Revised productivity conceals some realities

By Howard W. French
Published: December 21, 2007
Copyright The International Herald Tribune
A mass of intriguing economic news is flowing from China as the year draws to a close – dramatic and discordant at the same time, leaving the world to puzzle.
To begin with, the Chinese economy appears to be nothing like as large as we have grown accustomed to thinking. Indeed, according to the new World Bank calculations using the often controversial Purchasing Power Parity measurement, or PPP, China’s production is a whopping 40 percent less than previously assumed.
Getting something so important as the size of the world’s second largest economy wrong would seem to be a pretty severe indictment of the field of economics. But that’s at least partly unfair. Measuring relative national output is a tricky thing under the best of circumstances, but figuring out China has long been an especially difficult proposition, and the Chinese themselves, in this regard, carry a large portion of the blame.
Calculations of PPP rest on thorough surveys of prices for commonly consumed goods and services. Reliable data of this sort have simply been unavailable in China. For its own purposes, for decades the country was essentially closed to much of the outside world, and since then, although China is improving rapidly in this regard, publicly available statistics are frequently subject to political manipulation or are simply otherwise unreliable.
Until recently, in determining China’s wealth, the World Bank has had to rely on price information that predated the ascendancy of private business and the replacement of free or deeply subsidized state services by the market, hence the appearance of an economy that was far larger than it really was.
What does it mean, though, to lose 40 percent of one’s economy?
The answer, in China’s case, is somewhat reminiscent of the fuzzy logic of quantum physics. The significance depends on where one is standing and ranges all the way from it matters a great deal to it scarcely matters at all.
The one reality these new wealth statistics help illustrate best is the harshness of life at the greasy bottom of society’s totem pole. The new PPP data suggest that there are three times more poor people in China than previously thought. If the numbers are to be believed, this means 300 million poor instead of about 100 million.
As a non-economist who knows the back roads of China well, and who has rubbed shoulders with the poor on every continent, I believe the numbers. If anything, in fact, I would say they are too conservative, because the $1-a-day income poverty line used to measure such things is mostly a matter of statistical convenience to bodies like the World Bank, helping them to compare apples to apples, or in this case, the poor in Kenya or Brazil with the poor in Uttar Pradesh or in Sichuan Province.
Does anyone really think for a moment, though, that someone living, say, on $1.50 a day isn’t poor?
In China even shavings this thin of the statistical pie change the results by dozens of millions or even hundreds of millions of people, hence the risible nature of declaring that there are “only” 300 million poor in the country.
The new statistics don’t even begin to get at the reality of east central China, where huge swaths of territory are populated by people whose lives bear almost nothing in common with the new wealth of the east, the new China whose imagery we have all become familiar with.
None of this is meant to take anything away from the recent economic achievement of this country. Whatever the number, and hopefully better work will be done to determine exactly what it is, China has lifted more people out of poverty in the last generation than anyone anywhere else has previously achieved, or even thought possible, and this experience is of deep and untapped relevance to the rest of the world.
This brings us to the other extreme vantage point in the quantum calculation of whether the new PPP figures matter. China played host this week to the newest World Bank president, Robert Zoellick, and the terms of the conversation showed dramatically why no smart money from the outside is tempted to downgrade China as a force in today’s world.
In the past, World Bank heads visited China to figure out how to lend it more money. Today, though, China’s balances are such that it can raise capital more cheaply than even the World Bank itself. China pays a small penalty to borrow from the bank and only does so because it wishes to involve the bank’s expertise and human capital in working out solutions to environmental, energy and poverty problems.
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