Statistics: Key to Effective Institutions

Published on 9th March 2010

Hon. Pravin Gordhan         Photo courtesy
The financial crisis and the consequent economic crisis that has swept the globe, has had many negative results. Millions are out of jobs, the poor are suffering more, the achievement of the MDGs is placed in doubt and recent economics gains have been lost. Economic models have been fundamentally destabilized. Risk models and risk management are in crisis, and the world is searching for new frameworks and conceptual models for a more equitable and sustainable economic model.

 

I used to be a tax-collector. That was a lot more fun – there was a regular army of lawyers and accountants to make sure the law means what we want it to mean, and when I paid courtesy visits to business they knew exactly what was under discussion. At the end of the year we did a reckoning, and there was really just one number at the bottom of the page that really counted.

 

But this crisis has rendered economic development and the wider public finances a whole lot more complicated. It’s not just that countries are at different stages of development, and have to make difficult choices about their growth paths; it’s not just that there are many public spending priorities and limited resources to be allocated. It’s not just there is risk and uncertainty in every investment choice and in every economic projection or fiscal aggregate that forms part of the framework of numbers through which the public finances are disciplined over time. There is also complexity in the institutional, normative side of public finance management, the construction of social capital on which durable economic and fiscal progress must be built. And there are very real trade-offs between what we can achieve today, and what we build for our children and our children’s children. What we build in the realm of institutions, or rules and regulations, and of values and norms of behaviour, may well count for far more than what we construct on the physical landscape or measure in our trade and finance statistics.

 

That institutions are important is not a new insight, and of course it is true of the tax system, government service delivery, how businesses work and how civil society organisations interact. But what is new is that we have infinitely more data and data processing capacity at our disposal, and statistical analysis can increasingly be extended into territory that used to be regarded as non-financial, unquantifiable, social or philosophical. It is not that we no longer need political philosophy or anthropology or the arts. More than ever, we need to re-assert that to be human is to share humanity with others; that money-related measures are just one amongst many categories of value. Yet there are statistical applications and computing power at our disposal now, that can in very practical ways be brought to bear on so many aspects of life and service delivery that we used to think of as formal or institutional.

 

Modern supply chain management and procurement systems can use computer applications to improve integrity, transparency and competitiveness. Audit and fraud prevention programmes can use up-to-date information, crosschecked across a variety of administrative databases, to identify anomalies and trigger investigations long before the conventional audit follow-up procedures would indicate a problem. Social insurance and risk analysis can make use of much denser, up-to-date data resources to improve targeting, reduce abuses and more rapidly respond to needs. Financial and economic regulatory agencies have far greater access to data than ever before, and clearly have to find ways of using this information to protect the public better without violating individual privacy or unduly interfering with business competitiveness.

 

In all four of these areas, we have seen monumentally large failures of responsibility over the past three years: failures to connect and understand information properly, and failures to link accountability and responsibility across interacting categories of decision-makers, advisors and transacting agents.

 

This has implications for what actuaries do, what responsibilities they take on and how. But I hope I can also encourage you to reflect on the implications of the technological possibilities of statistical and data management power in the extraordinary times we live in, when data flows are no longer measured in gigabytes and terabytes, but we are told to think in terms of exabytes and zettabytes and yottabytes. We have, to put it simply, far more surveillance capability than even before, and far more data-mining and analytical power than was available to our predecessors.

 

And so the role of the actuary, who is pre-eminently a statistical analyst, has so much more scope than ever before. Yes, one trained professional with a handheld computer can do in 20 seconds what a room full of students might have taken a month to do a generation ago. But the intellectual challenge before us is to find new ways of using data and statistical analysis that contribute to addressing not just the economic and financial but also the institutional and social challenges before us.

 

It is reassuring to know that we can explore options against the background of a century of well-documented experience of other countries – but it rather complicates the reform process that there are so many permutations to consider and the advisory chorus is not always entirely harmonious…Like many other professions, actuaries also need to grapple with and find answers to several contemporary challenges and issues: 

  • Promoting and deepening professional responsibility and public – spiritedness;
  • Understanding that statistical analysis is not just an informational artifact but also contributes to the "integrity" and effectiveness of institutions;
  • Balancing client interest versus public interest – with a greater leaning to the latter;
  • Enhancing both the codes of ethics and management of conflict of interest;
  • Revisiting risk, enhancing ERM, and incorporating the lessons of the recent ”black swan” events;
  • Being aware of the dangers of short-termism and the long term implications of daily decisions and advice;
  • Governments have become increasingly the insurers and assurers of last resort – what are the new forms of moral hazard that are emerging?
  • Building public trust and confidence and accountability through “deobfuscation”, information accessibility and transparency
  • Recognising that we live with unsustainable economic and social imbalances in the world and that the global future brings great uncertainty;

 As a profession trained to deal with the future and its likely probabilities, you have both an unenviable task and exciting possibilities to connect the dots and evolve new conceptual frameworks to not only understand the world but change it.

 

By Pravin Gordhan, Minister of Finance, South Africa

 

Culled from his Keynote address during the International Congress of Actuaries, Cape Town.


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