The Legatum Institute has just released its 2011 Prosperity Index. The index has a number of strengths, topped by the versatility of its supporting Web site. But Legatum has trumpeted an inaccurate finding that China has eclipsed the U.S. on the narrow economic dimension of its measure of prosperity.
This finding demonstrates the problems with comparing China to other countries, as so much Chinese data are unusable. Some of Legatum’s numbers are clearly wrong; others are probably wrong.
The Legatum economic sub-index uses data from other sources on 15 economic indicators. The other sources are the World Bank’s World Development Indicators and Gallup’s World Poll. These would seem to be sound data to rely on, but problems are quickly apparent.
The worst problem is unemployment. Legatum uses the official Chinese figure of 4.3 percent. But this is urban registered unemployed. Registered unemployed isn’t a proper measure of urban unemployment, much less rural unemployment, which is far higher. Even the Chinese government does not defend its own figure as accurate, but it is unwilling to publish another.
In 2008, a Chinese government think tank put just urban unemployment at 9.4 percent. Using comparable data and including rural unemployment, Chinese unemployment is almost twice as high as American unemployment—not less than half as high, as Legatum estimates.
Another serious problem concerns non-performing loans (NPLs). No one outside the Chinese government, or probably inside, considers the official NPL figure useful in measuring the health of the Chinese financial system. This causes a problem, because Beijing has cowed observers into suppressing independent estimates of NPLs. So the Chinese financial system is less healthy than indicated by the NPL number that Legatum uses, but how much is unclear.
There are other issues with the official Chinese data used by Legatum, such as the share of “foreign” direct investment (which is actually returning domestic capital), the smoothing of GDP growth, measurements of domestic consumption and investment, and so on.
A separate issue arises in Legatum’s use of Gallup polling. Polling cannot be separated from context—how the respondent feels depends on local trends. But should an economic index compare Chinese respondents feeling good about finding a $10,000-per-year job to American respondents feeling insecure about keeping a $50,000-per-year job? Is actual economic prosperity being measured by some notion of “psychological prosperity”?
Legatum can properly respond that it is engaged in a difficult global exercise and some sacrifices of accuracy must be made to get comparable figures across so many countries. True, but a bilateral comparison on very shaky foundations should be treated accordingly, not highlighted as a major result.
Now the good news: Legatum has magnanimously offered to rerun its numbers to see if changing official Chinese figures makes much of a difference. This is harder than it sounds for NPLs, for example. We plan to give it a try and report back to you on how well the claim stands up that China has passed the U.S. in economic prosperity.