LONDON – “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law was first articulated by the British economist Charles Goodhart in the 1970s.

Column: Sanctions enforcement and Goodhart's Law- oil and gas 360

Source: Reuters

Goodhart was expressing policymakers’ frustration that as soon as a particular aggregate of the money supply was chosen as an intermediate target its previously stable relationship with inflation quickly broke down.

He was writing as a central banker, and this month received a lifetime achievement award from Central Banking magazine for work on monetary policy and financial supervision in Britain, Hong Kong and New Zealand.

But anthropologist Marilyn Strathern subsequently reformulated the law as a more general problem of measurement and accountability in any organisation or system.

“When a measure becomes a target, it ceases to be a good measure,” she wrote (“Improving ratings: audit in the British university system”, Strathern, 1997).

Goodhart’s Law is pervasive in commodity markets and explains why much of the official data on production, consumption and trade flows is incomplete at best and inaccurate at worst.

From the moment the Organization of the Petroleum Exporting Countries (OPEC) started to agree production allocations, also known as “quotas”, in the early 1980s, members were suspected of misreporting their output.

OPEC members’ own self-reported output numbers became so unreliable the organisation came to rely on independent media estimates, commonly described as “secondary sources”, to assess compliance.

Members had been cheating even before the introduction of production allocations. In the 1970s, OPEC tried to control the market by specifying minimum selling prices, leading to a system to secret discounts.


In the oil market, the latest incarnations of Goodhart’s Law concern customs statistics (intended to aid tax collection and measure trade flows) and the automatic information system for vessel tracking (intended to improve maritime safety).

Both systems are increasingly employed for sanctions enforcement, which has created an incentive for evasion and undermined their usefulness for their original purpose.

Iran’s oil exports are increasingly relabelled as exports from other countries in customs declarations and trade statistics to evade sanctions imposed by the United States.

Disguising the origin of imports, mislabelling or mischaracterising them, even not declaring them to customs at all, to avoid import controls and taxes has been going on for centuries.

Private smuggling activity is normally (incompletely) restrained by the threat of criminal penalties and enforcement activity by revenue collectors.

But the financial incentives for smuggling are high and it becomes considerably easier if it is openly or tacitly encouraged by the governments of the exporting or importing states, or both.

In the case of Iran’s petroleum, both buyers and sellers have an incentive to disguise the oil’s origins, introducing a fictional element into customs statistics for several oil exporting and importing countries.

China is reportedly buying increasingly quantities of crude from Iran, reported in official statistics as sourced from other countries (“China’s Iran oil imports seen hitting new high in March, curbing OPEC output options“, Reuters, March 30).

China’s imports from elsewhere have surged even as its imports from Iran have reportedly fallen to zero (“China’s crude imports from Oman, UAE jump as Iranian barrels fall”, Reuters, March 21)

The same problem has undermined compliance with vessel tracking systems, with sanctions-busting vessels switching off their AIS transceivers to disguise the origin and destination of cargoes.

Given that so much enforcement relies on tracking financial transactions through the international payments system, it is reasonable to assume the accuracy of payments data is also degrading.

Long before the growth of extraterritorial sanctions in the last 20 years, inflated sales invoices were a common way to transfer cash across international borders and evade capital controls.


In some cases, the incentive to evade controls introduces minor inaccuracies. But Goodhart’s Law underscores the risk it will fundamentally change the behaviour of the statistics or undermine their usefulness entirely.

Financial regulators have repeatedly discovered the attempt to impose lending controls to reduce credit risks or control credit growth has simply caused the credit creation process to migrate to unregulated institutions.

In OPEC’s case, Goodhart’s Law ensured the production statistics of member countries became widely suspect and are no longer relied on by either the organisation or oil traders.

Reliance on customs declarations, AIS and financial transaction data for sanctions enforcement and monitoring the implementation of trade deals has the potential to reduce the usefulness of all these data sources.

Intensifying sanctions enforcement and the multiplication of trade restrictions between the United States and China is already adversely affecting the accuracy and transparency of official statistics.

So far, the impact is limited to a relatively small number of transactions, but if the bilateral economic relationship continues to deteriorate, the adverse impact is likely to grow.

In an era of growing trade restrictions, countries will not willingly share information that could harm their own interests, and the quality and completeness of statistics will suffer.

John Kemp is a Reuters market analyst. The views expressed are his own.

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