Monday, August 30, 2010

Oriental Bookeeping

It was recently announced that China had finally surpassed Japan's GDP to make it the second largest economy in the world --
China surpassed Japan as the world’s second-largest economy last quarter, capping the nation’s three- decade rise from Communist isolation to emerging superpower.

Japan’s nominal gross domestic product for the second quarter totaled $1.288 trillion, less than China’s $1.337 trillion, the Japanese Cabinet Office said today. Japan remained bigger in the first half of 2010, the government agency said. Japan’s annual GDP is $5.07 trillion, while China’s is more than $4.9 trillion.

However, a few observant souls pointed out something which should have been obvious -- that in real terms China's GDP is actually far higher than the nominal figure would suggest. By other measures, China passed up Japan long ago. When measured in Purchasing Power Parity (PPP), China's GDP is about twice as large -- indicating that its currency trades on forex markets at about half its real value relative to the yen.  Compare the following data on nominal GDP vs. PPP GDP:

Nominal GDP

--  European Union  16,447,259
1  United States  14,256,275
2  Japan  5,068,059
3  China  4,908,982
4  Germany  3,352,742
5  France  2,675,951
6  United Kingdom  2,183,607
7  Italy  2,118,264
8  Brazil  1,574,039
9  Spain  1,464,040
10  Canada  1,336,427
11  India  1,235,975
12  Russia  1,229,227
13  Australia  997,201
14  Mexico  874,903
15  South Korea  832,512
16  Netherlands  794,777
17  Turkey  615,329
18  Indonesia  539,377
19  Switzerland  494,622
20  Belgium  470,400


--  European Union  14,793,979
1  United States  14,256,275
2  China  8,765,240
3  Japan  4,159,432
4  India  3,526,124
5  Germany  2,806,266
6  United Kingdom  2,139,400
7  Russia  2,109,551
8  France  2,108,228
9  Brazil  2,013,186
10  Italy  1,740,123
11  Mexico  1,465,726
12  South Korea  1,364,148
13  Spain  1,360,605
14  Canada  1,281,064
15  Indonesia  962,471
16  Turkey  880,061
17  Australia  851,170
18  Iran  827,858
19  Taiwan 735,997
20  Poland  688,761

PPP looks at how much stuff a unit of currency would buy in a local economy, then compares that to the purchase price of the same stuff in another currency in a different economy. Since theoretically (but of course not practically) all goods trade on an international market, they should have the same or very similar prices in every market -- much like turning everything into a commodity money a la the old international gold standard that prevailed in the nineteenth century.  Notice the particularly glaring disparities of the highlighted countries, especially China and India.  All tend to be (amazingly!) competitive exporters.

I also noticed this huge disparity when I was in China back in 2005. The prices of goods did not remotely reflect the exchange rate, but were very consistent with one another relative to what I would expect to pay in America. The exchange rate was (I think) about eight to one at that time, but goods were priced as if the rate were only about four to one. For example, a pound of grapes that might go for $1 here was only about 4 yuan instead of eight.

What a steal, right! No wonder Chinese exports are so 'competitive' -- they're being given away at half-price. At fair valuation, they wouldn't be competitive at all. I've said it before and I'll say it again -- the Chinese economy is not that competitive. People not that close to the situation cannot comprehend the wastefulness and corruption that is endemic there. China has had to rely on sleight of hand like this to keep it's edge, and now that this scheme has exploded on it, the Chinese economy is out of luck. It is said that China will start to wean itself off exports and start relying on domestic consumption, but nobody seems to want to ask the obvious questions -- if it were that easy, why hasn't it happened already, developing organically? Why not do that all along if that were all there was to it? Why did China need export markets to come out of revolutionary economic deep-freeze?

The obvious answer is that it didn't because it can't, and basketcases are basketcases for a reason. People who don't need crutches don't use them, and nobody with any sense sees a guy in a wheelchair and expects him to leap up and run a marathon on command. But then, I suppose that economics is not a subject to expect to see much good sense.

I don't care what the experts say, that country is going nowhere fast. Barring total annihilation of the West, China will not surpass US GDP by 2030, and it may not even do it by the end of the century.  Here is an excellent (thought somewhat lengthy) article about Japanese-Chinese similarities, and what might happen to China going forward.  His analysis is not particularly Austrian -- he attributes Asian bubble-blowing to built in subsidies that force manufacturing and industrial development at the expense of domestic consumers -- but the outcome is not entirely different from an export mania created by currency manipulation.  In the end, the nation develops an established economy dependent on the distortions, and unable to function and develop once they've lost any meaningful effect.

Here's a particularly interesting passage:
But for a long time the problem of misallocated investment, which was whispered about in Japan but not taken too seriously, didn’t seem to matter. After all, as nearly everyone knew, Japan’s leaders were extremely smart, with a deep knowledge of the very special circumstances that made Japan different from other countries and not subject to “western” economic laws, with real control over the economy, with a strong grasp of history and penchant for long-term thinking, and most of all with a clear understanding of what was needed to fix Japan’s problems.

And look what a great job they had already done: by the early 1990s Japan had generated so much investment-driven growth that it had grown from 7% of global GDP in 1970 to 10% in 1980, and then surged to nearly 18% at its peak in the early 1990s. In about twenty years Japan’s share of global GDP was two-and-a-half times its initial share. That is an extraordinary growth story and one that can only be explained as a function of a new kind of economic thinking, right?

But less than twenty years later, after a terribly long struggle to adjust to high debt levels and massive overinvestment, Japan is about to be overtaken by China with only 8% of global GDP. Japan, in other words, has given back in less than two decades almost the entire GDP share it had taken in the two astonishing decades that preceded it (while during the same period the US has maintained its share). What’s worse, it is hard to pick up a newspaper today and read about Japanese policymakers without getting the idea that they are a totally dysfunctional, narrowly ambitious, and not especially savvy lot, much like their US and European peers. As Mortimer Snerd used to say, who woulda thunk it?

Don't be fooled by the arguments of the brainwashed 'capitalists' touting repressive, backwards societies as models for Western policy and economic development, and don't blindly accept whatever outcome the market produces as the honest-to-goodness 'correct,' most optimal arrangement.  There will never be anything approaching free markets or free trade so long as there are central banks and meddlesome governments to manipulate currencies and terms of trade.  As long as they exist, you can't really trust the 'market' outcome.

It's all a game. 

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