November 17, 2007

Economic Juggernaut Of China Just A Mirage?

For the last few years, analysts have warned that China's growing economic power would threaten America's leadership position on trade and and the global economy. Two days ago, in a mostly overlooked Financial Times report, an American economist threw a healthy dose of cold water on such speculation. The tea leaves, Albert Keidel insists, show an economy barely over half of what most analysts assumed in China:

China's economy is 40 percent smaller than most recent estimates, a US economist said Wednesday, citing data from the Asian Development Bank and guidelines from the World Bank.

Albert Keidel, a senior associate at the Carnegie Endowment for International Peace and a former US Treasury official and World Bank economist, made the comments in a report published by the US think tank and in a commentary in the Financial Times.

Keidel told AFP he made the calculations based on a recent ADB report that made its first analysis of China's economy based on so-called purchasing power parity (PPP), which strips out the impact of exchange rates.

"The results tell us that when the World Bank announces its expected PPP data revisions later this year, China's economy will turn out to be 40 percent smaller than previously stated," Keidel wrote.

"This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities such as growth, public investment, pollution control and poverty reduction."

Poverty has been sharply underestimated, hidden by the vagaries of the exchange rates in play. Instead of 100 million Chinese living below the dollar-a-day poverty line, that number moves to 300 million -- the rough equivalent of the entire US population. And while China's economy has begun to move past Japan's as the largest in the Pacific Rim, it will take two decades longer than expected for them to challenge the US for global economic leadership.

Keidel notes that the efforts to move people out of poverty in China and India -- which Keidel also re-evaluates in this report -- was much larger than first thought, and the progress made has not been as impressive as assumed. China has moved perhaps 40% of the poor as defined by the World Bank to a better standard of living over the last twenty years, but not the two-thirds most economists had assumed. Because of this, the Chinese priorities for economic development make more sense, as does its monetary policy, to which the US regularly objects.

It also means that the fears of explosive growth in Chinese military investment are probably unfounded. Their economy isn't strong enough to fund that kind of growth, Keidel says, and it won't be for many years. Beijing still has too much on its plate in attempting to breathe economic life into too many domestic regions to worry much about projecting military power, or to have the realistic resources to do so.

As Jon Henke notes, if Keidel's analysis gets proven correct when the World Bank numbers come out later this year, many Western economists will have a lot of explaining to do to both governments and investors. The Asian stock market could take a beating when that happens, which will make at least a few of these into ex-analysts. It may also have some impact on long-term military planning here in the US, taking us from a near-panic mode to something more rational, allowing us to plan wisely for growth in our Pacific assets without provoking an arms race that neither country can afford.


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