Econ compare two country's economies

GUIDES: Insight through Indicators

Today’s business leaders are expected to have an informed, current, and strategic perspective on the economic performance of a wide range of countries. And they are expected to have it fast. That challenging task is made more difficult by the absence of a standard method of approaching, synthesizing, and extracting insights from macroeconomic indicators.

A similar problem confronts students in the business school classroom. While learning to understand and work with the key indicators of corporate performance is a standard part of a modern business school education, much less emphasis is placed on insightful, quantitative analysis of the economies in which businesses operate. Students in the classroom too often resort to ad hoc analyses that miss or misinterpret vital economic information.

This note introduces an easily remembered framework that addresses these problems. It can help the business leader and student to confidently and quickly identify, organize, and interpret a country’s key economic indicators. Alternatively, it can help them to evaluate third-party analyses and to compare such analyses across countries. In either case, this framework provides a structured way to complete and communicate analysis of a country’s economic data.

The framework is a simple acronym, GUIDES, in which each letter stands for a key economic indicator or set of related indicators. When analyzed together, these indicators give the business leader or student a vital set of facts with which to begin forming an intelligent judgment about the current state and likely future performance of an economy.1

This note is divided into three sections. The first section describes the components of GUIDES, discussing the meaning of key indicators referred to by each letter and providing guidance as to their importance for business leaders. The second section provides guidance on where to find the data required to implement GUIDES in either of the two ways mentioned above: as a checklist for evaluating third-party profiles of economies, or as a structure for independent analysis. Extensive exhibits at the end of this note provide a catalog of reliable data sources.2 The third section presents an implementation of GUIDES for Japan in the “Miracle Years” of 1954–1971. This historical application of GUIDES illustrates many of the challenges that arise when working with imperfect data and the rewards that come with identifying indicators that foreshadow the future path of an economy.

The Components of GUIDES

The purpose of GUIDES is to help the business leader analyze macroeconomic data with confidence and speed. GUIDES is not a theory of the macroeconomy or an exhaustive list of the data one might gather. Instead, it is a carefully selected set of the primary indicators that analysts look to when gauging a country’s macroeconomic performance and the stability of that performance.

The following table summarizes the components of GUIDES and the indicators that are usually of most help in applying it.

The first three components of GUIDES are generally considered the fundamental indicators of current macroeconomic performance. Policymakers and analysts often look first to these when

gauging the health of an economy. The second three components are vital indicators of the sustainability of that performance, and they are carefully watched by international organizations and investors looking for signs of instability or vulnerability in national economies.

G: GDP & Growth

The single most important and informative set of economic indicators relates to a country’s Gross Domestic Product (GDP): the market value of the final goods and services produced within a nation’s borders over a given period of time, usually a quarter (reported annualized) or a year. Real GDP measures the value of these goods and services using the prices from a fixed “base year,” thereby controlling for changes in prices and facilitating the comparison of production levels across time. Real GDP is the standard measure of an economy’s size; that is, the value of the goods and services a country produces with its people, equipment, and other resources in a certain period of time for their ultimate users.

As a matter of accounting, the value of the production measured by GDP can be divided into four categories: consumption, investment, government purchases, and net exports. This gives rise to a well-known accounting identity: GDP=C+I+G+NX. Every good or service, the production of which is counted in GDP, falls into these categories. Consumption is the purchase by domestic households of goods and services for current use. It makes up about 60% of GDP in developed economies. Investment is composed of the purchase of goods by businesses for their use in producing output in a future period (e.g., next year), purchases of new residential housing, and net contributions to business inventories. It has historically been more volatile than consumption, making it a prominent indicator of the business cycle. Investment also measures what is being spent by domestic residents to build up or maintain the stock of productive capital equipment, so it plays an important role in driving long-term growth. More detail on investment can be found under the S section of GUIDES. Government purchases include spending on national defense, education, and other public goods, but not transfer payments such as welfare benefits or public pensions. Government purchases as a share of total output is one measure of a government’s role in the economy, though in many countries the government controls resources in other ways as well. Finally, net exports is exports less imports, where exports are those goods produced domestically but sold abroad and imports are those goods produced abroad but sold domestically (imports must be subtracted because GDP measures domestic production only). The quantity of net exports is closely related to the current account, which is discussed in detail under the E section of GUIDES.

The growth rate of a country’s real GDP is the specific indicator most often used to gauge the health of an economy.3 It measures the rate of increase in the economy’s total output, and therefore how much more value is being produced in the economy. For business leaders, a fast-growing economy often presents substantial opportunities to both sell into a market with new, higher demand and to produce in an environment that evidently has the right conditions for expansion.

As important as the growth rate is what is driving that growth. The decomposition of real GDP growth into increases in capital, labor, and what economists call total factor productivity (TFP) indicates the source of an economy’s growth. Growth driven by capital accumulation (through investment) may signal that an economy is catching up to its potential by raising its capital-to-labor ratio to match more developed economies. Growth driven by an increase in labor is usually due to

the entrance of immigrants or domestic groups (such as women) into the workforce. Both of these sources of growth face diminishing returns, so they can drive rapid growth only temporarily. In contrast, growth due to the more efficient use of capital and labor, or TFP growth, is sustainable. Though the causes of TFP growth are unknown, technological progress and improvements in business management are often cited as key ingredients. A technical note: When analysts refer to productivity, rather than TFP, they usually have in mind output per worker or per unit of labor (such as per hour of work). Increases in productivity can be caused by increases in TFP, though they can also be due to an increase in the amount of capital available for use by labor. Though they measure somewhat different concepts, productivity and TFP are both important indicators of the determinants of total output.

The level of PPP-adjusted GDP per capita is the amount of GDP per person in an economy adjusted for the prices of goods in that economy relative to a reference country, i.e., adjusted for Purchasing Power Parity (PPP). For example, the output of an economy with relatively low prices will appear smaller if PPP adjustments are not made. PPP-adjusted GDP per capita, therefore, measures the value of what can be consumed, per person, with the proceeds of an economy’s output, and it often serves as a measure of the standard of living in an economy.

U: Unemployment & Utilization

The unemployment rate is the percentage of those individuals looking for work who cannot find it. This definition makes the unemployment rate a central indicator of the business cycle, as it captures the imbalance between the supply of and demand for workers. Though the unemployment rate is usually a lagging indicator of the overall business cycle, its direct impact on consumers affects the optimal timing of business investment and production. For instance, producers of consumer goods may be less interested in the timing of an overall economic recovery than in when consumers’ worries over unemployment subside. Moreover, as long as the unemployment rate remains high during a downturn, governments are often tempted to provide economic stimulus through policies that may affect the returns to doing business.

The average level of the unemployment rate reveals information as well. A persistently high unemployment rate may indicate that a friction in the system (such as a high minimum wage, dismissal costs, or barriers to geographic mobility) is preventing willing workers and employers from matching. Such frictions can affect the costs of doing business. However, labor markets and policies toward them differ substantially across countries, so a high unemployment rate may instead indicate that policymakers have prioritized other goals (such as the well-being of the unemployed) that work against lowering the unemployment rate. Therefore, careful identification of the drivers of unemployment in an economy is essential to properly interpreting the data.

Finally, the unemployment rate provides an important piece of information about those at the bottom of the economic ladder. By combining data on poverty and income mobility as well as an in- depth understanding of the political and social dynamics of a country, business leaders will be better able to foresee pressures for policies that are perceived to be redistributive. Often, these policies substantially affect the profitability of operating in a country.

Capacity utilization provides much the same information as the unemployment rate, but for factories and equipment rather than people. It measures how much of the productive ability of the installed capital base in a country is being used. Therefore, it also indicates how much of this capital base is going unused, i.e., is “unemployed.” One important caveat to this indicator is that capacity

utilization refers to goods production only, neglecting the service sectors that make up large shares of modern developed economies.

For business leaders, trends in capacity utilization are a key leading indicator of overall economic activity. In particular, a declining utilization rate provides a signal that firms expect weak demand for their goods in the near future. For reference, the average value of the capacity utilization rate in the United States over the long term has been just over 80 percent (the maximum value is 100).

I: Inflation and Interest Rates

Inflation is the rate of change in the overall price level of an economy. A conventional measure of inflation is the percent change in the Consumer Price Index (CPI). The CPI compares the current price of a fixed basket of a typical consumer’s purchases to the price of those purchases in a reference, or base, year. A complementary measure of inflation, the GDP deflator, compares the prices over time of all output in an economy. Most countries calculate some form of these measures.

Inflation directly affects the cost of doing business, as cash holdings deteriorate in value, outstanding debts and accounts payable become less burdensome, and outstanding loans and accounts receivable become less valuable with inflation. To minimize the impact of persistent inflation on a business, counter-measures (such as indexing contracts) become important.

Inflation usually has implications for a country’s currency as well. Holding fixed the value of currencies, persistent inflation raises the price of a country’s exports to other countries. In response, demand from abroad for the country’s goods is likely to fall. That fall in demand for exports translates into a fall in demand for the country’s currency, exerting downward pressure on its value relative to other nations’ currencies. This can lower the costs of foreign investment in the country, but it can also mean diminished returns from operating there.

Finally, because the management of inflation in the world’s leading economies has been assigned to central bankers who control the supply of money and interest rates, inflation is often used as an indicator of the policymaking structure in less developed economies. In particular, because expansionary monetary policy tends to spur economic activity in the short run, politicians may be tempted to ask monetary authorities to expand the money supply to levels that would raise inflation. Therefore, inflation can signal the relative importance of different factors in driving monetary policy.

Short-term nominal interest rates, as the primary tool of monetary policy, are closely connected with inflation. Interest rates are the prices at which money can be borrowed. When a central bank lowers these rates, it is attempting to encourage individuals and firms to borrow money and spend; in other words, it is using expansionary monetary policy. The potential cost of such stimulus is inflation: When a central bank keeps interest rates persistently low, it risks making money cheap and pushing up prices. To gauge whether this risk is becoming a reality, business leaders can look to long-term nominal interest rates. If borrowers and lenders expect future inflation to be high, they will agree on higher nominal rates on their long-term loans. Thus, rising long-term nominal interest rates can signal expectations of higher future inflation.

Interest rates also provide information about the market’s perception of risk. If a government, or a sector within a country, is perceived as an increasingly risky debtor, the supply of capital to it will fall and the interest rate at which it can borrow will rise. For instance, spreads between the rates paid on corporate bonds relative to government bonds may indicate that the corporate sector is perceived to be more risky for lenders. For businesses, these spreads can translate into a higher cost of capital.

For each nominal interest rate, there is a real interest rate that equals the nominal rate less expected inflation. Forward-looking real interest rates are not available in government statistics because expected inflation can vary across people with different beliefs about the future. But, real interest rates measure the expected cost of borrowing, and are therefore important to businesses and consumers who are considering whether to proceed with a project or purchases. In fact, when a central bank lowers nominal interest rates to spur the economy, it is doing so in order to lower real interest rates and thereby cause businesses and consumers to borrow more to fund spending. The real interest rate therefore plays a key role in specific decisions by businesses and the business cycle of the overall economy.

D: Debt and Deficits

Many of the world’s most prosperous countries run government budget deficits and have accumulated sizeable government debts. While not necessarily a sign of trouble, debt and deficits can present risks and, as a consequence, substantially affect policymaking and the costs of doing business.

A technical note: To gauge whether debts and deficits are large, they must be compared to the ability of the economy to service them. Therefore, economists recommend measuring debts and deficits as percentages of GDP. An alternative measure that focuses on the sustainability of debt is the cost of paying the interest on the debt relative to the size of the government budget.

Government debt is how much a country’s government owes to its domestic or foreign lenders. Domestically held debt is how much the government is borrowing from some of its citizens to fund current spending in excess of current tax revenue. Because it will be paid back to the country’s citizens in the future, this debt is generally seen as less problematic for a country’s economic stability than is debt owed abroad. At the same time, the interest expenses of carrying a large debt can weaken a government’s fiscal health. A technical note: Debt “held by the public” excludes debt owed by one part of the government to another and is generally viewed as a better measure of a government’s debt burden than is total debt.

Business leaders may want to pay particular attention to the debt owed to foreign lenders. In part because few mechanisms exist to compel payment across national borders, foreign lenders who sense increased risk may quickly and substantially reduce their willingness to lend. In that situation, the borrowing country can face a serious financial crisis that can lead to currency devaluation, reduced economic activity, and higher borrowing costs for the private sector.

A government budget deficit is the amount by which government spending exceeds its revenue in a given time period, usually a year. Deficits matter for at least two reasons. First, they raise the demand for the funds lenders are willing to supply to a country’s borrowers. This extra demand should, in principle, raise the price of borrowing, which is the interest rate. Higher interest rates make some private sector projects too costly to pursue, a result called “crowding-out.” Though the extent to which government borrowing crowds-out private borrowing is uncertain, there is a general consensus among analysts that increased government borrowing raises businesses’ costs of financing. Second, large deficits must eventually decline to sustainable levels. For this to occur, barring default or high inflation that reduces the real value of the debt burden, government spending must fall or tax revenue must rise.

To reduce deficits and debt, governments may increase taxes. Business leaders therefore ought to understand the key components of a nation’s tax policy and what changes to it are most likely if

increased revenue is sought. Of particular interest are the following: the size of tax revenue relative to GDP, as this measures the scope for increased taxation; the taxation of corporate profits, which varies widely across countries and which is determined in part by (competitive or cooperative) pressures from other countries; and the evolution of the use of sales (or value-added) taxes, which in many countries are becoming a major source of revenue. Though predicting the path of tax policy is never simple, these indicators will help the business leader foresee and plan for the leading possibilities.

E: External Balances and Exchange Rates

No evaluation of an economy is complete without an understanding of its relationship with other economies. While many external balances contain useful information, a few are particularly important.

The Current Account (CA) balance is an economy’s net proceeds from trade in goods, services, and payments for the factors of production (such as labor and capital) with the rest of the world. A positive CA balance, which indicates that the economy is receiving more from its sale of these items to foreigners than it is paying to foreigners for theirs, is neither good nor bad on its own. It may reflect high-performing domestic producers and a successful opening of foreign markets, or it may reflect weak domestic purchasing power and distortionary limits on imports from abroad. But, identifying the factors driving the CA balance can provide important insights into an economy’s business environment.

As a matter of accounting, the CA balance is equal to the opposite of the Capital and Financial Account (CFA) balance (subject to measurement errors and flows of official foreign currency reserves). The CFA balance is an economy’s net borrowing from the rest of the world. When an economy runs a CA deficit (as has the United States in recent years), it runs a CFA surplus. In other words, when an economy spends more than it earns on trade with the rest of the world, it must borrow to fund that extra spending.

The CFA balance, when measured as a share of GDP, is a powerful indicator of the sustainability of an economy’s current status. An economy can run large CFA surpluses as a share of GDP, and therefore borrow heavily from abroad, only so long as foreign investors are willing to lend. If foreign investors become skeptical of an economy’s ability or willingness to pay off their debts, the supply of lending will decrease and the interest rates that the economy pays to borrow will rise. If the situation deteriorates quickly, foreign lenders may demand payment on their loans in amounts that an economy’s borrowers cannot afford. In the ensuing crisis, the economy may default either explicitly or implicitly, the latter by devaluing its currency. For business leaders, predicting the onset of these financial crises can be invaluable.

To gauge whether a large CFA surplus is likely to generate a volatile economic environment, the business leader may find it useful to distinguish between two sources of borrowed funds: Portfolio Investment and Direct Investment. Portfolio Investment flows are investments by foreigners in domestic securities that do not exceed a threshold of ownership (e.g., 10%) in the domestic company. These flows are often called “hot money” flows because, if an economy is at risk of distress, these flows can quickly turn negative and exacerbate the crisis. In contrast, Direct Investment flows typically are concentrated investments by foreigners who want managerial influence in domestic companies. These flows are generally thought to be more stable, as they signal an investor’s long- term commitment to an economy and are unlikely to be quickly marketable.

One place to look for signs that an economy’s external balances threaten its stability is exchange rates. The nominal exchange rate is the price of one currency in terms of another: for example, the price of U.S. dollars in terms of Japanese Yen. If the currency’s value relative to others is determined by the market it is said to be “floating,” whereas a currency with a relative value controlled by the government is said to be “fixed.” If an economy’s ability to service its debt is in doubt, currency traders will reduce their demand for that economy’s currency. In that situation, floating currencies will become less valuable.

In this way, a floating currency is like any other good: when demand for it falls or its expected supply rises, its market value falls and the nominal exchange rates for this currency relative to others will reflect this depreciation. Seeing currencies in this way helps the business leader understand how other factors affect exchange rates. For example, when an economy’s output is less attractive to consumers abroad, demand for its currency, and thus the currency’s value, will fall.

As with interest rates, for each nominal exchange rate there is a real exchange rate. A real exchange rate is the price of goods and services in one country in terms of goods and services in another, and it is equal to the nominal exchange rate divided by the ratio of prices in the two countries. In general, competition among firms would cause goods that can be easily traded across borders to sell at the same price around the world, so real exchange rates ought to equal one (i.e., 1.0) in the long run, though they typically fluctuate along with nominal exchange rates in the short run.

The logic that real exchange rates should equal one in the long run can provide valuable insight to business leaders. Suppose a country has severe inflation but its nominal exchange rate is held temporarily fixed by the government (which may be worried that investors will flee if the currency is seen to be weak). Knowing that the real exchange rate is not equal to one, the business leader can anticipate either deflation or a severe devaluation of the currency and take action to insulate the business from—or take advantage of—these events.

S: Saving and Investment

An economy’s rate of saving is the share of its output that it sets aside for future rather than current use. An economy’s total domestic saving, called national saving, is made up of public saving and private saving. Public saving is the government’s budget surplus, while private saving is done by individuals and businesses.

National savings can be lent to businesses and individuals to fund investment, which is the purchase of assets that will generate production in later periods. Because existing equipment and skills deteriorate over time, investment is imperative for an economy that wants to maintain or increase its standard of living. Many of the most successful development stories of the last several decades have been in countries, such as China, with very high investment rates.

While domestic savings are a natural source of funds for investment, an economy may temporarily invest more than it saves by borrowing funds for investment from abroad. Investment exceeding domestic saving can be a sign of a robust economy that is attracting foreign investors. But, it can also reflect that the economy’s residents are neglecting to save. And while foreign savings can substitute for domestic savings in funding domestic investment, there is a tradeoff. When investment is funded from abroad, a portion of the returns to production and, in the case of equity investments, the productive assets themselves, are owned by foreign investors. Therefore, an economy can support substantial investment and claim the returns to it only if domestic savings are sufficient to fund it.

Special Topics: Thinking outside GUIDES

While the indicators included in GUIDES can help generate insights into a country’s macroeconomic performance, at times the following special topics may be particularly valuable additions to a GUIDES analysis.

 Forecasts of macroeconomic performance can suggest whether trends seen in the GUIDES analysis are expected to continue, and they directly measure the confidence that the public and expert analysts have in a country’s macroeconomy. See Exhibit 1: Sources for Forecast Data.

 Measures of a country’s Competitiveness and Country Risk Assessments provide information on how easy it is to operate a business in a country, incorporating measures of regulatory restrictions as well as political stability. See Exhibit 2: Sources for Competitiveness and Country Risk Data.

 Public Opinion Data can help a business leader gauge the direction of policy in a country. See the Harvard Kennedy School Library and Knowledge Services Public Opinion Research Guide http://www.hks.harvard.edu/library/research/guides/?guide=opinion and Exhibit 3: Sources for Regional Information. Using GUIDES in the Real World: Where to Find What Is Needed Business leaders can use the GUIDES framework in two ways to develop insights about an economy. First, they are most likely to use it as a checklist against which to evaluate country profiles prepared by a third party. Consumers of these profiles generally have limited ability to identify what is missing from them, but GUIDES makes that task much simpler. Second, when a proprietary or especially detailed analysis of a country is required, GUIDES provides a structure for completing an independent analysis of an economy using raw data. One key challenge in either approach to analyzing an economy is knowing where to look for the necessary information and data. In this section, we identify and discuss the key sources upon which business leaders can rely. Most major academic, public, and corporate libraries staff reference librarians to help locate and explain these resources.4 At the end of this section, we briefly discuss where to look for data not explicitly included in the framework that may be valuable for specific country analyses. Third-Party Country Profiles If the business leader’s objective is to develop a comprehensive, insightful perspective on an economy in a short period of time, third-party country profiles are a good choice. For example, the CFO of an EU consumer products company considering expanding into Latin America may want to compare the market opportunity there to what it was in Eastern Europe 10 years earlier, when the company first began operating in that region. Key to that comparison will be an understanding of the components of GUIDES for the two regions, as consumer demand is driven by the performance of the macroeconomy and the sustainability of that performance. Third-party profiles of the two regions (or of the major countries within the regions) are likely to provide sufficient data and analysis to make

this comparison possible, even with a tight deadline. GUIDES enables the CFO to check off the key indicators while digesting these profiles, lending confidence that the analysis is complete and making it easy to communicate findings to others.

The best of these profiles provide an overview of the macroeconomy, politics, and demography of a country, mixing trenchant analysis with key data. Other useful profiles may focus on a particular facet of a country such as its commercial sector or trade activities. A list of such sources is in Exhibit 4: Sources for Country Profiles, and a few of the key sources are briefly described here.

Many of the most important sets of profiles are paid for on subscription by firms and research libraries. Subscription sources are often more current, exhaustive, and user-friendly than freely available sources. In addition, they often have someone available to answer questions about the data. The Economist Intelligence Unit, affiliated with the publisher of the magazine, is a leading subscription-based provider of country profiles as well as of the data that inform them. Its coverage spans most of the countries in the world, and it is heavily relied on for the depth of its research as well as its breadth. For emerging markets, the ISI Emerging Markets database is an excellent resource. This user-friendly database is set up with a view for each country that provides macroeconomic data as well as reports on industries and companies in that country. The S&P Ratings Direct database is particularly useful for obtaining an overview of the financial situation in a country.

Free and reliable sources for country profiles do exist, however. The CIA World Factbook, for example, covers a broad range of countries and provides perspective on a wide range of topics, including economics. The dominant free source, however, is the set of International Governmental Organizations (IGOs), including the United Nations, International Monetary Fund, World Bank, and Organization for Economic Cooperation and Development. Each of these organizations prepares analyses of national economies (some are subscription-only), and their affiliation with governments helps ensure quality and accuracy of their reports. The IMF Country Reports and the OECD Economic Surveys are two prominent sets of such profiles.

When using GUIDES to evaluate third-party country profiles, the business leader will often find that a component of the framework is missing or underemphasized by the profile. In response, it is usually wise to check another source’s profile for the missing information. This also allows for a check on the accuracy of the first profile. If a number of profiles fail to address a component of GUIDES that the business leader thinks may be important, the next step is to try to fill that gap by finding the appropriate raw data. For this situation, and for the scenario in which a fully independent country analysis is required, the business leader needs to know where to look for specific macroeconomic indicators.

Raw Data

If the business leader’s objective is to develop a unique, subtle, and insightful perspective on an economy and sufficient time is available, third-party profiles may provide only a starting point for the desired analysis. Instead, direct analysis of the economic data may be required. This is a daunting task, as the data available can seem difficult to navigate. While GUIDES helps the business leader organize the data, finding and understanding the data is a prerequisite to analyzing it.

Providers of this sort of data can range from governmental agencies to private research organizations. As mentioned above, third-party profile providers often offer data along with their analyses. Depending on the business model of the source, information might be available from free

websites or a subscription service. For lists of such sources see Exhibit 5: IGO Sources for Country Economic Data, and Exhibit 6: Non-IGO Sources for Country Economic Data.

International governmental organizations (IGO) that either set or evaluate policy are dominant providers of a wide variety of data published in print and on the web. Having a better sense of their mandates and organizational structure can sometimes be helpful in determining which source is most likely to produce the data of interest. For some background information on some of these key IGOs, see Exhibit 7: International Government Organizations [IGOs] and their role in generating data. Similarly, regional organizations such as the European Union’s statistical office, Eurostat, can be particularly helpful when searching for data within or about a specific geographic area or zone. These regional sources will often also provide statistics at the metropolitan or city level. For a list of suggested sources, see Exhibit 3: Sources for Regional Information.

Statistical organizations within the U.S. government are excellent sources for foreign data as well. For an example of this, see the chapter on “Comparative International Statistics” in the annual Statistical Abstract of the United States. In addition, specific topics are often uniquely well-covered by U.S. government entities, e.g., the Energy Information Agency provides a vast amount of international and domestic data on the energy industry and markets.

Most countries (though not the United States) have a central statistical agency. These agencies are invaluable sources of raw data for GUIDES analyses. A list of portals to these agencies and other statistical data specific to countries is provided in Exhibit 8: Country Information Portals. In general, these portals link to reliable data sources. Nevertheless, the business leader using raw data, especially for countries with less well-developed civil administrations, ought to be cognizant that data are sometimes disputable. While the previous sources are recommended for initial investigations, searching the Internet may also prove important. For guidance on this see Exhibit 9: Guidance on how to effectively search for information on the Internet.

Finally, it is worth noting one under-utilized source for making the best use of raw data: printed versions of datasets. Often, the business leader looking at electronic data will be surprised by reported figures or confused by the technical terms used to describe the data. The paper publications of these data often offer accessible explanatory material and alternative breakdowns of data that can reveal insights hidden in the online version. For example, it is recommended that business leaders review the IMF’s International Financial Statistics (IFS) monthly publication alongside the data they retrieve from the IFS online product.

Challenges When Using Country Data

Accurate use of country-specific data sources requires the business leader to be aware of the differences across countries in how data are collected, organized, and presented.

For example, data categories may be unfamiliar in countries with atypical institutional structures, and research may be required to map them into the categories commonly understood in the business community, such as those used in GUIDES. More commonly, the categorization of data will be familiar, but the English used to describe the categories will not, as translation into abbreviated descriptions can be difficult. One example of this comes from the Central Bank of Brazil’s Annual

Report, vol. 42, 2006.5 That report’s Table 1.3 is titled “GDP real change rates—under the prism of production.” Translated to common terminology, that means “GDP—real growth rates by industry. “

Fortunately, most sources provide a telephone number and email address for inquiries. A telephone call usually elicits a faster response and allows for two-way conversations that lead to more accurate resolutions of confusion. In general, the staffs at statistical agencies are happy to explain and discuss the details of the data they work so hard to compile and communicate.

Of course, intentional manipulations and unintentional distortions to data are a real risk, especially at lower levels of government or in countries with weaker administrative infrastructures. General guidelines on evaluating data from websites are presented in Exhibit 10: Evaluating the credibility of free content on the Internet. To give a sense for the inaccuracies that find their way into official data, consider the following case.

According to the Nigerian national government, the population of Lagos State, the most industrialized in the country, is 9 million.6 According to Lagos State itself, however, its population is 17.5 million.7 This is no counting error. The national government is controlled by one ethnic group that wants to minimize the size of Lagos State, while Lagos State is controlled by another ethnic group that wants to maximize the size of Lagos State.

Political distortions to data are rarely this glaring, but knowing the political interests of the source of the data is an important component in assessing its reliability.

Much more often, technical considerations make data less reliable than it might at first appear. As long as these technical issues are unchanged over time, the trends in an indicator are likely to be informative even if the level of the indicator is unreliable or disputed. For example, variation in the size of the informal economy makes unemployment rates for some countries mean something very different from what they mean for others. As long as the informal economy stays the same size relative to the formal economy, however, a given change in the reported unemployment rate is likely to indicate a true underlying trend.

One challenge to analysis is when indicators that seem to measure the same thing have subtle definitional differences that generate large differences in what they report. For example, the U.S. Bureau of Labor Statistics has a household survey and an establishments (firms) survey, both of which measure the status of the labor market. Surprisingly, they sometimes imply markedly different patterns for employment, a divergence that has generated substantial study and debate over the last decade. The business leader trying to navigate such a situation will want to be aware, as much as possible, of these uncertainties when they materially affect the appraisal of economic performance. Fortunately, such debates are usually prominently discussed by the agencies that provide the data or in press coverage of the data.

Finally, avoiding mistakes in using country data is sometimes simply a matter of following one’s intuition that the figures seem suspect. In these cases, it is wise to turn to trusted sources to confirm the data. One such resource is the set of IMF Article IV Consultation staff reports. In these reports, filed

every year or two, IMF representatives discuss the economies of member countries with local officials and publish their results.8