[ad_1]

For more than three years, Steve Hanke, an economist at Johns Hopkins University’s Department of Environmental Health and Engineering, has been computing inflation rates for more than twenty developing countries and claiming that the official inflation rates of these countries have been deliberately underreported by their statistical agencies.

He calls them liars who churn out rubbish. They include Laos, Ghana, Iran, Turkey, Nigeria, Lebanon, Egypt, Zimbabwe, Lebanon, Pakistan, Sri Lanka, Argentina, Venezuela, Sudan, Syria, Ukraine, Myanmar, Malawi, Algeria, South Sudan, Columbia, South Africa, Sierra Leone, Columbia, etc. On May 5, 2023, he wrote “The Pakistan Bureau of Statistics released its inflation figure for April at 36.42%/yr. It’s bogus. Today, I accurately measure inflation in PAK at 62%/yr, That’s 1.7x the official rate.

The PBS produces rubbish.” On April 30, 2023, he wrote “Inflation in #Malawi shows no signs of slowing down. Today, I accurately measured Malawi’s #inflation at a punishing 63.85%/yr. That’s nearly 2.5x the “official” rate of 27.00%/yr. Malawi’s National Statistics Office continues to publish rubbish.” and “Today, I accurately measure inflation in #Ghana at a stunning 65.75%/yr, 1.46x the Ghana Statistical Services’ (GSS) phony official rate. The GSS just continues to churn out RUBBISH.” And on April 20, he wrote “I accurately measured #Egypt’s inflation at 74%/yr, over 2x the Central Bank of Egypt’s reported Jan 2023 headline inflation of 32.67%/yr. The CBE & Governor Abdalla are publishing rubbish.” (https://twitter.com/steve_hanke).

Interestingly, Steve Hanke does not accuse the statistical agency of Argentina of lying or publishing rubbish. For example, consider these two tweets:

Apr 22, 2023: “In Argentina, Pres. Fernandez, in a rare moment of clarity, announced he won’t be seeking re-election in the upcoming elections. Good riddance. His disastrous economic policies have left ARG’s economy teetering at the edge of collapse. Today, I measure ARG’s inflation at 133%/yr. … Official inflation rate (March 2023): 104.3%.”

Apr 27, 2023: “In this week’s Hanke’s Inflation Roundup, #Argentina is in 4th place. On April 20, I measured ARG’s inflation at a punishing 132%. It’s time for Pres. Fernandez to get serious and officially dollarize. … Last recorded official rate in January 2023: 98.80%.” Why didn’t Hanke measure Argentina’s inflation in January 2023?

The statistical agencies of Ghana, Nigeria, Zimbabwe, etc have responded to Steve Hanke. According to the director of Zimbabwe’s Statistical Agency, Taguma Mahonde “… Hanke’s views only became aggressive after he failed to secure advisory roles in President Emmerson Mnangagwa’s administration in 2018.” (https://www.newsday.co.zw/headlines/article/72/hanke-fires-back8230-zimstat-boss-talking-rubbish-says-us-economist).

On October 14, 2023, the Ghana Statistical Service (GSS) issued a press release in which it challenged Steve Hanke’s methodology for calculating inflation. In his response, Steve Hanke posted the following tweet: “Ghana Statistical Service statistician Samuel Kobina Annim claims that my measure of inflation for Ghana has a “major weakness.” Wrong. Prof. Annim should spend some time with the scientific literature. He should start with Hanke-Bushnell, linked here.”: https://www.ghanaweb.com/GhanaHomePage/NewsArchive/Spend-some-time-with-scientific-literature-Prof-Hanke-tells-Prof-Annim-1643615

This is nonsense. It is Professor Steve Hanke, not Professor Samuel Annim, who has to learn from the scientific literature.

1. Steve Hanke incorrectly uses a theory known as (relative) Purchasing Power Parity (PPP) to compute inflation rates. Relative PPP is a theory that postulates a relationship between exchange rates and inflation rates. Researchers test the validity of PPP by using official inflation rates and market exchange rates. It is the validity of the theory of PPP that is tested, not the validity of official inflation rates or market exchange rates. Scholars test theories. A pioneering work in this literature was in 1976 by Jeffrey Frenkel of Harvard University.

For example, in “Purchasing power parity in high-inflation countries: further evidence”, which was published in 1994 in the Journal of Macroeconomics, the authors stated that “In this paper, we attempt to test the empirical validity of PPP as a long-run equilibrium relationship in a sample of thirteen “high-inflation” countries using quarterly data over the “modern floating” period and recently developed techniques of cointegration and error-correction model. We find empirical evidence in favor of absolute or relative versions of PPP in Argentina, Brazil, Israel, Mexico, Peru, South Africa, Uruguay, and Yugoslavia. Our results, when analyzed in conjunction with actual inflation rates of these countries, suggest that PPP may hold over a range of inflationary experience; although it is likely to hold more consistently where the inflation rate is very high.”

They tested the validity of the theory of PPP, not the validity of inflation rates reported by statistical agencies. The first sentence in Edison (1987) is “This paper addresses the question of whether purchasing power parity (PPP) is valid in the long run,’ even though it has failed to explain short-run movements in exchange rates.” These papers use econometrics techniques to test the validity of PPP. Hanke does not use any econometrics.

2. Steve Hance does not follow the scientific literature. He does not test PPP theory. Instead, he assumes that PPP is a valid theory and then concludes that a country’s statistical agency is lying if his computed inflation rate is different from the official inflation rate. This is NOT what researchers in the field do. He also assumes that the dollar-domestic currency exchange rates (in the case of Ghana, the dollar-cedi rates) and the USA’s inflation rates are valid.

3. Following Hanke’s dubious methodology, one can take the inflation rates of the UK and USA, put these rates in the PPP formula (theory), and conclude that if the calculated dollar-pound sterling rate is not the same as the dollar-pound sterling rates in forex markets, then the dollar-pound sterling rates in forex markets are wrong. That’s patently preposterous. I did this for Canada’s inflation rate in September 2022 (see appendix). The computed inflation rate was 13.733%, 1.99 times (almost double) the official Canadian inflation rate of 6.9% (in September 2022). Thus, Statistics Canada has under-reported Canada’s inflation rate by 50%. So, using Hanke’s methodology, Statistics Canada is also publishing rubbish.

4. In Hanke and Kwok (2009, p. 357), the authors say that “There is a consensus among economists that, over relatively short periods of time and at relatively low inflation rates, the link between exchange rates and price levels is loose. But as inflation rates increase, the link becomes tighter.” Then in Hanke and Bushnell (2017, p. 6), the authors say that ” … to qualify as hyperinflation, the inflation rate had to be at 50% a month. Hanke adopted this convention.” Thus, before applying the PPP formula, he needs an independent source of inflation rates to determine whether a country has high inflation or hyperinflation. These must be official inflation rates by statistical agencies. Why then does Steve Hanke claim that he is applying relative PPP to high-inflation economies and yet cast doubt on the official inflation rates reported by the statistical agencies of the same countries? This makes no sense.

By the way, Hanke and Bushnell (2017) and Hanke and Kwok (2009) were published in the Cato Journal (published by the Cato Institute) and World Economics. These are not good journals in Economics. Steve Hanke cannot publish his dubious work on inflation in good macroeconomics journals like the Journal of Monetary Economics; Journal of Money, Credit, and Banking; Journal of Macroeconomics; American Economic Journal: Macroeconomics; Journal of International Money and Finance, etc. The editors may not even send his work to reviewers.

5. Imagine an experimental physicist who decides to test Albert Einstein’s famous equation, E = mc^2 (i.e., energy, E, equals mass, m, times the speed of light, c, squared). Suppose that when the physicist’s numerous tests do not support Einstein’s equation, the physicist concludes that his measurement of mass must necessarily be wrong. That is Steve Hanke’s logic.

6. The Economist magazine uses the same PPP methodology when it computes its Big Mac index of exchange rates. It doesn’t say that its computed exchange rate is more accurate than market exchange rates. Its economists know the limitations of its methodology. The Economist says that “The big mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. Burgernomics was never intended as a precise gauge of currency misalignment.” (https://www.economist.com/big-mac-index)

7. If it was so easy to sit in one’s office and calculate inflation rates without collecting data for the market prices of goods and services, why do countries invest resources in statistical agencies like the US Bureau of Statistics, Statistics Canada, Office of National Statistics (UK), Statistics Bureau of Japan, etc to collect data and compute inflation rates?

8. We can quibble about the accuracy of the GSS figures. There are standard arguments … Using Hanke’s nonsensical methodology is not one of them. When we do not find official inflation rates credible, we question the weights assigned to various commodity groups, look at the narrow set of goods and services, not the entire goods and services in the CPI basket, that we consume etc. Different consumers purchase different subsets of goods and services (e.g., kenkey, transportation, electricity, water, etc) in the CPI basket more frequently than other subsets of goods and services. Like the six blind men who touched different parts of an elephant, we may have different realities of the cost of living. Thus, official inflation rates may be at variance with our “lived experience”. We do not need Steve Hanke’s dubious methodology to validate our “lived experience”.

One should not assume that Steve Hanke cannot be wrong because he is a professor at Johns Hopkins University and has advised the governments of several countries. It does not change the fact that his use of relative PPP is irresponsible. For an academic, his conduct is very shameful and embarrassing.

References

Edison, H. J. (1987). Purchasing Power Parity in the Long Run: A Test of the Dollar/Pound Exchange Rate, 1890–1978. Journal of Money, Credit and Banking.

Frankel, J. (1976). A monetary approach to the exchange rate: doctrinal aspects and empirical evidence. Scandinavian Journal of Economics.

Hanke, S.H., and Kwok, A.K. (2009). On the measurement of Zimbabwe’s hyperinflation. Cato Journal.

Hanke, S.H., and Bushnell, C. (2017). On measuring hyperinflation: the Venezuela Episode. World Economics.

Mahdavi, S. and Zhou, S. (1994). Purchasing power parity in high-inflation countries: further evidence. Journal of Macroeconomics.

Appendix

A1. Steve Hanke uses the formula below (which was not discovered by him):

Inflation (annual) in Ghana up to a given month = (1 + US inflation rate during the twelve-month period)(1 + annual percentage change in the number of cedis to buy 1 US dollar during the twelve-month period) – 1.

Note, from the formula, that it does NOT use market prices in Ghana. It uses the inflation rate in the USA and the depreciation of the cedi. Statistical agencies collect market prices. Hanke does not. He sits in the comfort of his office, goes online, and computes rubbish. When the rate of depreciation of the cedi is high, the inflation rate, using this formula, will be high and will significantly diverge from the official rate.This does not mean that the formula is right. Otherwise, it would have been right for two very integrated economies like the USA and Canada. But it is not.

When I applied this formula to calculate Canada’s inflation in September 2022, I got:

Inflation in Canada in September 2022 = (1 + 0.082)(1 + (1.3319 – 1.2671)/1.2671) – 1 = 13.733%.

Note that 13.733% is 1.99 times (almost double) the official Canadian inflation rate of 6.9% (in September 2022). Thus, Statistics Canada has under-reported Canada’s inflation rate by 50%. So, using Hanke’s methodology, Canada is also lying. If you apply the formula to compute the inflation of any country, the computed inflation rate rate will be very different from the official inflation rate. Why? Because the formula is not meant for computing inflation and then claiming that it is more accurate than official inflation rates.

Why does he apply the formula above to only developing countries: Jamaica, Ghana, Malawi, Turkey, Pakistan, Myanmar, Sierra Leone, Egypt, Sri Lanka, etc? If he wants to prove that his methodology is sound, he should apply it to Canada, Germany, Japan, UK, etc. As I have demonstrated in the case of Canada, his computed rates will be very different from official rates.

A2. On April 10, 2023, he calculated Ghana’s inflation rate at 53.76%. The official rate was about 52.8%. He did not accuse the GSS of lying or publishing rubbish because the difference between 53.76% and 52.8% was very small. Then three weeks later, he accused the GSS of publishing rubbish ( No intellectual consistency or integrity.

A3. Computing Ghana’s inflation in September 2022 using Hanke’s dubious methodology.

Official inflation in USA in September 2022: 8.2%

Official inflation in Ghana in September 2022: 37.2%

US dollar-cedi rate in September 2022: $ US 1 = 10 cedis

US dollar-cedi rate in September 2021: $ US 1 = 6 cedis

Inflation in Ghana in September 2022 = (1 + 0.082)(1 + (10 – 6)/6) – 1 = 80.332%.

On September 26, 2022, Steve Hanke tweeted “Thanks to president Akufo-Addo, Ghana’s economy is in the tank…. Today, I measure Ghana’s inflation at 84%/yr” ( The slight difference (80.33% vrs 84%) between my figure and Hanke’s figure is the result of slightly different cedi-dollar exchange data. If I use $ US 1 = 10.2 cedis (in September 2022) instead of $ US 1 = 10 cedis, the calculated inflation rate is 83.94%, almost 84%.

**DISCLAIMER: **The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.

[ad_2]

Source link