China's GDP

A New York Times article offered some bold claims regarding Chinese economic growth. It was entitled China on Path to Become Second-Largest Economy. The main evidence offered was that China reported an increase of 10.7% for its Gross National Product during the 4th quarter of 2009. This figure seems suspicious. In a increasingly interdependent and global economy that level of growth seems unlikely amid worldwide economic downturn. Economic growth and increased GDP are of course possible and China's high level of exports would likely contribute to some level of increase.
However, some things about China and it's government should be kept in mind when dealing with these types of reports. The most important being that China is a totalitarian state. In China the government has complete control over and effectively exclusive access to most of the raw data used to formulate economic benchmarks. The Chinese government is notorious for reporting only good news and wanting to show a strong front to the "enemy" west. Additionally the method used by the Chinese government, purchasing power parity, is regarded sceptically by even kind critics. That method tries to take into account lower cost of living but in doing so departs significantly from nominal exchange rates and relative strength of different currencies. In 2003 the World Bank's purchasing power parity calculations put the parity rate at 1.8 Chinese yuan to 1 US dollar. At the time the nominal exchange rate was 7.6 yuan = 1 dollar.
With the assumption that these GDP figures are inaccurate comes the obvious foll0w up question. What is the actual economic growth of China? This also raises a point about the validity of indicators like GDP in general. How much faith should we place in these numbers? GDP does seem to be the most effective and broadest way to generally measure economic growth and activity but since most of the educated world is at least in part influenced in financial decisions by changes in GDP, i.e. an announcement of recession, then shouldn't more focus be placed on evaluating this number and analyzing the underlying data?


Dr. Tufte said...

-1 on Flinkspringer for a spelling error (waived since it's Block 1).

I agree that the numbers seem suspicious. For example, there are credible reports that China is encouraging investment in a pre-20th century cement making technology so they can claim better use of their resources (see this post at Paul Kedrosky's Infectious Greed.

I also agree that purchasing power parity (PPP) is a problematic way to measure prices across countries. It tends to overestimate the richness of poor countries and understate the richness of rich countries. The reason for this is that it computes prices based on what people buy where they live, rather than where they might live, which goofs up the comparison of different countries. It ends up implying that poor people are richer than they are because they can buy so much stuff that poor people buy. But, of course, most of them would like to be richer, and when they are, their spending habits shift towards what the rich people are already buying.

Having said that, the other method of just using exchange rates tend to overstate differences between countries. So, in practice, you need to use both, and assume that the truth is somewhere in the middle.

Adam Loris said...

I was wondering how much of the chines growth is due to the artificially low renmibi. While reading http://findarticles.com/p/articles/mi_m2633/is_2_17/ai_100545302/ I started to think that maybe this inflation rate is much more inflated than we think it is.

Dr. Tufte said...

Certainly the low exchange rate will increase exports and decrease imports, which will tend to increase GDP.

But ... there are a lot of other effects from exchange rates (including the inflation you mentioned) and I'm not sure it's worth the effort to figure out how they all play out if they cut both ways and might cancel each other.

Menger said...

The inflated GDP reported by the Chinese government makes me think of a quote from Sun Tzu. "When strong appear weak; when weak appear strong." The strategies taught by Sun Tzu have permeated the eastern theory of governance and warfare. Thus, if China is inflating its GDP it is a good indicator that China is in fact feeling weak. If China was under reporting its GDP then we could assume they feel strong.

Whidbey said...

In reference to China inflating its GDP numbers, they are apparently making an effort to improve the accuracy with with their numbers are reported to the National Bureau of Statistics. This is an attempt to increase their GDP creditability on the international level. A major issue is that local officials will report inflated numbers, hoping to show that they are good at managing local economic activity. The issue was brought to light when, in 2009, the sum of all the local GDP figures exceeded the national GDP numbers, as both are calculated independently.

Dr. Tufte said...

This is all good.

But ... you all have experience in a country with a viable political opposition. Don't underestimate the ability or willingness of governments without an opposition to lie.

Julia said...

I agree with Spencer that China is a totalitarian state. As far as I know, China confronted the inflation issue by giving its central bank more power, so that the bank can raise interest rates to damp down investment spending. I believe that was one of the reasons how China has reduced inflation-by means of greater monetary control. Another point that the author makes in that article is the increase of industrial production. From my research about the economy of this country, I can conclude that the growth of per capita income in China has resulted from increased use of capital, improved technology, and shifts of labor away from lower-productivity toward higher-productivity uses. The first shift that I have observed is the shift from state-owned companies to private owned companies. The second shift is the shift of employment from agriculture toward rural manufacturing. In my opinion, both changes have raised the productivity of Chinese employees. Despite all of the changes that the economy of China has embraced, the country still has a long way to go to become the second-largest economy.

Julia said...
This comment has been removed by the author.
Dave Tufte said...

Julia: 47/50 "tamp" not "damp"

I think the really interesting thing about China (and India which will overtake it in a few decades) is that the biggest economy in the world will not be close to the top in terms of per capita income. This hasn't happened since economic growth took off about 3 centuries ago.