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Tuesday, Jan. 22, 2008
EDITORIAL
The shrinking Chinese economy
Forget defense buildups. There are far easier ways to deal with the "China threat." Just crunch the numbers. A recent recalculation by the World Bank has shrunk the Chinese economy by some 40 percent. This should quiet the alarmists who maintain that China's dominance is just around the corner. China is big and a geopolitical force to be reckoned with. But there is little chance that it will overtake Japan or the United States any time soon.
Economists use various tools to measure economies. Total economic output is a simple yardstick, but it is inexact. Prices differ from country to country so some standardization is needed to make meaningful comparisons. The most famous measure is the "Mac Index," which uses the price of a McDonald's hamburger as its indicator. If a Big Mac costs ¥300 in Tokyo, and $3 in New York, then a dollar is worth ¥100. The number should then be used to make comparisons of Japan and the U.S. This is called finding purchasing power parity (PPP) to ascertain an economy's real size.
Meaningful analysis requires data. China had not participated in price surveys so the baseline that economists used to calculate Chinese prices was based on 1985 data, which assumed $1 was worth 2.1 yuan. Recently, the Beijing authorities allowed data collection on over 1,000 items. Using this information, the economists concluded that $1 was actually worth 3.4 yuan. As a result, the calculation of China's GDP in 2005 shrank from $8.8 trillion to $5.3 trillion, a 40-percent reduction — it is as if half of Chinese wealth had disappeared.
While PPP provides some perspective, it is controversial. The data it uses is vulnerable to the usual problems that come with collecting information. And Chinese statistics are notoriously unreliable for all sorts of reasons: poor reporting infrastructure (not uncommon in developing countries), a tendency to inflate results for political purposes and secrecy concerns (lots of ordinary data is restricted for sometimes unfathomable explanations). As one indication of the elasticity of Chinese data, two years ago, Chinese economists concluded that national output was underestimated by 17 percent. Other economists object that PPP merely tells us that prices are lower in poor countries. And if the government sets exchange rates — as is the case in China — then the calculations are subject to political constraints.
So, do the new numbers matter? Yes. First, they tell us that the hyperventilation about China's inexorable rise and how it is "certain" to displace Japan and the U.S. as leading economies are just that: exaggeration. China has a long way to go before it overtakes either of those economies.
Second, with a reduced economy, China is poorer than it was. GDP per capita has been considerably reduced — population has stayed constant while total economic output has shrunk. That means much of the poverty reduction for which China has been applauded has not in fact occurred. Moreover, the grand plans to tap the expanding middle class market in China should be shelved, for a while at least: that market does not yet exist.
Third, if China is not as rich as thought, then it will be more difficult for Beijing to finance its ambitious defense modernization plans. It will also be harder to pay for the infrastructure development that is needed, along with all the other social improvements that a modernizing country needs. This has political implications too. The strains in Chinese society are unmistakable. The government needs wealth to pay for measures that can remedy those strains. These calculations mean there is less revenue available for those purposes.
The recalculations may also have an impact on international financial institutions. Developing countries have been lobbying for a reallocation of voting rights within organizations such as the International Monetary Fund, arguing that the current distribution of votes disadvantages them. They have pressed for an allocation based on PPP, asserting that such a move would raise the status of developing countries.
Shifting the standard would give them more say than they currently have but the new calculations suggest that a move would not be as helpful as envisioned: China's share of the global economy in terms of PPP fell from 14 percent to 9.7 percent. To take another example, India's share dropped to 4.3 percent from 6 percent. In both cases, the share determined by PPP is larger than that measured by market exchange rates — China has 5 percent of world GDP, and India less than 3 percent — but the case is less compelling than before.
Of course, mere recalculation does not mean that anything of substance has vanished or that China has somehow significantly changed. It should impact our perceptions, however, and focus attention on what is at hand, rather than sometimes illusory projections of intangible strength and influence. T |
