How to measure economies (and not get lost in the woods)

12th September, 2009

In the late 18th century, Johann Gottlieb Beckmann, a Saxon forester, hit upon the idea of systematically surveying Saxony’s forests. He dispatched trained surveyors into a tract of woodland to hammer nails into every tree. Each man carried nails of five different colours, enabling them to grade trees by size. When every tree was marked and the men emerged, Beckmann counted the coloured nails left over to calculate the exploitable resources.

Efforts to measure what goes on in the economy have a chequered history. The political scientist James C. Scott, who unearthed the example of Beckmann, points out that forest planners tried to conform to Beckmann’s theories, spacing with architectural precision trees of the same breed and age. The resulting forests were vulnerable to high winds and to disease.

Sir William Petty, an adviser to Oliver Cromwell, produced the first estimate of Britain’s national income, which he put at £40m a year back in 1664. But Petty’s surveys also made it easier for the English to exploit Ireland. William the First’s Domesday book is both a historical treasure and the tool of a conqueror.

It is no wonder Sir John Cowperthwaite, the laissez-faire financial secretary of Hong Kong in the 1960s, refused to calculate economic statistics for the colony. He thought they would only encourage bureaucratic meddling from London.

With all this in mind, it is perhaps not surprising that economic indicators continue to generate heat as well as light. This week, the World Bank and the International Finance Corporation published their annual “Doing Business” report, which surveys the time and expense involved in performing simple business procedures such as incorporating a medium-sized enterprise.

The report’s authors – some are former colleagues of mine – draw conscious parallels between their attempts to collect microeconomic data and the much more established macroeconomic indicators such as inflation and unemployment rates.

Doing Business is beginning to be incorporated in academic research and it is probably a modest spur to reform efforts. One of the merits of its data is that for any given regulatory obstacle in a country, it is easy to see which neighbouring country is doing better, and whether there are any relatively simple changes that would help.

Not everyone is happy, though. Arvind Panagariya, professor of economics at Columbia University, has called for the indicators to be scrapped. “When firms are entering a market with a horizon of several decades, does it matter whether it costs $500 rather than $5,000 and takes 20 rather than 200 days to start the business?” he wrote last summer in India’s Economic Times newspaper. But that is an odd complaint; not every business is a corporate titan, and even corporate titans like to operate in an economic ecosystem of smaller suppliers.

Doing Business statistics sometimes show a different picture to that painted by statistics on foreign investment and economic growth. Critics claim this shows that they are irrelevant; supporters that the data provide information not captured elsewhere.

In response to criticism, the World Bank is distancing itself from the suggestion that “less regulation” equals “better regulation”. Fair enough – but the report’s most important finding is that the world’s most regulated economies are not the likes of Germany and Japan, but the Central African Republic and the Democratic Republic of Congo. Hong Kong stands at number three in the world. Even Sir John Cowperthwaite might have given these statistics his grudging acceptance.

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