What gets measured gets managed
Aug 06 2014
With a few notable exceptions — one of which I’ll come to — in recent years discussions on debts have focused on the public sector. From 2010 on, in many European nations, macroeconomic policy undertook a profound U-turn as conventional wisdom asserted that public sector debts were growing faster than the perceived ability to repay them. Rising ratios of state debt-to-national income were cited all over the place. And if these didn’t scare policymakers, projections of future debt levels were rolled out. Spending was cut, taxes increased, and much pain followed. What was measured got managed.
For sure, public sector debt defaults are no laughing matter, not least to those savers who effectively lent their money to the government in the first place. Plus, some leading lights believe that very high public debt burdens tend to reduce economic growth which, if true, can’t be good. Now it’s becoming clear, however, just much data availability distorted decision-making. Turns out that what gets measured might not be such a smart way to decide what gets managed. Consider two troubling counterpoints.
As western governments were told to swallow the medicine of austerity, China was held up as an example of a country with its state debts under control. Public debts were only a quarter of national income in China, we were frequently told. In fact, that number related only to central government debt, which it turns out is much better measured in China than just about any other form of debt. Later estimates showed that once the debts of local governments, state banks, and state-owned enterprises were taken into account, then as a share of national income, China’s public debts were smack in the middle of those spendthrift, uncompetitive, and feckless European nations.
Enough of recent history, but what about the here and now? Well that’s where the second example comes in. The recent annual report of the Bank of International Settlements (BIS), the informal but influential central banker’s club that is based in Switzerland, reported that the debts of non-financial firms in emerging markets have risen by over 30 per cent since 2007. Recent months have seen concerns about excessive credit growth raised for China, Malaysia, and Sri Lanka, to name a few emerging markets.
Compared with the hysteria over public debt, far less is said about growing private sector debt. You don’t have to point to anti-state bias to understand why, which is not the same thing as saying that no such bias exists. Many emerging market firms have financed themselves through foreign securities markets using affiliates located abroad. Such debts, as the BIS notes, are “typically off the authorities’ radar screens.” Worse, little tends to be known about the terms of such borrowing, making systemic risks harder to assess.
This oversight matters. It means that emerging market central bankers and ministers tend to be unprepared for big shifts in financial markets abroad. Recall, the fears that arose last year when it was thought that funding for emerging markets might dwindle once the US Federal Reserve Board started raising interest rates. If emerging market firms can’t borrow so much abroad, they tend to run down their large bank balances at home and, in turn, this limits the amount of money local banks can lend to others. In an interconnected world, to coin a phrase: what happens in Vegas doesn’t stay in Vegas.
Borrowing by emerging market firms isn’t new, nor are the problems that arise when it gets out of hand. So you’d think policymakers would seek better measures of private sector borrowing — yet somehow this doesn’t happen. The result is an imbalance in policy debates, with the spotlight concentrated on the public sector. Unflattering remarks about better-measured state performance often overlook the fact that the private sector is not scrutinised to the same degree. When concerns about private debt are raised, they are often dismissed as not evidence-based. While rhetorically pleasing, this is not a recipe for sensible policymaking. ‘When’ gets measured shouldn’t dictate ‘what’ gets managed.
(The writer is a professor of international trade and economic development at University of St Gallen, Switzerland)