By Abdul Haris Nasution
KUALA UMPUR, Malaysia: In the swirling complexity of today’s global economy, it’s easy to latch onto a single number or index and assume it tells the whole story. But in reality, many economic indicators, especially diffusion indexes, often paint a picture that is far from the ground truth. A diffusion index, at its core, is a tool that tracks how a particular economic indicator spreads across sectors. It’s like a macroeconomic radar, scanning the landscape for signals of strength or weakness. In theory, it helps us identify patterns and spot trends, much like a weather vane in an unpredictable storm.
Take the Purchasing Managers' Index (PMI) or Japan’s Tankan survey. These diffusion indexes are hailed as early warnings of economic shifts. When the PMI crosses 50, it’s like a green light telling us that the manufacturing sector is expanding; fall below 50, and it's flashing red. Yet, relying too heavily on these metrics can be dangerous. Why? Because they offer a snapshot, not a full panoramic view. Sure, they tell us if more companies report positive versus negative conditions, but they don't capture the magnitude or underlying dynamics of those shifts. Are these firms barely treading water, or are they surging ahead at full speed? That’s a crucial distinction lost in the headline figure.
The same goes for predicting future trends. While a diffusion index might hint at the general direction of the economy, it’s often slow to capture turning points or structural changes that can upend conventional wisdom. It’s the difference between seeing the ripples on the surface and understanding the undercurrents below. A diffusion index may show a sector expanding, but does it account for which industries are driving that growth? Is it a handful of tech giants, or is it a broader-based recovery? Without context, these numbers can become disconnected from the actual situation on the ground, leaving policymakers and investors chasing shadows instead of reality.
In Malaysia, two diffusion indices produced by the Malaysian Institute of Economic Research (MIER) have long been touted as vital economic barometers—one tracking business confidence, the other consumer sentiments. Yet, the truth is far less reassuring. Statistical analysis has shown that these indices often fail to align with actual economic data, sometimes even defying prevailing trends. It’s no wonder the Monetary Authority of Singapore (MAS) decided to stop paying attention to them altogether.
Despite calls to retire these flawed metrics, a stubborn economist dug in and insisted they remain relevant. In a twist of bureaucratic persistence, these indices were woven into the fabric of Malaysia's now-defunct National Recovery Council (NRC). And what became of it? The NRC has yet to publish a single report. Where are the supposed recommendations for guiding the country through the pandemic's economic fallout? How much did businesses lose, how hard was GDP hit, and what about the devastation to the informal economy and social fabric? We’re left with silence.
This is a textbook case of economic indicators that fail to reflect the reality on the ground? It begs the question: where is the accountability? Taxpayers deserve answers, not a set of metrics that are out of sync with the actual pulse of the economy.
Somehow, this determined economist managed to persuade the Malaysian Industrial Development Authority (MIDA) to adopt the same flawed set of diffusion indices from MIER to track business performance. Whether any adjustments were made to MIER’s original questionnaire remains unclear. But here’s the kicker—the final product, a slim report of about six pages, is sold for around 200 Malaysian Ringgit. Meanwhile, out in the marketplace, you’ve got far more robust alternatives like the Business Confidence Index or the Business Optimism Index, widely available and arguably superior. So why the duplication? Why cling to a redundant set of metrics when better tools are already on the shelf?
Clearly, drinking too much brandy with lemon clouds Solomon’s judgment (Leman Brandi), especially when paired with an overload of mutton curry. Always striving but rarely succeeding, even in marriage, Solomon would be far more effective —and perhaps more successful in life (marriage & mutton curry) —if he stayed sober.
*Abdul Haris Nasution is a scholar of Southeast Asian Studies.*
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