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China v US: An economic rematch


Mark Thirlwell

This post is part of the US-China: Measuring decline and rise debate thread. To read other posts in this debate, click here.

27 January 2012 09:34

This post is part of the US-China: Measuring decline and rise debate thread. To read other posts in this debate, click here.

Andrew Shearer's recent post on US-China comparisons prompted me to take a look at the paper by Michael Beckley he recommended. While I don't have anything useful to contribute on the specific subject of the US military/security edge over China, a couple of things did strike me.

First, I would summarise many of Beckley's points regarding the clear superiority of the US in measures of innovative capacity such as R&D spending and patent citations as reflecting the big difference in GDP per capita between the two countries. Given the close correlation between the level of a country's development and many of these variables, these results are exactly what we should expect when comparing a developed and developing economy. 

Or, to put it another way, countries at the economic frontier are likely to grow more through innovation while countries involved in catch-up growth will rely on a different growth model. 

This difference is one of the factors that lie behind concerns about so-called 'middle-income traps': the policies and institutions you need to deliver the growth that get you from low- to middle-income status may not map all that well onto those that get you from middle-income to high-income status. So while it's quite possible that the gap with the US on these innovation-style indicators will narrow as China develops and its GDP per head rises, it's not a foregone conclusion.

Second, I was surprised by the claim – at least with regard to economic variables – that the US lead over China has grown since 1991. That's certainly not what I would take away from the data. Of course, there are lots of potential variables to consider, and there are probably some data points that would support this story. 

But there's a great virtue in parsimony, and given that the simplest measure of wealth we have is GDP, I'm going to claim that comparing GDP and GDP per capita over time should do a pretty good job of capturing much of what's going on in the relative economic positions of the two economies. After all, most of the other potential variables we might consider can be thought of as inputs or contributors to GDP. And as I've noted before, although GDP has a lot of well-known shortcomings, a general dearth of alternatives tends to mean that we end up using it anyway.

That still leaves us with the problem of how best to measure it. Long-standing Interpreter readers will be familiar with the ongoing debate over whether PPP or US dollar GDP is the best choice. Arvind Subramanian discusses this issue in his recent book on China's rise, and goes for the interesting option of weighting the GDP variable in his 'index of economic dominance' half on a PPP basis and half on a US dollar one. 

Below, I try to side-step this issue by charting both the US dollar and the PPP series for GDP and GDP per capita, expressed as a ratio of the Chinese to the US value (all data taken from the latest IMF WEO database, including the latest Fund forecasts out to 2016):

Looking at these two charts, even on the measure that's least favourable to China – GDP per capita measured on a US dollar basis – it's pretty hard to argue that China has gone backwards relative to the US since 1991. On a PPP basis, the degree of catch-up is actually rather impressive. Moreover, it's possible that this still understates China's progress.

Finally, having just made the case for GDP as the appropriate metric for economic comparisons, I'm going to back away from that claim a bit. One recent  approach to measuring national wealth has been pursued by the World Bank, where analysts have constructed an alternative estimate comprising the sum of produced capital (machinery, structures and equipment), natural capital (agricultural land, forests, minerals, energy) and intangible capital (calculated as a residual, but intended to capture human, social and institutional capital including hard-to-measure factors like the rule of law and the quality of governance). 

The idea of this measure is that, unlike GDP, which only captures the value of production, it takes into account both environmental factors and intangibles. The Bank has produced estimates for national wealth for three years (1995, 2000 and 2005), and again I've plotted the ratio of Chinese to US wealth on both a total and a per capita basis.

I'll finish with two points based on this last comparison.

First, both the overall and the per capita wealth ratios are much lower than the comparable ratios for GDP. While this reflects significant gaps across all three measures of wealth — according to the Bank's estimates, natural wealth per capita in China in 2005 was about 30% of US levels, produced capital was about 6% of US levels, and intangible capital less than 1.5% of US levels – the last of these is the standout item for me. This brings us nicely back to my opening point: that there are significant differences between developed and developing/emerging economies. One of those differences is the relative size and quality of the kind of things that make up intangible capital.

Second, even on these measures, China has still made some modest progress in terms of catch-up. This slower progress also suggests (not surprisingly) that closing the gap in human, social and institutional capital is likely to be tougher for emerging markets than closing the gap in machines and factories.

Photo by Flickr user kk-.