Economists and China-watchers love to speculate about when China will overtake the US as the world’s economic superpower. Their favoured scoring system is absolute GDP, measured in dollars. The IMF’s latest prediction by this scale is that China will hit the number one spot in 2019 (not for the first time, it’s worth pointing out: in 1820 the Middle Kingdom accounted for nearly a third of global GDP).
But the dollar-GDP approach has attracted plenty of criticism, because of its sensitivities to local currency fluctuations against the dollar.
In order to compare GDP around the world by a single standard, the figures produced by individual governments using their own local currencies, must be translated into dollars at the current rate. This means that short-term shifts in the value of currencies against the greenback can mask more substantive changes in underlying output.
Russia is a striking recent example: it has lost roughly half its value against the dollar since investors began to desert it in the face of global economic sanctions and a spiralling oil price in early December. But it’s hard to believe that the country’s fundamental ability to produce things has halved in that time.
This approach has punished Argentina over the longer term, too. It may not be the most glittering of growth stories in recent years, but it has played a role in the emergence of the economic emergence South America: for more than 80 per cent of the time since 2007 growth in local currency terms has been positive. However, the Argentinian peso is today worth less than half what it was against the dollar as it was in 2007.
Take away the dollar bias in GDP comparisons and the figures look very different.
The International Comparison Project (another IMF initiative), focuses on what things a unit of GDP can buy local citizens of country rather than how many dollars they can get for it – so-called purchasing power parity (PPP). PPP measurement produces a very different set of results.
Typically countries in the emerging world, Indonesia, India and – most strikingly China – are under-weighted by the conventional measure compared with those in the developed world – US, Germany, the UK. China-philes will be especially pleased. The PPP measure has the country overtaking the US by the end of this year.
A bigger problem that the IMF hasn’t attempted to combat is misreporting. When it comes to publishing data on the growth of its economy, for example, China is euphemistic at best.
Particularly glaring evidence for this, says Craig Botham, Emerging Markets Economist at London-based Investment management company Schroders, is that adding up the GDP growth numbers published at a provincial level typically gives a figure that is larger than the total national GDP number.
Looking at how they collect the data, we shouldn’t be surprised: the agencies responsible have a poor infrastructure at their disposal, compared to their peers in the US or the US, but publish GDP data to a similar timescale, notes Botham. In particular, China’s huge physical size frustrates these efforts. “It is a country that is more than four times the size of the US and their GDP data comes out two weeks before,” says Botham.
Should we worry that China may be fudging the figures?
Greece’s creative accounting of its budget deficits precipitated the Eurozone crisis, the ripples of which are still keenly felt in the form of sluggish European growth and the continuing spectre of European deflation. But it’s unlikely that Beijing is trying to dupe the rest of the world into believing China is growing quicker than it is.
This is mainly because Beijing doesn’t much care about GDP growth. Botham, who reckons total GDP growth is currently closer to 2 per cent than the 7.5 per cemt government target, says the Communist party’s main concern is employment and wage growth – the important factors for Chinese workers - rather than total economic output.
For the time being, then, don’t expect the uncertainties of measuring Chinese GDP to derail the fragile global economic recovery. But it might be worth questioning whether, when it comes to Chinese output, size matters quite as much as it seems to.
PPP ignores the exchange rates between the two countries and favours the relative buying power of a unit of each currency in its home market.
How it works is best illustrated by an example.
Say a hamburger costs €4.80 in France and $4.00 in the US, the PPP for hamburgers between the two economies is $0.83 to the euro from the French perspective (4.00/4.80) and €1.20 to the dollar from the U.S. perspective (4.80/4.00). In other words, for every euro spent on hamburgers in France, $0.83 would have to be spent in the United States to obtain the same quantity and quality — that is, the same volume — of hamburgers. Notice that this calculation has nothing to do with the exchange rates between the two countries.
This calculation is done first for individual goods and services, then for groups of products, and finally for each of the various levels of aggregation up to GDP.
