A few weeks back, I commented an apparently ground breaking study coming from the World Bank, that China’s economy is grossly overvalued, by as much as 40% in Purchasing Power Parity. Well it seems this is not so ground breaking, as Lester Thurow at MIT gave the world due warning as to the “fuzzy math” coming out of the PRC. The article sounds fairly reasonable based on what I know of China’s economy from my thesis work, but I am wondering if anyone out there has a more erudite commentary? I would very much like to hear a counterargument.

Here is another article on the sustainability of China’s economy.

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August 19, 2007

Economic View

A Chinese Century? Maybe It’s the Next One

CHINA claims that its economy is growing at 10 to 11 percent a year, and China’s official analysts say that their nation will catch up with the United States long before the 22nd century arrives. Don’t believe it.

First, let’s deal with the implausibility of the official Chinese statistics. Mathematically, if the overall economy were to grow 10 percent annually, and the 70 percent of the economy that is based in rural areas were not growing (as stated by the Chinese government), the economy in China’s cities would have to be growing by 33 percent a year. The urban economy is growing rapidly, but not at a 33 percent pace.

Furthermore, Chinese statistics conflict with those of Hong Kong, the semiautonomous territory that serves as the financial capital of much of southern China. In 2001, Hong Kong had a recession, which is to say that it reported that its gross domestic product fell. Guangdong, the adjacent Chinese province, has a population of around 200 million. In 2001, it reported that its G.D.P. grew by 10 percent. What are the chances that both of those numbers are correct? Very slim.

Economic growth rates can be inferred from electricity consumption. In every country in the world, electricity use has generally grown faster than the G.D.P. Electricity is necessary for nearly all productive activities, and because of inefficiencies, consumption of electricity has generally outstripped economic growth. Rising energy costs have resulted in more efficient use of electricity, but especially in the developing world, economic growth has still generally lagged growth in electricity.

But if China’s official numbers are to be believed, there are provinces in China where the G.D.P. has been growing faster than energy use. That is unlikely, since the central government’s statistics also say that energy use per unit of G.D.P. is going up — not down, as claimed in provincial G.D.P. statistics.

Among the world’s 12 most rapidly growing economies over the last 10 years, the G.D.P. has grown only 45 percent as fast as electricity consumption. In the early 1970s, Japan was shutting down its electricity-guzzling aluminum industry. During this period, the G.D.P. grew 60 percent as fast as electricity consumption, the highest recorded level among industrialized nations.

Using those numbers as a guide, if we consider China’s actual electrical use, which is relatively easy to measure, and do a little math, we come up with this estimate: The G.D.P. in China has been growing somewhere between 4.5 percent (using the average for a rapidly growing country) to 6 percent a year (using the highest rate for Japan), not at the 10 percent rate claimed in official statistics.

The official statistic for China’s overall growth rate is best regarded as an approximate growth rate of the economy of its cities.

China also officially claims that it will catch up with the United States and become the world’s largest economy well before the 22nd century arrives.

There is an equally simple reason that neither of these predictions is likely to be realized. It simply takes more than 100 years for a large, less economically developed country to catch up with the world leader in per capita income. One need look only at the history of the United States, which had a much higher growth rate than Britain in the 19th century, yet did not catch up until World War I. Or consider Japan and the United States. Some 150 years after Japan started to modernize during the Meiji restoration, the country’s per capita G.D.P. is still only 80 percent of that of the United States in terms of purchasing power parity — although, in nominal terms, it has caught up.

The United States is not standing still. In fact, its per capita income grew faster than nearly all other big countries from 1990 to 2007. Europe’s per capita income fell from 85 percent of that of the United States in 1990 to 66 percent in 2007, according to International Monetary Fund statistics.

So let’s say that the inflation-adjusted growth rate for China is 4 percent a year. This is optimistic, because China will certainly have some bad years in the next century. Every country does — remember the Great Depression in the United States. A 4 percent rate is faster than any big country has ever grown for 100 years. But assume that China can do it. Assume, too, that America grows at the 3 percent rate it has averaged for the last 15 years.

Now project the two growth rates forward: the inflation-adjusted per-capita G.D.P. of China would be less than $40,000 in 2100, versus almost $650,000 in the United States. That’s because China starts at $1,000 per capita and the United States at $43,000. If, in 2100, China has four times as many people as the United States, as it does now, China would still not have a total G.D.P. equal to America’s.

But it is unlikely to have four times as many people. It is always a mistake to project population growth rates for a century, but let’s do it anyway: With a one-child policy and a sex ratio that favors boys (many men won’t find wives) — China should experience a decline in population in the 21st century. Yet let’s assume for a moment that China’s population remains constant, at 1.3 billion. If immigration to the United States continued at the current rate, America’s population would rise. If the population grew at 1 percent a year, as it has recently, it would more than double by 2100, reducing the enormous population gap between the two countries. Are these projections likely to be realized? Who knows?

What is clear is that China is unlikely to surpass the United States in G.D.P. in absolute or relative terms anytime soon.

There may be a Chinese century, but it will be the 22nd century — not the 21st.

Lester Thurow is a professor of management and economics at the Massachusetts Institute of Technology. He is also on the board of Taiwan Semiconductor, which does business in mainland China.

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