Can Investors Trust Official Statistics?

Investing is about information. Having more - and better - information allows an investor to paint a more complete picture about the financial health of a company, or even of an entire country's economy. This is especially important as companies grow their multinational presence, entering markets in areas that are rapidly developing and have an insatiable appetite for the world's goods and services. But venturing into these markets can mean entering a world in which the rule of law can be overlooked, and in which the principles that drive business in developed countries come face to face with a different reality.

Economic Data Collection
Economists and investors alike look to certain statistics to judge the health of an economy, and thus get an idea of what threats and opportunities companies operating in those economies may face. Statistics such as unemployment, public debt, inflation, poverty rates and other macroeconomic and socioeconomic figures form the backbone of this type of analysis.

To compile these statistics governments create agencies to come up with the appropriate methodology and hire personnel to go through the cities and countryside to collect information. Examples of government agencies include the Bureau of Labor Statistics and Census Bureau (United States), Eurostat (European Union), Federal State Statistics Service (Russia) and National Bureau of Statistics (China). Personnel interview residents to find out how big their households are, check local prices for goods and services, visit schools to check attendance and gauge the general opinion of the population. This data is then brought back for analysis.

There are several reasons why a country may manipulate the information coming in from the field.

International Investors Want Healthy Economies
Multinational corporations don't want to invest millions of dollars in new markets if they think that things will collapse. Growth in consumer demand, stable government policies and access to transport are important factors that contribute to a venture's success. For example, favorable education figures make the country look more attractive to companies who need an educated workforce to manufacture products.

Credit Markets Want Stability
Lower inflation rates give the country more flexibility in its monetary policy, as it may want to continue to print money to bolster its reserves or fend off accusations of scarcity. For countries obtaining credit through inflation-linked bonds, understating inflation can amount to significant savings for the home government and the equivalent amount of losses for investors. (more)