well. However, the exact production of Chinese statistical estimates is not transparent and cannot be tracked in detail. This makes it very difficult to explain how come Chinese economic estimates closely correspond to the GDP targets.
Echowall: Aside from its symbolic function, you discuss the role of GDP as a control tool to ensure that local officials perform properly to meet the central government's economic development targets. But I understand this tool does not work particularly well. Is that right?
van Heijster: There are certainly deficiencies to using GDP as a political control tool. The first two problems are inherent to using indicators as control tools. When you formulate targets or make rankings on the basis of specific indicators then the stakeholders that are ranked or evaluated have an incentive to influence the scoring on these indicators. This causes several problems.
First of all, due to data falsification practices, the assessment system provided biased information about the performance of local cadres. Local officials tried to use their influence to manipulate the GDP statistics. Local officials in China have regularly used their power over local statistical bureaus to score higher on GDP growth rates. This is true not just for the past but even today — as recent cases in Tianjin, Inner Mongolia, and Liaoning have shown. As a result higher level officials receive biased information on the performance of GDP growth rates. This makes the GDP indicator useless as a control tool because it can't provide objective insight into the performance of local officials anymore.
Second, GDP malfunctioned as a control tool because the target affected the central leadership’s control over economic policymaking. The existence of the GDP target incentivized local officials to interfere in the economy in counterproductive ways. Increasing economic output led to high GDP growth rates. But producing ever more also led to overproduction and inefficient economic policies. As a result of the GDP target the central government loss some control over the quality of economic reforms.
These deficiencies of GDP as a control tool also harmed the function the indicator plays in the legitimation of CCP rule. The problem of data falsification breaches Chinese citizens' trust in the government. Reporting fake GDP figures can be seen as lying to the Chinese people about the accomplishments of the CCP.
Furthermore, the overemphasis on GDP growth rates in economic policy — which is the second problem of GDP as a control too — leads to the sacrifice of economic growth over other economic, social and environmental goals. This might lead to unrest and dissatisfaction among the Chinese people when rising inequality, high inflation rates or environmental pollution affect their daily lives and well-being. While GDP thus contributed to the legitimacy of the CCP, the embrace of the indicator as control tool also exposed vulnerabilities to that legitimation strategy.
The problem of data falsification breaches Chinese citizens' trust in the government. Reporting fake GDP figures can be seen as lying to the Chinese people about the accomplishments of the CCP.
Echowall: Just last month, on September 16th, the NBS surprised some observers and economists by announcing a change to how statistics would be handled. The bureau said local GDP would now be measured uniformly by the central government. Does this mean the problem is solved?
van Heijster: It is definitely a good step in the direction of more reliable GDP statistics with less data distortion caused by the interference of local governments. The power of local politicians over local statistical offices has been a source of data falsification for many decades. To cope with this problem, the NBS has been gaining a more centralized role in China’s GDP accounting. This has especially been true since 2008, when the State Council approved the addition of several new functions to be performed by the NBS. The NBS, for example, set up a provincial survey team to gather their own data, which helped to check the reliability of provincial GDP numbers.
Since 2017, with the introduction of a new Statistics Law, there have been more efforts to curb data falsification. One change is that the NBS now has responsibility over measuring regional GDP figures. We should also note that a new national census is happening this year in China, and the results of this census will almost certainly lead to new adjustments to China’s GDP. These adjustments are sure to attract a lot of political and media attention, and are important for future GDP calculations as well. That is why the NBS finds it important right now to take more control over the regional GDP calculations. While the bureau has gained more control over the process, it has still found census-related data manipulations in several cities, such as Baicheng and Guanghan.
Data manipulation will only stop if the real cause disappears, which is the political incentive or mentality of local officials to focus on economic growth. As long as economic growth remains important in the Chinese political system, it will be hard to remove data fraud especially at the city and prefecture level.
Echowall: One common criticism of the narrow concept of GDP you hear across the world is that it overlooks environmental issues and questions of social equality. Do you think the CCP is ready to step away from this economy-based form of legitimacy? If so, what alternatives are available, and how could they be measured?
van Heijster: I think economic performance remains important. But economic performance will be defined more broadly, beyond just simple growth, to reflect other issues, including environmental pollution and social well-being. Right now, the GDP indicator still plays a role in economic goals in the period Xi has referred to as the "new normal." And official national GDP targets apply until next year. But the CCP is working hard to step away from a narrowly defined economy-based form of legitimacy, which has traditionally been based on GDP growth. The National Bureau of Statistics (NBS) has been developing many other types of indicators and indexes to track China’s performance on a range of issues.
Echowall: Are there any good examples that we can already talk about?
van Heijster: Well, the oldest example already is the Xiaokang Index. This was first produced in 1992, and redeveloped between 2004 and 2009 and in 2013. Since the NBS produced the index in 1992 many new indicators and categories have been added to it, and the importance of the weight of the GDP indicator within the index has declined. This index tracks a variety of issues including economic development, but also quality of life, resources and the environment. It sets specific standards on each indicator to reflect the development goals of the CCP on that particular issue. For example, the 2013 index strives for an unemployment rate of “no more than 6 percent." Or goals are set for energy consumption.
We can already see that the changes in the Xiaokang Index reflect the effort of the CCP to move away from a narrowly defined economic performance legitimacy strategy. An index system with many indicators can support this strategy.
Another very politically controversial example is the development of so-called "Green GDP." This indicator was developed in 2004 as a response to the increasing pressure on the CCP to address environmental pollution and challenges relating to environmental issues. Green GDP is a measure of economic development taking into account environmental and social costs. It takes GDP and subtracts environmental and social costs from the GDP figure. This means a province that produced GDP growth of eight percent, but with an environmentally polluting industry such as steel or coal production, can expect a reduction of GDP growth rates when measured according to Green GDP. In some cases, the province might even show negative Green GDP figures.
Data manipulation will only stop if the real cause disappears, which is the political incentive or mentality of local officials to focus on economic growth.
Echowall: Given the pressure local officials are already under in terms of growth, it would seem that green growth would be a big ask for many, right?
van Heijster: Well, you can imagine that this measure was very politically sensitive as it interfered with local cadres’ interests. After all, many of them built their economic development achievements around producing GDP growth rates. Additionally, the statistical bureau was not convinced about the measure, because the indicator was technically very complex and no clear agreed upon international standards were available to guide decisions about complex valuation issues. As a result of these challenges, the Green GDP project did not follow through. Nevertheless, the NBS recently set up a new Green Development Index. This index displays less measurement problems than Green GDP but can be used to evaluate the performance of local cadres on a range of environmental issues. Some provinces and municipalities are planning to implement the index in their performance assessment system.
The effort of the CCP and institutions such as the NBS to develop new types of indicators to track performance shows that indicators remain to function as governance tools supporting the legitimacy strategy of the CCP. Compared to the GDP indicator, what these indexes and indicators have in common is that they apply to a broad set of performance areas in terms of social, environmental and economic issues, which allows for flexibility as the CCP is not dependent on the performance on one indicator for its legitimacy. The CCP learned from the past that focusing on one target or indicator alone is dangerous and can have negative (unintended) consequences.