The media has reported that China has passed Japan to become the world’s second largest economy. But I wonder what that really means.
During the Cold War there were reports about how big the Soviet Union’s economy was or how good East Germany was doing. But when the Cold War ended, we discovered things weren’t like those stories indicated.
First, you couldn’t be sure whether the numbers that the Soviet Union officially put out about its economy were right. They could have lied at the top level. But even if the official numbers accurately reflected the numbers reported to the central government, were the numbers being submitted right – and what did they represent?
In a command economy like the Soviet Union, and in a totalitarian state like the Soviet Union, if the central government gave a particular industry a goal to meet, you can be sure they’d meet it. Or at least the numbers they submitted to the central government would say they met it. But how trustworthy were those numbers? If you were being pushed, why not fudge the numbers? Maybe they would catch you eventually, but you wouldn’t be in trouble now.
Alternatively, if there was an output goal or production goal, what was being measured was the number or cost of things being produced. There was nothing in the goal about the products being any good. As long as you made the number of products required, who would know if what was made was any good? Shoes that didn’t fit, or weren’t the style or color that people wanted, counted toward the production goal as much as things that were good. Low quality goods counted just as much toward the GDP number that the central government put out as products people really wanted. So what if the products sat unused in a warehouse or broke shortly after somebody bought them. They still counted toward the quotas, and they still let the government brag about how much the economy was growing.
Except that once the people had a choice to buy good products, those old factories and those old ways of doing things collapsed. And the GDP figures that included them collapsed along with them. Once the East Germans could buy Volkswagens, nobody wanted a Trabi – because the Trabis were only good when people had no other choice. The number that the Trabis added to the GDP of East Germany was mostly illusory, and it disappeared once East Germans could buy something else.
Which brings me to China. I am not saying China is lying about its economy. I am not saying China is making poor quality products. I don’t know. But I do sort of wonder how real some of China’s GDP number is.
GDP includes all spending, whether by consumers or businesses or the government. The construction of an office building counts just like the food or clothes that a consumer buys. Which raises a question about GDP as a measure of an economy. The Soviet Union included in its GDP products that weren’t any good – or at least weren’t worth what they were counted for in GDP. China includes in its GDP huge amounts of capital investment: Bullet trains; office buildings; highways; factories. When they are built, the cost of building them is included in GDP.
But what if, after these things are built, they aren’t fully used – or they aren’t used at all. There are reports from China of high-speed trains running almost empty because tickets are so expensive that most people can’t afford them. There are office buildings that are unused because they were built in places that don’t need them. New aluminum smelters have been closed because there is a glut of production capacity around the world and not operating them will hopefully keep prices up. (You can see more examples here and here.)
If it is things like this that have pushed China’s GDP ahead of Japan’s, is that really a sign of a bigger economy? Is China producing more useful things or just producing more things? Will all of this capital investment make the economy grow in the future or is just a glorified variation of paying people to dig a ditch and then to fill it up again? It raises GDP, but does it provide any value?
I don’t know the answer, but we should keep things like this in mind when we hear about how much China is growing and how big their economy is. Because sometimes numbers don’t tell the whole story.