Taking a Step Back – Reflecting on China’s Growth

Fortune Cookie: What does China's future hold

Although the focus of contemporary discussion about China has been centred upon its astonishing recent growth, it’s all-to-easy to lose sight of the fact that large swathes of China haven’t yet felt the benefits of industrialisation.

Indeed, even we are guilty of looking rather too closely at the good stuff – Only yesterday we made a post about multi-millionaire 10 year-olds and billion-dollar Internet start-ups in the People’s Republic. So, in an effort provide some balance when discussing emerging markets, the following article provides for a sobering reflection upon where China truly stands in terms of its population’s wealth and what the prospects are for closing the poverty gap in the country:

Albert Keidel

In a little-noticed mid-summer announcement, the Asian Development Bank (ADB) presented official survey results indicating China‘s economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China’s size using purchasing power parity methods. 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 per cent smaller than previously stated.

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. The number of people in China living below the World Bank’s dollar-a-day poverty line is 300m – three times larger than currently estimated.

Why such a large revision in the estimates of China’s economic condition? Until recently, China had never participated in the careful price surveys needed to convert accurately its gross domestic product into PPP dollars.

The World Bank’s estimates based on summary data from the late 1980s probably overstated China’s PPP gross domestic product even then. Up to now, the bank has revised its estimate very little. In the meantime, China has repeatedly raised the prices of food, housing, healthcare and a range of other non-traded goods and services. These reforms should have lowered the PPP adjustment, but the bank left it basically unchanged.

For China, the ADB correction needs to be made back to the 1980s and 1990s, when instead of World Bank estimates of roughly 300m people below the dollar-a-day poverty line, the number was more likely more than 500m. China has made enormous strides in lifting its population out of poverty – but the task was perhaps more gargantuan than most people thought and progress has been overstated by bank estimates.

The immediate international interest is for China to succeed in its still daunting internal development challenges. Such opportunities might be manageable if engagement focused on a needy sub-region such as Sichuan Province, where the US has a flourishing Peace Corps programme, the goal being to promote economic development.

Close contact with China’s development process on the ground might also help us understand better the lessons China’s experience might have for so many poor countries where development is stalled.

The above article recently appeared in the Chinese Financial Times

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