Wednesday, October 8, 2014

China is the world's largest in one way

The IMF today announced China now has the world's largest economy in terms of purchasing power, but jumping to the conclusion that China is number one also needs to take into account a lot of other factors:

  1. In terms of the raw size of the economy calculated by real GDP they are still only around $10 trillion versus America's $17 trillion.
  2. China and the United States have roughly the same distribution of income. This will have long-term effects on the power dynamics of China's government and access to opportunity.

Other things about China's economy I must point out:
  1. China's GDP was 44% from industry in 2013. It has been in the 40s since about the 1980s, which shows that their economic growth has been unusually even across all industries. This is probably due partially to keeping their currency artificially deflated by printing lots of currency to keep it cheap relative to the US dollar, which is probably the largest dispute between the two countries today. This is very different from the narrative that we often hear about China. (IMF)
  2. Their GDP per capita PPP is currently around $13,000 while the US is around $54,000. There is no question that the US beats China on this metric and it is going to take a long time for China to catch up to us on this. GDP matters for geopolitics, but China won't be a really serious contender for being the world's strongest power until their GDP per capita gets above the middle income stage, which is where it is right now. (IMF)
  3. Leaving inequality aside, and using statistics that sidestep this issue, America currently has the 4th highest median household income (which controls for inequality) in the world at around $31,000 (World Bank), while China's median household income is around $4,600 (27000 RMB) which shows a massive difference in the income of people in the United States and China. China has a long way to go to meet us on this mark. http://econweb.tamu.edu/gan/Report-English-Dec-2013.pdf
  4. When it comes to Household final expenditure per capita the United States is currently around $31,000 and China is at $1,300. China is rapidly rising and hopefully will continue to rise in the future. (World Bank)
  5. They rank 91st on the Ease of Doing Business Index, the United States ranks 4. The best city in China to start a business is Hangzhou and it takes an average of 31 days to start a business, which is close to the national average, versus an average of 5 days in the United States. The amount of capital you need to pay in on average is 71% of national income in China versus 0% in the United States. This has a very real effect in the ability of entrepeneurs who are not well connected and already wealthy to start a business.
  6. The rate of poverty in China below $5 a day remains above 50%, though the rate of poverty under $1.25 a day has plummeted from around 63% in 1992 to 6% today (adjusted for price inflation). China has come a long ways in the reduction of poverty and there is still a long ways to go in its reduction still. The trend however is towards less poverty.
  7. China currently has large problems with corruption, ranking at number 80, while the United States ranks at number 19. This is a deep threat to the economic and social stability of China. http://cpi.transparency.org/cpi2013/results/
IMF data: https://www.imf.org/external/datamapper/index.php

http://www.newsweek.com/chinas-economy-overtaekes-us-worlds-largest-276104

So the future of the global economy is going to see China continue to grow, and this will be a good thing for people in China. The following policy changes would fix or at least start to fix the current problems:

  1. Make it easier to start a business. This will immediately increase the demand for workers, push wages up, which will decrease their GINI coefficient, which will increase their multiplier, which will in the medium run increase their GDP growth again.
  2. Open up private banking to increase investment opportunities.
  3. Bring back the state health care system.
  4. Increase access to education in rural areas.
  5. Repeal all restrictions on migration around the country to increase the ability of people to seek out new economic opportunities.
  6. Implement trial by public jury to separate the courts from the political process. This will help reduce corruption.
There is still enough room for development of the political and economic situation to merely say that China has overtaken the United States is rather silly, and misses most of the picture. Hopefully China will continue to develop and see it move forward even further.

Given that China has a population over 4 times that of the United States it was inevitable that they would someday overtake us in one GDP metric or another soon, and is actually a good thing because it allows their economy to grow so their GDP per capita can start to approach a developed level, and hopefully continue to see a rapid decrease in poverty along with other problems.

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