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Monday 23 February 2009
Will the real GDP please stand up?
So, the size of the US economy could be a figment of statisticians’ imagination. So could China’s. It’s no longer clear what to believe. Making sense of the world is getting harder by the day.
China’s economy, depending on your bias, will surpass the US by 2020, 2030, 2050 - or never. Yet China’s economy might already be bigger than the America’s.
The point isn’t to fish for hate mail, but to demonstrate how disorienting the world has become. Remember how two years ago, most people said that the sub-prime crisis was containable, Asia was immune to global turmoil, and Goldman Sachs Group Inc alumni could do no wrong? Well, think again.
My Jan21 column headlined: I wrote in a column last month that “a US$17 trillion alliance can save world economies”. Critics had much to say about my argument that the US and China must drop the nationalism and cooperate. They had even more to say about figures. Many took exception to my claim that the US economy is worth US$14 trillion and China’s US$3.3 trillion. Most argued that the US figure - from the World Bank - was overstated. Others wondered if the Chinese figure was too high. Some argued that it was too low.
All this makes you consider our goalposts. The methods used to calculate gross domestic product (GDP) may not be valid as the global economy swoons.
Take China. At its most basic level, GDP is the total market value of final goods and services that a nation produces in a given year. Andy Xie, a Shanghai- based independent economist, puts China’s GDP at US$4.1 trillion to US$4.3 trillion. Mr. Xie isn’t alone. Some put the figure at US$4.4 trillion.
Mr. Xie’s calculations are as follows. China’s exports were about US$1.4 trillion last year, while total labour income was about US$2.4 trillion, capital income was about US$550 billion and government income was about US$600 billion. Then he subtracts about US$800 billion to account for the depreciation of roads, properties and other facilities.
If correct, China has just about caught up with Japan, the second-biggest economy. Or is China really a shell of its claimed size? You have to wonder about a place that, every couple of years, finds an economy the size of Austria that it wasn’t aware of, as it did in late 2005. In January, China suddenly said that its economy overtook Germany’s to become the third-largest in 2007. Who knows, next year statisticians may say that China has surpassed the US. China’s data are about as accurate as tossing a dart at a chart on the wall.
The point isn’t to insult Chinese officials. China’s is a structurally imbalanced economy distorted by top-down policies and considerable “grey activities” that are hard to measure. There also are daunting scale issues. Think about it. With modest resources, Chinese officials sitting in a room need to condense and capture the activities of more than 1.3 billion people at many levels of poverty and prosperity over 365 days. Then, they are expected to come up with a single figure that news agencies can headline and traders can react to.
“It’s always going to be Sisyphus-ian,” says Stephen Green, a Shanghai-based economist at Standard Chartered plc, referring to a king in Greek mythology condemned to roll a boulder up a hill, only to watch it roll down again.
Not surprisingly, many readers doubt the brawn of China’s economy. The scepticism is over how any country can announce such huge revisions and be believed. Some also point to a lack of transparency (not that the US has much these days) and the quality of Chinese goods.
Looking at the US, there is cause to doubt the size of the world’s biggest economy. The reason? Wall Street.
Economies that are highly reliant on financial flows “are less transparent”, says Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. “That means any economy that has depended on financial services for growth. Financial-sector profits were responsible for most of the growth in US profits in this cycle.” Is the size of the US economy really a mirage based on irresponsible, asset-inflating monetary policy? The financial products that created so much wealth and are now destroying it were built upon existing ones, and so on.
US prosperity, one could argue, is predicated on several layers of over-inflated assets and, thus, by extension so is the world economy. When you have a mispricing of asset values on a national or international scale, it’s hard to know what’s real and what isn’t - what genuinely is floating around in the financial ether, and what’s not. And when do we stop referring to economies such as the US as “industrialised”? One is hard-pressed to name many products that are actually made in America.
That leaves services, the value of which is devilishly hard to measure. Chinese officials who think they can trade in US$682 billion of US government debt for tangible goods that will be loaded onto ships and delivered to Shanghai are dreaming.
So, the size of the US economy could be a figment of statisticians’ imagination. So could China’s. It’s no longer clear what to believe. Making sense of the world is getting harder by the day.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own
1 comment:
Will the real GDP please stand up?
By WILLIAM PESEK JR
21 February 2009
China’s economy, depending on your bias, will surpass the US by 2020, 2030, 2050 - or never. Yet China’s economy might already be bigger than the America’s.
The point isn’t to fish for hate mail, but to demonstrate how disorienting the world has become. Remember how two years ago, most people said that the sub-prime crisis was containable, Asia was immune to global turmoil, and Goldman Sachs Group Inc alumni could do no wrong? Well, think again.
My Jan21 column headlined: I wrote in a column last month that “a US$17 trillion alliance can save world economies”. Critics had much to say about my argument that the US and China must drop the nationalism and cooperate. They had even more to say about figures. Many took exception to my claim that the US economy is worth US$14 trillion and China’s US$3.3 trillion. Most argued that the US figure - from the World Bank - was overstated. Others wondered if the Chinese figure was too high. Some argued that it was too low.
All this makes you consider our goalposts. The methods used to calculate gross domestic product (GDP) may not be valid as the global economy swoons.
Take China. At its most basic level, GDP is the total market value of final goods and services that a nation produces in a given year. Andy Xie, a Shanghai- based independent economist, puts China’s GDP at US$4.1 trillion to US$4.3 trillion. Mr. Xie isn’t alone. Some put the figure at US$4.4 trillion.
Mr. Xie’s calculations are as follows. China’s exports were about US$1.4 trillion last year, while total labour income was about US$2.4 trillion, capital income was about US$550 billion and government income was about US$600 billion. Then he subtracts about US$800 billion to account for the depreciation of roads, properties and other facilities.
If correct, China has just about caught up with Japan, the second-biggest economy. Or is China really a shell of its claimed size? You have to wonder about a place that, every couple of years, finds an economy the size of Austria that it wasn’t aware of, as it did in late 2005. In January, China suddenly said that its economy overtook Germany’s to become the third-largest in 2007. Who knows, next year statisticians may say that China has surpassed the US. China’s data are about as accurate as tossing a dart at a chart on the wall.
The point isn’t to insult Chinese officials. China’s is a structurally imbalanced economy distorted by top-down policies and considerable “grey activities” that are hard to measure. There also are daunting scale issues. Think about it. With modest resources, Chinese officials sitting in a room need to condense and capture the activities of more than 1.3 billion people at many levels of poverty and prosperity over 365 days. Then, they are expected to come up with a single figure that news agencies can headline and traders can react to.
“It’s always going to be Sisyphus-ian,” says Stephen Green, a Shanghai-based economist at Standard Chartered plc, referring to a king in Greek mythology condemned to roll a boulder up a hill, only to watch it roll down again.
Not surprisingly, many readers doubt the brawn of China’s economy. The scepticism is over how any country can announce such huge revisions and be believed. Some also point to a lack of transparency (not that the US has much these days) and the quality of Chinese goods.
Looking at the US, there is cause to doubt the size of the world’s biggest economy. The reason? Wall Street.
Economies that are highly reliant on financial flows “are less transparent”, says Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. “That means any economy that has depended on financial services for growth. Financial-sector profits were responsible for most of the growth in US profits in this cycle.” Is the size of the US economy really a mirage based on irresponsible, asset-inflating monetary policy? The financial products that created so much wealth and are now destroying it were built upon existing ones, and so on.
US prosperity, one could argue, is predicated on several layers of over-inflated assets and, thus, by extension so is the world economy. When you have a mispricing of asset values on a national or international scale, it’s hard to know what’s real and what isn’t - what genuinely is floating around in the financial ether, and what’s not. And when do we stop referring to economies such as the US as “industrialised”? One is hard-pressed to name many products that are actually made in America.
That leaves services, the value of which is devilishly hard to measure. Chinese officials who think they can trade in US$682 billion of US government debt for tangible goods that will be loaded onto ships and delivered to Shanghai are dreaming.
So, the size of the US economy could be a figment of statisticians’ imagination. So could China’s. It’s no longer clear what to believe. Making sense of the world is getting harder by the day.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own
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