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Monday, August 30, 2010
Oriental Bookkeeping
It was recently announced that China had finally surpassed Japan’s GDP to make it the second largest economy in the world—
China surpassed Japan as the world’s second-largest economy last quarter, capping the nation’s three- decade rise from Communist isolation to emerging superpower.
Japan’s nominal gross domestic product for the second quarter totaled $1.288 trillion, less than China’s $1.337 trillion, the Japanese Cabinet Office said today. Japan remained bigger in the first half of 2010, the government agency said. Japan’s annual GDP is $5.07 trillion, while China’s is more than $4.9 trillion.
However, a few observant souls pointed out something which should have been obvious—that in real terms China’s GDP is actually far higher than the nominal figure would suggest. By other measures, China passed up Japan long ago. When measured in Purchasing Power Parity (PPP), China’s GDP is about twice as large—indicating that its currency trades on forex markets at about half its real value relative to the yen. Compare the following data on nominal GDP vs. PPP GDP:
Nominal GDP
— European Union 16,447,259
1 United States 14,256,275
2 Japan 5,068,059
3 China 4,908,982
4 Germany 3,352,742
5 France 2,675,951
6 United Kingdom 2,183,607
7 Italy 2,118,264
8 Brazil 1,574,039
9 Spain 1,464,040
10 Canada 1,336,427
11 India 1,235,975
12 Russia 1,229,227
13 Australia 997,201
14 Mexico 874,903
15 South Korea 832,512
16 Netherlands 794,777
17 Turkey 615,329
18 Indonesia 539,377
19 Switzerland 494,622
20 Belgium 470,400
PPP GDP
— European Union 14,793,979
1 United States 14,256,275
2 China 8,765,240
3 Japan 4,159,432
4 India 3,526,124
5 Germany 2,806,266
6 United Kingdom 2,139,400
7 Russia 2,109,551
8 France 2,108,228
9 Brazil 2,013,186
10 Italy 1,740,123
11 Mexico 1,465,726
12 South Korea 1,364,148
13 Spain 1,360,605
14 Canada 1,281,064
15 Indonesia 962,471
16 Turkey 880,061
17 Australia 851,170
18 Iran 827,858
19 Taiwan 735,997
20 Poland 688,761
(My apologies on the table format. Fran’s HTML editor hates me.)
Gentle Reader, which list looks more reasonable?
PPP looks at how much stuff a unit of currency would buy in a local economy, then compares that to the purchase price of the same stuff in another currency in a different economy. Since theoretically (but of course not practically) all goods trade on an international market, they should have the same or very similar prices in every market—much like turning everything into a commodity money a la the old international gold standard that prevailed in the nineteenth century. Notice the particularly glaring disparities of the highlighted countries, especially China and India. All tend to be (amazingly!) competitive exporters.
I also noticed this huge disparity when I was in China back in 2005. The prices of goods did not remotely reflect the exchange rate, but were very consistent with one another relative to what I would expect to pay in America. The exchange rate was (I think) about eight to one at that time, but goods were priced as if the rate were only about four to one. For example, a pound of grapes that might go for $1 here was only about 4 yuan instead of eight.
What a steal, right! No wonder Chinese exports are so ‘competitive’—they’re being given away at half-price. At fair valuation, they wouldn’t be competitive at all. I’ve said it before and I’ll say it again—the Chinese economy is not that competitive. People not that close to the situation cannot comprehend the wastefulness and corruption that is endemic there. China has had to rely on sleight of hand like this to keep it’s edge, and now that this scheme has exploded on it, the Chinese economy is out of luck. It is said that China will start to wean itself off exports and start relying on domestic consumption, but nobody seems to want to ask the obvious questions—if it were that easy, why hasn’t it happened already, developing organically? Why not do that all along if that were all there was to it? Why did China need export markets to come out of revolutionary economic deep-freeze?
The obvious answer is that it didn’t because it can’t, and basketcases are basketcases for a reason. People who don’t need crutches don’t use them, and nobody with any sense sees a guy in a wheelchair and expects him to leap up and run a marathon on command. But then, I suppose that economics is not a subject to expect to see much good sense.
I don’t care what the experts say, that country is going nowhere fast. Barring total annihilation of the West, China will not surpass US GDP by 2030, and it may not even do it by the end of the century. Here is an excellent (thought somewhat lengthy) article about Japanese-Chinese similarities, and what might happen to China going forward. His analysis is not particularly Austrian—he attributes Asian bubble-blowing to built in subsidies that force manufacturing and industrial development at the expense of domestic consumers—but the outcome is not entirely different from an export mania created by currency manipulation. In the end, the nation develops an established economy dependent on the distortions, and unable to function and develop once they’ve lost any meaningful effect.
Here’s a particularly interesting passage:
But for a long time the problem of misallocated investment, which was whispered about in Japan but not taken too seriously, didn’t seem to matter. After all, as nearly everyone knew, Japan’s leaders were extremely smart, with a deep knowledge of the very special circumstances that made Japan different from other countries and not subject to “western” economic laws, with real control over the economy, with a strong grasp of history and penchant for long-term thinking, and most of all with a clear understanding of what was needed to fix Japan’s problems.
And look what a great job they had already done: by the early 1990s Japan had generated so much investment-driven growth that it had grown from 7% of global GDP in 1970 to 10% in 1980, and then surged to nearly 18% at its peak in the early 1990s. In about twenty years Japan’s share of global GDP was two-and-a-half times its initial share. That is an extraordinary growth story and one that can only be explained as a function of a new kind of economic thinking, right?
But less than twenty years later, after a terribly long struggle to adjust to high debt levels and massive overinvestment, Japan is about to be overtaken by China with only 8% of global GDP. Japan, in other words, has given back in less than two decades almost the entire GDP share it had taken in the two astonishing decades that preceded it (while during the same period the US has maintained its share). What’s worse, it is hard to pick up a newspaper today and read about Japanese policymakers without getting the idea that they are a totally dysfunctional, narrowly ambitious, and not especially savvy lot, much like their US and European peers. As Mortimer Snerd used to say, who woulda thunk it?
Don’t be fooled by the arguments of the brainwashed ‘capitalists’ touting repressive, backwards societies as models for Western policy and economic development, and don’t blindly accept whatever outcome the market produces as the honest-to-goodness ‘correct,’ most optimal arrangement. There will never be anything approaching free markets or free trade so long as there are central banks and meddlesome governments to manipulate currencies and terms of trade. As long as they exist, you can’t really trust the ‘market’ outcome.
It’s all a game.
Comments
Shh, Scott! Don’t tell this to Thomas Friedman! Why, just a few months ago he was asking an interviewer with all sincerity “Don’t you just wish we could be China for a day?” What will happen to his poor heart when he finds out China’s corrupt dictatorship is mostly good for enriching itself and shooting dissidents?
In all seriousness, you can credit China with some attempt to stimulate domestic demand—except it appears to have done so by creating a real estate bubble that dwarfs even our own. Civil war by decade’s end is a more likely outcome than world domination. I do not wish misery on the Chinese people, but it continues to amaze that the West’s useful idiots fall for totalitarian scams time and time again.
Posted by .(JavaScript must be enabled to view this email address) on 08/31/2010 at 07:57 PMThomas Friedman is a real piece of work, that’s for sure. Is there anybody out there who actually takes him seriously?
There are a whole lotta issues tied up in China’s real estate bubble. But it is a most interesting observation: overwhelming interest in one particular market when it comes to individual Chinese spending power. Raises the question—how exactly is the Chinese economy supposed to develop to service such patterns of consumer demand? I have a post in the works on the subject. Hopefully it’ll be out… sometime.
I’m not really out to China-bash myself, and I hate sometimes coming off that way. I like the place, actually. I prefer to think of myself in everybody’s corner, because I feel like I know enough about what it takes to produce a wealthy society that there’s really fundamentally only one way to do it, and I wish that for everybody.
Still, if nobody bothers to point out exactly what is wrong and why it is so disastrous, rather than pooh-poohing the issue of corruption as so many do, there really isn’t much hope for real progress.
Posted by Scott Angell on 08/31/2010 at 09:09 PMI’m an amateur in these matters, but it seems to me that there’s every chance that China will be riven by its own internal contradictions (one-child policy/gender imbalance; artificial economy/what happens if we stop buying?; more exposure to the West/restive population; local arguments/Japan/Korea, etc) before it becomes a real threat to anyone.
Posted by .(JavaScript must be enabled to view this email address) on 08/31/2010 at 11:32 PM
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