Doctored Statistics

Argentina has been playing with its statistical data to produce inflation numbers that understate the true value, according to this article in the Washington Post:

Workers at the government's National Institute of Statistics call it crass manipulation: Their agency, under pressure from above, altered socioeconomic data to reflect numbers palatable to the presidency. Inflation and poverty miraculously dropped, they said in interviews, and the economy boomed.

At least officially.

"They just erased the real numbers," said Luciano Belforte, an 18-year veteran at the institute. "Reality did not matter."

The basic method was to cease including data on goods whose prices were rising too fast:

Statisticians, mathematicians and survey-takers who still work at the INDEC described how managers stopped surveying products that had recorded steep price hikes. "If something went up more than 15 percent, they'd take it off the list," said Marcela Almeida, a mathematician and one of several workers deposed by prosecutors.

Almeida said managers would obsess about certain products, such as bread, urging surveyors to come back to the INDEC office with prices that remained low. If they were not low enough, Almeida said, "the person who received their forms would change this price."

This reminds me of "hidden inflation" in the Soviet Union. Prices were centrally fixed. If costs went up enterprises were not allowed to raise prices. So they instead got their goods classified as new goods. These new goods were not included in the price indices, so inflation would remain non-existent under socialism. Thus the inflation was hidden (as opposed to repressed inflation which occurs when prices are controlled and excess demand spills over into the black markets.)

Meanwhile, the Soviet statistical compendiums would cease to report indices that made the economy look bad.

So Argentina learns by example. But it is interesting because it is a democracy. And because many debt payments the government makes depends on these statistics.

By underreporting inflation figures, economists say, Argentina is cheating investors of proper compensation on nearly $50 billion in debt benchmarked to inflation.

"The way these bonds work is that every month, or every six months, the principal adjusts for inflation," said Robert Shapiro, co-chair of the American Task Force Argentina, a Washington group lobbying for Argentina to pay its debt to American investors. "So if inflation is actually 30 percent, and they're only adjusting 10 percent, that's a huge loss."

This no doubt is going to have serious repercussions on capital flows.