Monday, 27 August 2007

Chinese Data, Lester Thurow or both: Can we believe any of it?

As an applied economist I rely on data to investigate, analyse and examine to test theoretical predictions.

This is a problem with China which is that it is difficult to say with any certainly that the data one is using is reliable especially if the data is required over a large number of years.

This topic is forcefully bought to the fore by Lester Thurow of MIT in this article "Chinese Century? Maybe It’s the Next One".

In this article Lester examines the claim that Chinese growth has not been as rapid as the published GDP figures suggest. What is clear is that GDP growth in China has been phenomenal and may not be as far off as Professor Thurow is claiming. My bold.

A Chinese Century? Maybe It’s the Next One [Ny Times - subscription required]
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

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

Thirty-three percent a year for 10 years is a quite astonishing rate but remember that new cities are springing up everywhere and the population growth rate of urban areas has also been dramatic.
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.

The economies of Hong Kong and Guangdong are very different. Hong Kong is reliant of financial services to a large extent and the technology crash of 2000/2001 will have hit Hong Kong and not Guangdong. These statistics are not outlandish at all. A 10% increase from a low level can easily be compatible with a small fall from a very very high level. For example, it is easy to think that an increase from 10 to 11 (Guangdong) could happen in the same year that Hong Kong moves from 100 to 99.
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

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.

This argument has some basis but perhaps it is the energy use statistics that are incorrect and NOT the GDP figures.

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.

Is electrical use data reliable? There is also a time inconsistency problem here. The drivers of growth now are different to those of Japan in the 1970s.
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.

Note here China is talking about being the world's LARGEST economy in ABSOLUTE terms.
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
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.

Lester is talking here about per capita which is very different. Nowhere do China claim that they will have a higher per capita income. With China's population that is very unlikely.

The article then does a little maths based on possibly plausible but seeminglly implausible assumptions on population growth and immigration rates to conclude that:
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.

The final line of the article states that:
There may be a Chinese century, but it will be the 22nd century — not the 21st.

My conclusion - why does the New York Times publish stuff like this? Is it fine to throw a few predictions out there but this article is in desperate need of some proper economics. A cynic would say this is all part of the anti-China bias in the US press.


Anonymous said...

To see the opposite bullish view on China, read Robert Fogel's recent NBER paper on the state of the world in 2040.

Maybe you would comment on this one as well.

ChinaEconomist said...

Thanks for the comment - I will have a read of the Fogel paper and perhaps write a post.

On the surface it appears that Fogel has China with a GDP (PPP) of three times that of the US by 2040 (not so far away).

It will be interesting to see how Fogel arrives at these figures.

The population estiamtes all need to be compared to Lester's poor approximations.

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