New Study Shines Light — Literally — On China's And Russia's Fake GDP Data

Countries ruled by an authoritarian regime often cheat on their official GDP data, a new study shows. No surprise, really. But how do we know this? Well, it's all about the light.

What do we mean? A new working paper by Luis R. Martinez of the University of Chicago with the amusing title "How Much Should We Trust the Dictator's GDP Estimates?" explores the unusual, but direct, link between the amount of light produced by an economy — as captured and measured through nighttime satellite photographs — and its GDP.

The surprising result: Martinez concludes that economies in authoritarian countries such as China and Russia are not as large as official estimates show. In fact, they're way below what they report.

"Based on the autocracy gradient," Martinez writes, "I estimate that yearly GDP growth rates are inflated by a factor of between 1.15 and 1.3 in the most authoritarian regimes. Correcting for manipulation substantially changes our understanding of comparative economic performance at the turn of the 21st century."

For years, it officially reported 10%-plus GDP growth each year, with that number declining only in recent years to just above 6%. That growth rate was enough, according to various reports, to make it the world's No. 1 economy when figured on a purchasing power of parity basis (PPP) — that is, what a dollar buys in China vs. what a dollar buys in the U.S.

And, several forecasts say it will challenge the U.S. for the No. 1 spot in the official, non-PPP GDP data, perhaps as soon as the next decade.

If Martinez is right, no. China's average GDP growth has been roughly 30% less than reported, based on the measures of its changes in national lighting. This would be an enormous shift in how we view China's economy.

(The same, by the way, is true for Russia. Its economy, similarly, is much smaller than official estimates show. But its economy also has been struggling for nearly 20 years, so the idea that it may be even worse than it seems comes as no great shock.)

This year, World Bank and U.S. government estimates put U.S. GDP at roughly $17.7 trillion (in 2010$). By the same measure, China's GDP this year will be about $10.8 trillion.

That's far short of the U.S. level, but taken at face value, it's still an amazing number given that as recently as 1980, China's GDP for its entire economy was just $340 billion. That's about a 3,200% gain.

But Martinez cuts China's GDP to roughly $7.5 trillion currently. That's not even half the U.S. level.

As for real GDP per person, which many economists consider the best indicator of a nation's productivity and economic well-being, in the U.S. it will average a record $53,839 this year, based on current estimates.

China's citizens, based on Martinez' revised numbers, will produce about $5,440 each in economic output. That's a huge gain from 1980, when annual output was around $349 per person. But again, even today, it's barely at 10% of U.S. output.

So, sorry, those who think China's economy is now as big as the U.S.' are mistaken.

That's not just based on Martinez' study. A host of others have made similar findings.

Washington Post blogger Christopher Ingraham, who first brought the Martinez study to our attention, notes that "research published in 2012 by economists from Brown University and the National Bureau of Economic Research showed how changes in nighttime lighting closely tracked with economic activity.

And, as we noted in earlier, China's total debt, now exceeding 250% of GDP, dwarfs the U.S. debt at about 100% of our GDP. Any downturn in growth could precipitate a debt crisis. So the country has every incentive to lie, just as operators of a Ponzi scheme do.

Former IMF deputy director and current fellow at the American Enterprise Institute Desmond Lachman last year called China's growing debt "a credit bubble of epic proportions.

That's not all. As we noted on these pages back in 2016, economist Harry Wu, working for the Conference Board and using a different technique than Martinez, comes up with China's economy as much as 36% smaller than its official data show. So it's consistent.

According to U.S. Census estimates, China's population is set to begin shrinking as soon as 2026, dragging economic growth rates down. So maybe the 21st century won't be dubbed the "China Century" after all.

But dwelling on China is perhaps unfair, since Martinez' study isn't just about China. It's about authoritarian regimes in general, and how they misreport their economic data in order to appear more successful and stable than they really are.

Indeed, he measures a large number of countries ranked by Freedom House for economic and political freedom.

His findings were consistent: Autocratic regimes cheated more on their economic growth data than freer regimes.

"I find that a 10% increase in nighttime lights is associated with a 2.4% increase in GDP in the most democratic countries and with a 3.4% increase in GDP in the most authoritarian ones," Martinez wrote.

That means, all other things being equal, authoritarian countries are grossly overestimating their economic growth, largely to silence potential critics and to maintain their hold on power.

Martinez found that the distortions in economic growth estimates become particularly pronounced during election cycles, even in nations where the elections are rigged.

Once again a study shows why socialist, communist and other authoritarian and totalitarian economies don't thrive, and can't. Modern, efficient economies depend on actionable information to function. If you have to lie even to your own citizens, your economy can never be as good as you say it is.