Leading indicators and tendency surveys

Ask the economists: Statistics - separating facts from fiction

 

Can we trust official statistics? Do they give us a true picture of how societies are changing? Read below the questions and answers from the online debate that took place on Thursday 12 July with Enrico Giovannini, the OECD’s Chief Statistician.


Q. How come the numbers proposed by organizations such as the OECD don't reflect "reality": ex. Inflation is supposedly going down, but prices seem to be going up?
Heather Malley, US

A. "The irony of the Information Age is that it has given new respectability to uninformed opinion" (John Lawton). This sentence was said in 1995 and it is more true now than ever. The paradox is that statistics was invented to go beyond what individuals can observe, and now it is under attack because it does not reflect what people "perceive" the reality is.

Look at what happened in Europe after the Euro changeover. Official figures about the inflation rate in 2002 were around 2-3%, but a large majority of people felt that inflation was much higher (10%, 20%, even 100%). Several studies have been carried out to explain this difference and nobody has been able to demonstrate, on a scientific basis, that official figures were biased. Anyway, in several countries people still believe that the reality was very different and that this event (and not other factors, such as a long stagnation of the economy or changes in income distribution) has largely determined, in some countries, a worsening in the economic conditions of the middle-class.

Q. Once you have got what you consider a satisfactory measurement for happiness, what are you going to do with it?
Jeremy Fisher, UK

A. The measurement of happiness is a very interesting subject from an analytical point of view. However, it is less clear how these measures can be used for policy purposes. This issue was discussed at the OECD conference "Is happiness measurable and what do those measures mean for policy?" held in April 2007 (see http://www.oecd.org/oecdworldforum/happiness).

One of the conclusions of the Conference is that country rankings based on the "average happiness" do not make sense, although media love them. Much more interesting is to include these measures concering individuals in microeconometric models aimed at evaluating the impact of specific policies (for example, to reduce unemployment). The available evidence shows that variables (based on subjective assessments) like "happiness" or "life satisfaction" can explain why the same policy has been more effective in a particular region, or for a particular group of people. In other words, they capture some elements of the human behaviour that are normally forgotten in economic models, but that can be extremely important in practice.

 

Q. Independently of the degree of reliability of official statistics, what are the other alternatives? Are there international parameters for certain indicators, and if so, does the same methodology applies for different countries?
Eduardo Jardon, Mexico

A. Official statistics have to be compiled according to international guidelines and principles, but they cannot be considered the only reliable source of statistics. Relevant and reliable data are also produced by other bodies, such as international organisations, central banks, research institues and non-governmental organisations. What matters is not necessarily the institutional position of the source, but the quality of data.

The IMF, Eurostat and other international organisations have established some standards to assess the quality of statistics. But quality is multifaceted concept: for statistics, it includes relevance, timeliness and puctuality, interpretability, accessibility, etc. (see, for example, the IMF Data Quality Assessment Framework at http://dsbb.imf.org/Applications/web/dqrs/dqrsdqaf/).

International organisations have also established standards for the production of statistics in several fields, such as national accounts, prices, international trade, employment and unemployment. The way in which national statistical offices and other official sources implement these recommendations is often assessed by international organisations, while there is no evaluation mechanism for statistics produced by unofficial source.

At the end of the day, it is up to the user to assess the quality of data, but this is not an easy task indeed, especially for non-specialists. With the proliferation of private sources and the use of Internet this is becoming a big issue. Perhaps in future there will be a system of certification like the ISO one, both for official and unofficial statistics.

 

Q. Recently Hungarian media reported that according to a study, reportedly conducted by UCLA, it will take up to 100 years for Bulgaria to catch up with the old EU members from Western Europa as opposed to Slovenia which will  need only 5 years to do so. How trustworthy are such economic forecasts and based on what evidence or measurements are such conclusions being drawn?
Elena Nikleva, Hungary

A. I am not aware of these results, also because it is very difficult to translate the existing differences in the levels of certain variables (GDP per capita, unemployment, etc.) into a time-distance metric, as this implies some assumptions on future trends. However, there are scholars who propose this  approach. For example, prof. Sicherl from Slovenia is advocating the use of time-distance to measure differences between countries (see http://www.oecd.org/dataoecd/27/63/38797359.pdf?contentId=38797360).

 

Q. I strongly believe that such indicators as GDP, GDP per capita, National Income, Disposable Income etc. show to some extent the level of economic and social development of a country.  However, they do not take into account the fractionation of the society and hardly distinguish the corporate welfare from personal.  Please comment if you believe there is a trustworthy indicator of a country people's majority's welfare independent from subjective judgment. If you do, please, name it and comment, if you believe this indicator to be an eligible valuation of government's economic policy.
Sergei Popov, St.Petersburg State University

 

A. The issue of measuring the "progress" of a society was the key issue discussed during the recent OECD World Forum held in Istanbul at the end of June (see www.oecd.org/oecdworldforum). Of course, there are different views about what progress means, depending on different economic, cultural and historical conditions. Anyway, there is a growing consensus that it is not possible to build a single indicator able to encompass all dimensions of progress (or quality of life, welfare, etc., all terms often used to indicate similar things). It is better, instead, to build a set of indicators, covering different dimensions, from income to health, from education to environment, etc. including some subjective dimensions (such as happiness of life satisfaction).

The key point is: who should select the set of indicators? What we have seen over the last two years of research is that more and more local communities or countries develop sets of indicators through a conultative process, engaging citizens (or their representatives) to choose a list of indicators that could be considered a good and especially "shared" view of what progress means. This indeed gives a stronger credibility to the resulting set, which can be considered a "public good".

For more information about these issues, and indicator initiatives, you can visit the "knowledge base" available on the Forum web site and consult the presentations given during the Forum itself. Finally, you may be interested in the Working Paper I recently published on "Statistics and Polictics in a Knowledge Society" (see http://www.oecd.org/std/workingpapersPublications & Documents).

 

Q. Why are all comparisons about public (current and/or capital account) expenditure computed at nominal exchange rates (expressed as a ratio on nominal GDP)?

I tried to compute a per head public (and capital account) expenditure based on OECD current PPPs. In your opinion is it a better indicator of the level of public expenditure?
Marco Biagetti, Italy

 

A. Purchasing Power Parities (PPPs) are extremely useful to make comparisons across countries. In their simplest form, PPPs are price relatives, which show the ratio of the prices in national currencies of the same good and service in different countries. One of the most frequent uses of PPPs is the computation of GDP and GDP per capita across countries.

For a better understanding of PPPs see http://www.oecd.org/dataoecd/32/34/2078177.pdf.

As far as the comparison of public expenditure is concerned, it depends on the aim of the analysis. For example, in the "OECD Factbook" (www.sourceOECD.org/factbook) we use PPPs to compare toatla and public expenditure on health using PPPs (see http://fiordiliji.sourceoecd.org/pdf//fact2007pdf//11-01-04.pdf).

 

Q. Ultimately, we are interested in well-being, what conventional economic indicators such gross domestic product (GDP) are supposed to measure. It has been a question that was concerning me for a while - are the conventional economic indicators such sufficient to measure progress and quality of life? The answer is probably not. Which, then, alternative measures could be used? Are there already examples that have a potential to be more widely accepted?
Starting at the firm level of analysis which indicators could be used that could publicly legitimate the outstanding contribution to the public good?
Ada Stanulovic

A. GDP per capita cannot be considered a satisfactory measure of well-being. In fact, from a conceptual point of view, GDP is an accurate measure of the amount of production, but cannot take into account other aspects of well-being, such as health conditions, environmental conditions, etc.

In 2005 the OECD published a review of different approaches to the measurement of well-being (see http://www.oecd.org/dataoecd/13/38/36165332.pdf), while in 2006 an international conference on this issue was organised in preparation of the second OECD World Forum on "Statistics, Knowledge and Policy" (www.oecd.org/oecdworldforum).

In a nutshell, there are three alternative approaches to the use of GDP per capita: first, it is possible to extend the "core" system of national accounts to include environmental and social aspects. This approach is extremely powerful from an analytical point of view, but it is also very expensive and complex, especially for countries who do not have well established statistical systems.

The second possible approach is based on composite indicators, such as the "Human Development Index". The OECD has published a handbook on this approach, which highlights pros and cons (see http://www.oecd.org/officialdocuments/displaydocument/?doclanguage=en&cote=std/doc(2005)3) of it. One of the main problems of this approach is the choice of weights used to synthesise sectoral indicators. On the other hand, composite indicators are useful for advocacy purposes, but less useful for analytical purposes.

The third approach, recommended by the OECD, is the development of sets of key indicators covering different dimensions, including those related to the quality of life, often measured through subjective indicators. Key indicators are able to provide a comprehensive view of what progress means, leaving to the user the role of interpreting it and then draw conlusions about the overall progress of the country/region/community. Of course, to be meaningful, the set cannot include too many indicators. For an example of this approach see www.sourceoecd.org/factbook.

Background reading

 

 

 

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