Bloomberg recently pointed out that the Chinese economy is “bigger than” the economy of the United States. Today we’re going to explore why. Actually they did a pretty good job with the article; my standards might be low but I thought it was better than I expected from that source. My experience (tl;dr) is that they are certainly right about that conclusion, but hey I will draw it out into a lengthy blog post.
Another Bloomberg article claims that the Chinese economy isn’t and won’t be bigger than the US economy for 10 years. I completely disagree with most all the numbers they presented then (a year and a half ago now). But hey – it’s really hard to come up with accurate numbers in economics – so hard that almost nobody even tries to put error bars on their stats. And unfortunately it’s even harder to draw useful conclusions from them.
Mea Culpa
It seems like these days every 瓜老外 (melon [head] foreigner) has a blog or youtube channel about life in China. But really, what do you expect from us? I’ve been here less than a year, and only speak beginner level Mandarin. You think you are going to arrive at some high level knowledge of east Asian cultural anthropology here? Good, I didn’t think so either. But just maybe, you haven’t even been to China – so in this case the perspective I offer could – perhaps – give you something. It could also be that my relative ignorance on the topic could allow me to explore some perspectives which would be off limit to the seasoned professional. This happens from time to time in technical fields of academia so, why not? Ok on to the show.
The Chinese economy is MUCH larger than the United States’ economy.
Well this is the immediate impression upon seeing the place from the air, and walking around in a few cities. There are way more people, and each one of them does way more commerce. There are so many more restaurants, more pushcarts, more vehicles, more fleets of BMWs and Audis, more well-dressed fruit-stand operators on every corner, more advertisements, and more electronics. More bikes, more motorbikes, more electric vehicles, more exercise watches, more digital payment systems, and more language schools. More dancing light shows on buildings, more buildings, more and better and bigger roads, more and better trains and subways. More shopping malls, more farmers markets, and more fireworks. More all-night bars, more cigarettes, more trash, more plastic, more taxis, and more dancing seniors on the streets. This is not just the mega-cities but even “small” cities, even those which have basically no sign of existence on the English speaking web.
You get the idea? I feel like one of the Spanish explorers arriving in Tenochtitlan (now Mexico city) – if you haven’t read any of these accounts, they were astounded by the magnitude and variety of commerce taking place in what was then the biggest city in the world, or at least much bigger than anything in Europe. I have the same questions as I look around here. How is this possible? What could possibly support all this infrastructure, energy use, food consumption, etc. etc. ? Is this Technological Tower of Babel really going to stay upright? OK so not everything is bigger here. There are fewer police, fewer psychoanalysts, fewer jails, fewer golf courses, and not as much live music. Not as much cannabis. Not as much drug addiction (especially coffee). Not as much begging in the street.
Does an economy have a size?
Lets take a step back. Does it even make sense to represent some complex economy with a scalar number? We love to put scalars on things as then we can compare them directly, but the question of whether or not the comparison has any meaning in the context of your choosing is another one. It’s not clear that putting a number on the activities of people inside an arbitrary border is a useful exercise, and it’s also not clear that one would rather have this number be larger or smaller.
But lets ignore these most important considerations for now and just go on anyway.
GDP
I know right? GDP is somehow an important measure of the economy, everybody knows. Well as much as you might understand this as unspoken in a lot of discourse on economics, in actuality most economists don’t come right out and say it. But hey, let’s take a look. There it is right in figure one of the Bloomberg article.
The first thing we see is that it is measured in dollars. The dollar is a privately issued or fiat currency, and so there is no cost or limitation to issuing more of them. It appears at first glance to a scientist that GDP can’t possibly be a useful figure, if it is measured in such a unit. We can tell this is a broken measurement, for example we see that the GDP of areas undergoing hyperinflation shows massive increase – although there isn’t much change in the underlying economic activity. Zimbabwe’s economy grew by a million percent or so in 2015, right? Is this a useful number?
It turns out that there are a couple assumptions we can make, or definitions if you like, that return GDP to a useful status.
We must assume that the activities of the wealthiest people don’t count (or aren’t what we are interested in) when we are talking about this measure of size of an economy.
If we make this assumption, then GDP becomes meaningful again – and it only breaks as a useful measurement when the money issuing class (if this exists) begins to be a rapidly changing influence on the economy.
OK so this is rather forced I know, but the thing is we want to find some number – even if it’s not clear what it represents at least it is something – that we can try to use as a yardstick. So let’s look at the reported GDP. Note that “reported” has various levels of significance and difference in different parts of the world. Who are we reporting it to? Who is tallying and why should we be honest? To see the kind of money that is floating around China, here’s another article from the same source. But let’s look at reported GDP, just for fun.
China – 75 Trillion 人民币
USA – 0 人民币
Haha you see what I did there? Not many people report earning CNY back stateside do they. OK so let’s try to compare:
USA – 20 Trillion 美元 ($)
For a quick back of the envelope calculation to compare these numbers, we see that a cheap pack of smokes in China goes for 5 to 10 CNY, so we could get 7 to 15 trillion packs of smokes with that kind of money. In USA the cheap smokes go for 10 to 20 dollars so you could get 1 to 2 trillion. This puts the Chinese economy at some 7 times the size of the US economy.
Not fair you say? Well sure, tobacco is heavily taxed back in the land of the free. When we are looking at GDP, why not look at the Big Mac index – another champion of The Economist. This isn’t really fair either because 麦当劳 is more of a fancy foreign restaurant in China. In fact it enjoys such a reputation on the European Continent as well (which you can spot this if you squint at the big mac index or wind up travelling through Europe). They claim it’s 20 kuai for a big mac, which is definitely very high here. A typical restaurant will give you an sizable lunch for about half that. But anyway, let’s compare that to the US at $5.3 (where?) for the sandwich. This would mean you can get about 4 trillion big macs in china for their reported GDP, compared to, well really this is within any error bars – these two numbers are about the same.
Back to the topic!
Sorry about that diversion! OK we’re not going to quantitatively prove the Chinese economic miracle exists. However we are going to try to explain it, thanks to a Russian colleague of mine, who insisted we answer this question one night around a table with a group of Moroccans, Americans, and Russians at a local bar.
Without further ado, here are some potential explanations for the Chinese economic miracle:
One-Party Politics
Some people say that the one-party system enables quick action and has avoided stagnation and helped quick adoption of new technologies. Well, by itself this isn’t going to do much but perhaps with a lot of other things in place it could help. Some might argue this is basically the way things work everywhere to dome degree, as there are factions within the party.
Luck / Timing / Not Invaded by Orcs
Not being invaded by barbarian foreigners can really help the development. Also one can never deny an element of luck and timing. Perhaps the revolution came at the right moment in terms of global economics and technology?
Population
Well this is certainly a dominant factor. However comparison to India here is worthwhile.
Language
Perhaps the requirement of literacy and the symbolic work that it includes helps people become better functioning members of a society. There’s a real chance that the language itself has something to do with the economic miracle. “Culture” is of course the obvious answer to our problem, but really now we are trying to figure out what that means.
Soil
A wise person once said the health of the people is the health of the soil. After all, we are what we eat. Thanks to millennia of floods from the Himalayas running through mainland china, and not as much desertification, there is a lot of deep and mineral rich topsoil here. This is hugely important for feeding folks and stopping mineral deficiencies, and so plays at least some role in the economics.
Leadership
You might ask for example, why they have built so many great trains over here while they haven’t built any in the United States. Why not? Well the obvious answer worth considering, is that the leaders cared in one place while in the other they didn’t. Whether this should be attributed to less corruption, better education, or a better selection process, I will leave to you to figure out.
OK we’ll stop there for now. Let me know what you think, if there’s an economic mircale here at all, or if you have other factors in mind that could have given rise to this alleged miracle.