Wednesday, January 27, 2010

Failed State Index: China in Worsening Economic Decline

In looking at the Fund for Peace/Foreign Policy Failed State Index the other day, I made a list of fastest degrading countries and was surprised to see China on it:

There it is in position 6 on that list, having gone from an overall score of 72.3 in 2005 to one of 84.6 in 2009.  It is only 5 points from hitting the 90 threshold to be on "Alert" status - the highest category on the list, along with such basket cases as Zimbabwe, Somalia, and Afghanistan.  If the average trend of the last five years were to continue, it would reach this status in about 2011.

This seems odd, given the general impression of China as a burgeoning superpower, and so the question: does this say something bad about China, or something bad about the data quality of the Failed State Index?

To try to gain some insight on that question, I took a look at the internals of the index for China - in what way exactly is the index claiming that China is going to hell?

To remind you, here is the list of measures, along with a shorter phrase I can use in a graph legend:
  • I-1. Mounting Demographic Pressures (Demographic Pressure)
  • I-2. Massive Movement of Refugees or Internally Displaced Persons creating Complex Humanitarian Emergencies (Displaced People)
  • I-3. Legacy of Vengeance-Seeking Group Grievance or Group Paranoia (Vengeance Seeking)
  • I-4. Chronic and Sustained Human Flight (Human Flight)
  • I-5. Uneven Economic Development along Group Lines (Uneven Development)
  • I-6. Sharp and/or Severe Economic Decline (Economic Decline)
  • I-7. Criminalization and/or Delegitimization of the State (Criminal State)
  • I-8. Progressive Deterioration of Public Services (Deteriorating Services)
  • I-9. Suspension or Arbitrary Application of the Rule of Law and Widespread Violation of Human Rights (Human Rights)
  • I-10. Security Apparatus Operates as a "State Within a State" (State within State)
  • I-11. Rise of Factionalized Elites (Factionalized Elites)
  • I-12. Intervention of Other States or External Political Actors (External Intervention)
Here is my graph of how these indexes have been evolving over time for China:

So the largest component of the worsening score is that "Sharp and/or Severe Economic Decline" has gone from 0.5 to around 4.5.  Now, whatever else you can accuse China of, with a GDP growth of 8%-12% a year, large trade surplus, and huge foreign reserves, it's hard to see how you can accuse it of any appreciable degree of "Sharp and/or Severe Economic Decline".  If China was in economic decline during the late 2000s, then black is white and pigs can fly.  If there's any country in the world that should get a zero here, it's China.  A 0.5/10, ok, I can grant.  But 4/10 or 4.5/10?

For example Spain in 2009, in the midst of major post-bubble recession, has a score on economic decline of 1.3.  In what sense was China in significantly greater economic decline than Spain in 2009?

Wanting to make sure the error was not mine, I went back to the original websites to check the numbers again.  Here's the 2005 version (see the 0.5 in the sixth slot over)

and here's the 2009 version: (now 4.5 in the same slot)

There will be no more blogging about the Failed State Index until further notice.  This is nonsense, and so clearly the index cannot be relied on to draw any kind of conclusions about the world until there are major improvements in the methodology to avoid obvious gross errors.  Economic decline is one of the few things on the Failed State Index measures for which there are reasonable quantitative indicators: the IMF produces GDP estimates for just about all the countries in the world, so it's easy for others to figure out if a given country's economy is contracting or growing.  If the Fund for Peace can't get "Economic Decline" in the largest population country in the world right, then they certainly don't deserve a big spread in Foreign Policy magazine every year.


Steve From Virginia said...

I agree with your approach. Mexico is a better candidate - at the moment - than is China.

However, this can change in a heartbeat. China's official GDP figures probably measure inflation. China cannot afford to cut back on stimulus - as it keeps the bogeyman of world- wide deflation at bay. Consequently the bubbles in stocks and real estate expand. To prevent these from deflating the PBOC is likely to add even more funds levered from increasing 'hot money' flows in all currencies that form China's reserves. More funds, more inflation, more hot money .. the outcome is likely default in an unorthodox form.

Even after such a default, China becoming a failed state like Somalia ... is hardly likely. China has experienced far worse than a currency collapse in its past. Genghis Khan, Imperial Japan's occupation and the civil war come to mind. China endures, but as a form of quasi- America ... never.

squashpractice said...

Here is the "official" explanation for the change from 0.5 to 4.5 that you are concerned about from the Fund for Peace website:

Economic Indicators

China’s uneven development rating increased from a score of 9.0 in FSI 2005 to 9.2 in FSI 2006. Major development projects were implemented all across China immediately after the announcement of the 2008 Beijing Olympics, but the nation continues to suffer from a stark contrast between poor rural areas and coastal urban developments. The economic indicator rose from 0.5 in FSI 2005 to 4.5 in FSI 2006, due to a variety of factors, including lack of growth in rural job opportunities, persistent corruption and other economic crimes, and the immense environmental damage and social conflict resulting directly from the fast-paced development and land grabs by local politicians that are impoverishing and displacing peasants.

I have to admit - I don't see how you can quantify any of these indicators very reliably.

Stuart Staniford said...

squashpractice - well, I can all of those as arguments for the "Uneven development" indicator to worsen (though in fact there's been a huge build-out of rural housing too). But they don't make any sense as arguments for the "Sharp economic decline" indicator. I just don't see how any reasonable analysis can view a massive infrastructure and housing buildout as an economic decline. A reasonable person could argue that it's unwise, that it will have environmental impacts, that it should cause an increase in the corrupt government indicator, or that it isn't sustainable and might lead to risks of decline in the future. But it just seems to me flat out senseless to consider it as actual evidence of a concurrent economic decline.

Stuart Staniford said...


I don't agree that Chinese growth is mainly inflation (ie illusory). While there's certainly scope for wondering about the accuracy of the figures, there's little doubt that there's large amount of actual concrete-and-steel economic growth with new buildings, roads, and railways. If you don't believe the official stats, just look at satellite pictures. You can see the steel production figures, for example, at the world steel association. Chinese steel production went from 356Mt in 2005 to 567 Mt in 2009. Hardly a sign of "sharp economic decline".

Greg said...


Now if the Fund for Peace had used "environmental decline" instead of economic decline... that's it! They're dyslexic!

Humour aside, environmental pressures ought to be on their list of measures.

Greg said...

Coincidentally, Yale has just released its environmental performance index: China is not in the "basket-case" category, but not doing well, either.

Stuart Staniford said...

Greg: Interesting! I wasn't aware of the EPI - looks intriguing.

stevensonfinancialmarketing said...

Thank you for this data and analysis.

I find the numbers to be consistent with China' worsening economic situation and rather dismal longer term prospects given the loss of their demographic dividend due to the one child policy. I will provide you some links showing why economists believe that China is headed for economic implosion, and is already showing signs of serious recession.