Now that I got you all briefed about the Great Game on oil that is
being played there is one more recurrent theme that I'd like to
address. This is the one where Americans think that China is so
dependent on America buying the WalMart trash that all America has to
do is to stop buying Chinese and China will be brought crashing to her
This article from the Economist will belie that comfortable feeling.
Recalculating China's GDP
Clipping the dragon's wings
Dec 19th 2007
| HONG KONG
From The Economist print edition
China's economy is smaller than was thought
AMERICANS may well be delighted by new figures that show China's GDP
is 40%% smaller than previously thought. Has the devious Beijing
government been massaging the numbers, as communist planners are wont
to do? Hardly. China's GDP in yuan terms remains unchanged. What has
happened is that the World Bank has changed the calculations it uses
to make international comparisons of the size of economies.
Converting a poor country's GDP into dollars at market exchange rates
can understate the true size because a dollar buys much more in an
emerging market such as China than it does in America. The IMF and the
World Bank therefore prefer to convert GDPs into dollars using
purchasing-power parities (or PPPs), which take account of price
differences between countries.
Previous estimates of China's PPP were largely guesswork. Now the
World Bank has produced new calculations based on a survey of prices
of over 1,000 goods and services in 146 countries, including China for
the first time. On this basis, China's GDP in 2005 was $5.3 trillion,
compared with $2.2 trillion using market exchange rates and $8.9
trillion using previous PPP estimates. This was still well below
America's $12.4 trillion that year (see chart).
But this does not mean China's economic miracle has been just a
statistical artefact. The revisions do not reduce China's growth
rate-the fastest over 30 years of any large country in history. It
remains the world's largest producer and consumer of steel, the
second-biggest user of energy and even on revised figures the world's
second-largest economy. In 2008 it is almost certain to overtake
Germany as the world's largest exporter, and assuming recent rates of
growth are sustained, within ten years it will overtake America (in
PPP terms) as the world's largest economy.
China itself has always played down the PPP numbers, hoping to portray
itself as a poor country so America will give it more leeway when
arguing about exchange rates and trade. China's policymakers will not
be unhappy with their new, slimline figure. Indians, in contrast, love
to boast that their GDP overtook Japan's in 2006 to become the world's
third-biggest. Unfortunately, this is no longer true: its GDP has also
been slashed by almost 40%%.
With Brazil's GDP also down a bit, the share of emerging economies in
world output (including Asia's newly industrialising economies) has
been cut to 46%% in 2005, compared with over 50%% on the old numbers.
Their economic dominance has merely been postponed.
Finance & Economics
The new (improved) Gilded Age
Dec 19th 2007
From The Economist print edition
The very rich are not that different from you and me; or less
different, perhaps, than they used to be
IN 1904 Willie Vanderbilt hit a thrilling 92.3 mph (147.7 kph) in his
new German motorcar, smashing the land-speed record. His older
brother's sprawling North Carolina manse, Biltmore, could accommodate
up to 500 pounds of meat in its electrical refrigerators. In miserable
contrast, the below-average Gilded Age American had to make do with a
pair of shoes and a melting block of ice. If he could somehow save
enough for an icebox, a day's wage would not have bought a pound of
meat to put in it. Paul Krugman, of Princeton University, has recently
argued* that contemporary America's widening income gap is ushering in
a new age of invidious inequalities. But a peek at the numbers behind
the numbers suggests that Mr Krugman has been misled: far from a new
Gilded Age, America is experiencing a period of unprecedented material
This is not to deny that income inequality is rising: it is. But
measures of income inequality are misleading because an individual's
income is, at best, a rough proxy for his or her real economic
wellbeing. Because we can save, draw down savings, or run up debt, our
income may tell us little about how we're faring. Consumption surveys,
which track what people actually spend, sketch a more lifelike
portrait of the material quality of life. According to one 2006
study**, by Dirk Krueger of the University of Pennsylvania and
Fabrizio Perri of New York University, consumption inequality has
barely budged for several decades, despite a sharp upswing in income
inequality. They can record only that we have spent, but not the
value-the pleasure or health-gained in the spending. A stable trend in
nominal consumption inequality can mask a narrowing of real or
"utility-adjusted" consumption inequality. Indeed, according to
happiness researchers, inequality in self-reported "life satisfaction"
has been shrinking in wealthy market democracies, America included,
suggesting that the quality of lives across the income scale are
becoming more similar, not less.
You can see this levelling at work in markets for transport and
appliances. You no longer need be a Vanderbilt to own a refrigerator
or a car. Refrigerators are now all but universal in America, even
though refrigerator inequality continues to grow. The Sub-Zero PRO 48,
which the manufacturer calls "a monument to food preservation", costs
about $11,000, compared with a paltry $350 for the IKEA Energisk B18
W. The lived difference, however, is rather smaller than that between
having fresh meat and milk and having none. Similarly, more than 70%%
of Americans under the official poverty line own at least one car. And
the distance between driving a used Hyundai Elantra and a new Jaguar
XJ is well nigh undetectable compared with the difference between
motoring and hiking through the muck. The vast spread of prices often
distracts from a narrowing range of experience.
Save money. Live better
This compression is not a thing of the past. To take one recent
example, Jerry Hausman of the Massachusetts Institute of Technology
and Ephraim Leibtag of the United States Department of Agriculture,
show† that Wal-Mart's move into the grocery business has lowered food
prices. Because the poorest spend the largest part of their budget on
food, lower prices have benefited them most. The official statistics
do not capture these gains.
As a rule, when the prices of food, clothing and basic modern
conveniences drop relative to the price of luxury goods, real
consumption inequality drops. But the point is not that in America the
relatively poor suffer no painful indignities, which would be absurd.
It is that, over time, the everyday experience of consumption among
the less fortunate has become in many ways more similar to that of
their wealthier compatriots. A widescreen plasma television is lovely,
but you do not need one to laugh at "Shrek".
This compression is the predictable consequence of innovations in
production and distribution that have improved the quality of goods at
the lower range of prices faster than at the top. New technologies and
knock-off fashions now spread down the price scale too fast to
distinguish the rich from the aspiring for long.
This increasing equality in real consumption mirrors a dramatic
narrowing of other inequalities between rich and poor, such as the
inequalities in height, life expectancy and leisure. William Robert
Fogel, a Nobel prize-winning economic historian, argues†† that nominal
measures of economic well-being often miss such huge changes in the
conditions of life. "In every measure that we have bearing on the
standard of living...the gains of the lower classes have been far
greater than those experienced by the population as a whole," Mr Fogel
Some worrying inequalities, such as the access to a good education,
may indeed be widening, arresting economic mobility for the least
fortunate and exacerbating income-inequality trends. Yet even if you
care about those aspects of income inequality, the idea can send
misleading signals about the underlying trends in real consumption and
the real quality of life. Contrary to Mr Krugman's implications,
today's Gilded Age income gaps do not imply Gilded Age lifestyle gaps.
On the contrary, those intrepid souls who make vast fortunes turning
out ever higher-quality goods at ever lower prices widen the income
gap while reducing the differences that matter most.
*"The Conscience of a Liberal" by Paul Krugman. W.W. Norton, 2007.
**"Does Income Inequality Lead to Consumption Inequality? Evidence and
Theory" by Dirk Krueger and Fabrizio Perri. Review of Economic
†"Consumer Benefits from Increased Competition in Shopping Outlets:
Measuring the Effect of Wal-Mart" by Jerry Hausman and Ephraim
Leibtag. Journal of Applied Econometrics, forthcoming.
††"The Escape from Hunger and Premature Death, 1700-2100" by Robert
William Fogel. Cambridge University Press, 2004.
A few months ago I had a long series of arguments with Tom Oliver
where Tom's position was China's posession of more than a trillion
dollars in USD debt comes to naught since the US can refuse to cash
them in on demand and there's nothing China can do. My position was
that that's an amazing renunciation of the sancity of sovereign debt.
Anyway the arguments tapered off with me stating that China will not
sell off its USD notes any time soon and see its accumlated earnings
disappear into thin air. But given the falling value of the USD China
and all the other countries that had hitherto parked their money in US
debt would be seeking other forms of investment. The US will no
longer be able to get cheap financing for its public expenditures
(including the war in Iraq.)
PPP: Who would have thunk that events have proved me right so soon.
This is not the time to gloat. What I hope for is that we will see
the disappearance of posts that assumes that the US has the power to
regime change or shoot anybody she doesn't like. Or worse lie to
justify support of US transggressions in foreign lands.