“Facts” Everybody Knows – Statistical Cautions about the BRICs (in honor of Igor Birman)

In business and finance, statistics and quantitative comparisons are daily companions.  Sometimes, however, key statistics can become too familiar, and reify, i.e. harden into “facts” that everybody knows.  In so doing, they play a large part in strategic surprises.

In the late 1980s, for example, the US Intelligence Community “knew” that Soviet GDP was $2.5 trillion, i.e. about 52 percent of the US GDP of $4.8 trillion.  How?  Their computer models told them so.  These models relied upon – among other things – assumptions about ruble-dollar Purchasing Power Parity (PPP).

Western academic Sovietologists also “knew” the USSR’s economy was about $2.5 trillion.  How?  Mostly, they relied on an authoritative source:  the CIA.

By the early 1990s, it was clear that the US Intelligence Community’s estimate of the USSR’s economy was about $1 trillion too large – that Soviet GDP was closer to $1.6 trillion.  What difference did that error make?  Among other things, Soviet GDP was the denominator used to estimate the burden of defense spending as a percentage of  the overall economy of the USSR.   When the CIA, for example, put Soviet military spending at 11-15% of GNP between 1975 and 1980, the 11-15% figure had the overall GDP number as the denominator. Simple math.  But, the sustainability of the entire Soviet edifice might have been called into question earlier if the GDP number that everyone “knew” had been questioned more closely – change the denominator, and Soviet defense spending becomes unsustainable (as, in reality, it was).

The CIA model began with flawed assumptions about the appropriate discount for poor quality Soviet goods, and never adequately revised them.  For PPP to work, items need to be truly comparable.  The wonders of unquestioned PPP models ultimately allowed the CIA’s 1987 World Fact Book to list the GNP per capita in West Germany as lower than East Germany’s!  The evidence to the contrary that one could gather in an afternoon stroll was considered “anecdotal”.

There were Cassandras like Igor Birman (who died on April 6th) calling Soviet GDP estimates into question, but they were largely ignored by the US Intelligence Community.

This is not to say that the CIA had an easy job penetrating Soviet misinformation and obscurantism.  Even for those inside it, understanding the economy of the USSR  was hard (just ask Gorbachev).  It is simply to illustrate that flawed assumptions and authoritative numbers that go unquestioned can have real consequences and contribute to strategic surprises.

Why does this mostly-forgotten history matter to businesspeople today?  Because it is a cautionary tale about the so-called BRIC economies.  In fact (while noting that PPP is the method usually used to estimate the size of BRIC economies), let’s look at something simpler:  urbanization statistics.

One “fact” that many people know about China, for example, is that one of the primary drivers of its economy’s future growth will be continued urbanization. (This is because country people on farms are less productive than city people producing goods and services).  Maybe that will continue to happen in China, and it will drive economic growth.  Certainly many Chinese say so, and cite their ability to “urbanize” further as a key part of the good news story that is supposedly the future of China’s economy.

At first glance, proponents of the China has Plenty of Urban Growth Left Story can cite an authoritative source, the UN Statistics Division.  Check the UN’s urbanization basic statistics, and you’ll see that China is said to be only 47% urban, compared to say the US’s 82% urban figure, or Germany’s 74%.  Exciting room to grow, right?  It’s a part of the classic “convergence story”.

Think again.  The UN uses each country’s individual definition of urban.   Dig into the details of the UN statistics above and it turns out that the Chinese definition of a city is 1,500 people per sq. km (though the overall definition is complex), and the US and German definition of a city is 400 people per sq. km!  In fact, most developed countries use the 400 people per sq. km definition.  In short, China is already a lot more urban than you’d think looking at the authoritative UN Statistics Division headline figure!  The UN’s figures are not comparing apples with apples, and neither are the BRICs cheerleaders who blithely cite them.

In fact, the CIA’s past troubles with PPP – or the subtleties of UN statistics today – should give everyone pause about how much they “know” about various economies, especially the BRICs (but also recall the subprime crisis).  There are certainly China skeptics.  As you consider their individual points, bear in mind that if “The largest single social science research project in the history of humanity” could  overestimate the size of its primary target by about 40% for decades, will the salesmen known as Chief Economists at investment banks do any better?

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8 responses to ““Facts” Everybody Knows – Statistical Cautions about the BRICs (in honor of Igor Birman)

  1. As a follow-up – one also have to wonder how “Ghost Cities” get reported to Chinese statistical authorities: http://www.youtube.com/watch?v=rPILhiTJv7E&feature=player_embedded How many local officials have the integrity to say that they’re largely empty?

  2. Pingback: Des « Faits  apparemment évidents – Précautions statistiques à propos des BRIC (en l’honneur de Igor Birman) « Philippe Silberzahn

  3. The Washington Post’s obituary of Birman was published yesterday; there is one error: a Kandidat degree is not a doctorate.
    Igor Birman, economist who predicted outcome of Soviet economic crash, dies at 82

    By T. Rees Shapiro, Wednesday, April 20, 2011

    Igor Birman, 82, a Russian emigre and economist who predicted the implosion of the Soviet economy and the fall of the Soviet Union a decade before the events occurred, died April 6 at his home in Rockville. He had a brain tumor.

    In the years leading up to the Soviet Union’s collapse in 1991, many economists — foreign and domestic — foretold the Soviet economic meltdown. Dr. Birman was regarded as the first to predict the outcome, and he did so with impressive accuracy.
    Before arriving in the United States in 1974, Dr. Birman was a high-ranking economist in Moscow, where he worked as a director of planning for Soviet factories.

    In an essay in The Washington Post on Oct. 27, 1980, Dr. Birman dissected the CIA’s estimates on the Soviet economy, including the agency’s belief that the Soviet standard of living was equal to about half of that in America.

    The reality, Dr. Birman argued, was starkly different, with a standard of living closer to one-fourth or one-fifth of that in the United States.

    He wrote that Americans spent about 17 percent of their income on food but that residents of the Soviet Union spent about half. Practically no Soviet households had two bathrooms, and “walk-in closets do not exist because people don’t need them.” There were at most 3,000 swimming pools, he wrote.

    Dr. Birman also asserted that the Soviet government spent close to 20 percent of the gross national product on the military — nearly double the CIA estimate — which he called a “backbreaking” expenditure.

    Dr. Birman concluded that the best strategy for the United States would be to ramp up the arms race and bankrupt the Soviet Union into submission.

    In subsequent articles, he said the Russian government was running a dangerous budget deficit and camouflaging that fact in its official data. He argued that the weak Soviet economy would ultimately destroy the country itself.

    “If the Soviet Union continues to raise production of goods and services as it has done over the past 23 years,” Dr. Birman said at an international conference in 1985, “then it will catch up with the United States’ 1976 level in 62 years in fruit, 74 years in meat, 142 years in housing, 176 years in automobiles, 188 years in telephones and 298 years in roads.”

    Dr. Birman’s was a lonely voice among U.S. government experts, who widely believed the Soviet economy was stable and growing.

    Nicholas Eberstadt, a political economist with the American Enterprise Institute in Washington, said Dr. Birman’s opinions were considered biased because he was a sharp-tongued and abrasive outsider who “did not build political coalitions in a way that would have been bureaucratically advantageous.”

    Decades after his predictions, Dr. Birman was largely proved correct by records released by the Russian government. Scholars said his estimates were consistently among the most accurate, including his prediction of extremely high Soviet military spending, later calculated to be at least 25 percent of the Soviet GNP.

    “I was alone in the world, saying the huge CIA is wrong,” Dr. Birman told journalist Ronald Kessler in an interview for his 1992 book “Inside the CIA.” “The wonderful American press has criticized the CIA for spy operations, but never for their analysis. I did. I knew I was alone, and if I say the truth, nobody would believe me.”

    Igor Yakovlevich Birman was born July 25, 1928 in Moscow. He received a master’s degree and a doctorate in economics in Soviet universities and worked for the government as an industrial economist conducting research on the construction and lumber industries.

    After Dr. Birman’s 1980 article was published in The Post, he was invited by Defense Department futurist Andrew Marshall to give briefings at the Pentagon and was hired as a contractor.

    For many years, Dr. Birman served as president of the Foundation for Soviet Studies and published his articles in scholarly periodicals, including the journal Russia, which he helped establish. He retired in the early 1990s.

    His first marriage, to Maya Israilevitch, ended in divorce. Survivors include his wife of 52 years, Albina Tretyakova Birman of Rockville; a daughter from his first marriage, Julia Shildkret of Queens, N.Y.; two children from his second marriage, Dina Birman of Chicago and Igor Birman of Herndon; and six grandchildren.

    In 1984, Dr. Birman wrote to Robert M. Gates, then a senior CIA analyst, asking for the opportunity to discuss the Soviet economy. His request was denied, and instead he was interviewed by junior CIA officers.

    “I tried to tell Gates in the letter that his people were not convinceable,” Dr. Birman told the New York Times in 1991 shortly before Gates became director of central intelligence. “Now he’s castigating his people for not listening to me. Why couldn’t he talk to me, especially since I was right?”

    Reproduced from http://www.washingtonpost.com/local/obituaries/igor-birman-economist-who-predicted-collapse-of-soviet-economy-dies-at-82/2011/04/19/AFh062EE_story.html

  4. There is much disagreement about equivalence of degrees, and in truth, the post graduate degrees in Eastern block and US are not equivalent so it’s difficult to make translations.

    A Kandidate degree can be thought of as roughly equivalent to a U.S. Ph.D. It requires an original contribution to science evidenced by publications in peer-reviewed journals and a dissertation defended in front of a senior academic board (see wiki on Education in Russia). The criteria for U.S. Ph.D.’s is also an original contribution to the field; but in many doctoral programs in the U.S. one can earn a Ph.D. without having published, much less in peer reviewed journals, whereas not so for Kandidate degrees.

    The Soviet Doktorate requires much more than a U.S. Ph.D., and is only awarded to people in at least mid career who have extensive publicatons, as in this wiki entry “Doctorate”: “Higher doctorates In some countries, especially the United Kingdom, Ireland, and some Scandinavian, Commonwealth nations, or former USSR and other Eastern Bloc countries, there is a higher tier of research doctorates…”

  5. Thanks, Duncan! While I knew they were not exactly the same, I certainly could not have explained the difference in such detail. It sounds as if the Washington Post was probably right to simplify the degree to “Ph.D.”. In any case, I appreciate the clarification.

  6. Pingback: Has China peaked? An exercise in forecasting using Neustadt and May’s History framework « Silberzahn & Jones

  7. Pingback: Des “Faits” apparemment évidents – Précautions statistiques à propos des BRIC (en l’honneur de Igor Birman) « Le blog de Philippe Silberzahn

  8. A small update.

    This article documents the falsification of natural resource data by the Chinese Institute of Contemporary International Relations: http://www.intelligenceonline.com/government-intelligence/organizations/2012/03/22/cicir-spreads-disinformation,99920112-ART-CAN

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