After months of speculation, it’s
finally official:
the
Chinese economy, as measured by GDP, is larger than the Japanese
economy. In the second quarter of 2010, the Japanese economy was
valued at about $1.29 trillion, the Chinese economy at $1.34 trillion.
The gap will widen next year and for the foreseeable future.
The
swap of the number two and three spots in the world, behind the U.S., is
heralded as (i) a sign of Chinese ascendance and Japanese stagnation;
and (ii) proof of the superiority of the PRC’s state-led development
model.
This swap is certainly
not
the result of a superior development model and it might not even
say too much about Chinese ascendance. This is because, while GDP does
measure size, it is a flawed measure of economic performance and
prosperity.
Start with what GDP does
measure. On simple GDP, China just became larger than Japan. However,
the PRC repeatedly revises its own GDP higher and is still missing some
service sector and rural transactions. It probably passed Japan several
years ago. Also, GDP calculations adjusting for different prices within
economies —known as purchasing power parity—indicated China’s economy
was larger than Japan’s as early as 1995. This is old news.
It’s
true that simple GDP does matter. The increasing size of China’s economy
means the entire world is now affected by its voracious demand for oil,
iron ore, and other commodities, as well as its low-cost supply of
consumer electronics, clothing, and other goods.
But for
successful economic development, what matters far more is the wealth of
individuals and families. Japanese economic weakness is not shown in its
still impressive 3rd place in world GDP but in its roughly 40th place
on measures of personal income. From an economy once thought better
managed and better performing than the U.S.,
the
average citizen of Japan is now poorer than the average citizen of
Mississippi. American citizens are noticeably richer than citizens
of most other developed countries, such as in the EU. But Japan, in
particular, is moving backward.
In contrast to Japan’s 20 years of
weakness, there has been stunning growth in Chinese GDP per capita for
30 years. Yet China is still a developing economy.
Chinese
GDP per capita, even adjusted for purchasing power, is about 15 percent
the level of the U.S. Further, GDP per capita actually exaggerates
China’s performance.
The PRC’s incomplete data revisions undermine
comparisons but, from the middle of 2000 to the middle of 2010, GDP per
capita increased by more than 9500 yuan or, at present exchange rates,
another $2800 in annual income. However, urban disposable income
increased less than 6800 yuan, or about $2000 in annual income. And
rural income increased less than 2000 yuan, or $600 in annual income.
Urban
and rural income increases don’t average to the GDP per capita increase
because most households see little of China’s GDP gains. Instead, the
benefits of the PRC’s growth are captured by state-owned enterprises.
Japan is struggling, but this moment of apparent Chinese triumph
requires a disclaimer:
fast
GDP growth is overrated when individuals and families lag behind.
