Sunday, February 27, 2011

On a Per-Capita Basis, China's GDP = U.S. in 1878

There have been reports lately like this one that predict that the U.S. will be the third largest economy by 2050, after falling behind China's GDP in 2020 and India's by 2050. But of course one of the main reasons for the rise in economic output for China and India will be because their populations are so much larger than the U.S. (China: 1.3 billion and  India: 1.15 billion).  The chart above shows real GDP on a per capita basis for the U.S. from 1800 to 1880 (data from Global Financial Data), and for China from 1969 to 2010.  

Bottom Line: While China's exponential economic growth over the last 40 years is pretty impressive, from wretched, abject poverty and only $128 of per capita real GDP in 1969, to per-capita output of $2,800 in 2010, China's economic output on a per capita basis is still about the same as the U.S. in 1878 ($2,800), 132 years ago. 

21 Comments:

At 2/27/2011 7:51 PM, Blogger PeakTrader said...

I asked this question before. Who's better off?

China's per capita real income rising from $500 to $3,000, while U.S. per capita real income rising from $15,000 to $45,000 over the same period?

China gained 500%, while the U.S. gained 200%.

Or, China gained $2,500, while the U.S. gained $30,000.

 
At 2/27/2011 8:08 PM, Blogger PeakTrader said...

However, U.S. real per capita GDP has been flat the past four years, at around $43,000, while China is expected to add another $3,000 to real per capita GDP by 2020:

China's per capita GDP to hit US$3,000 by 2010
(Xinhua)
2008-01-04

China's per capita GDP will reach 3,000 US dollars by 2010...the figure would reach 6,000 US dollars in 2020 if it maintained the current growth rate.

 
At 2/27/2011 8:29 PM, OpenID premierbusinessoperations said...

This is a great comparison and probably a fair and balanced way to compare the two economies. However in the macro-global sense, there can be either winners or losers... based on shear size and growth and the hamstrung present and future US debt conditions, China will certainly exceed the US within 2-3 decades. However, it is important to recognize that China (along with the rest of the world) will face some very critical resource issues to deal with as well.

 
At 2/27/2011 8:40 PM, Blogger PeakTrader said...

China will likely face barriers to growth much faster than Japan, e.g. through depletable resources, aging population (one-child policy), political unrest or rebellion, the "growth-at-any-cost" policy, etc.

 
At 2/27/2011 9:13 PM, Blogger Hydra said...

When it comes to defense spending, only the gross amount of gdp matters.

 
At 2/27/2011 9:37 PM, Blogger PeakTrader said...

Hydra, a more important priority for China may be how to deal with one billion dirt poor people, particularly when they get close to retirement age.

 
At 2/27/2011 9:55 PM, Blogger PeakTrader said...

I suspect, if China's GDP surpasses U.S. GDP and China spends more on defense than the U.S., the U.S. will build a stronger alliance with the E.U., Japan, India, Taiwan, South Korea, and many other countries (the Roman Empire wasn't just Italy).

 
At 2/27/2011 11:37 PM, Blogger PeakTrader said...

It's easy to achieve a high GDP growth rate with the lowest labor costs and lowest prices in the world (and resulting in China's household consumption falling from 45% of GDP in 2000 to 36% in 2010):

Just How Cheap is Chinese Labor?
DECEMBER 13, 2004
Businessweek

"The cost of Chinese factory labor is a paltry 64 cents an hour (in 2002)...It includes both wages and employer contributions for benefits and social insurance. For comparison, hourly factory compensation in the U.S. in 2002 was $21.11."

The end of cheap Chinese labour?
Jul 18th 2010
The Economist

"Compensation of Chinese manufacturing workers was only $0.81 per hour in 2006—just 2.7% of comparable costs in the U.S...Even if Chinese manufacturing wages increased at an average annual rate of 25% over the 2007-10 period—highly unlikely for reasons noted below—the hourly compensation rate would be just $1.98 in 2010.

That would boost Chinese compensation to only about 4% of U.S. pay rates...At $1.98 per hour in 2010, Chinese hourly compensation in manufacturing would still be less than 15% of that elsewhere in East Asia (ex Japan)."

 
At 2/27/2011 11:46 PM, Blogger Hydra said...

China has dealt with that problem for centuries.

 
At 2/28/2011 4:56 AM, Blogger rjs said...

best your children all learn mandarin to prepare for the coming chinese hegemony

 
At 2/28/2011 6:22 AM, Blogger nn said...

LOL thise numbers are way OFF

China's real per capita GDP is ~ $7500.

 
At 2/28/2011 9:49 AM, Blogger morganovich said...

nn-

you are correct that these numbers are pretty far off of current values, but how far depends on what numbers you use. (also note that they are 2005 numbers and are correct and clearly labeled, though one might be driven to ask why such dated data was used)

the number you cite is on a purchasing power parity basis, which makes it a pretty heavily modified figure:

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita

estimates place china between 6800-7500 on this basis.

looked at in purely nominal terms, the figure drops to $3700-4300, still considerably higher than the figure mark cites, but much lower than the PPP number you mention.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29_per_capita

the fact is that no matter how you slice it, china is still a very poor country and even doubling in size from here will only give it nominal per capita output equal to the Dominican republic.

that said, we could look at it another way and marvel at china's ability to gain as much per capita output in a decade as the US did from 1810-75.

this is the so called "advantage of backwardness" where an emerging economy can leapfrog several stages of technological development to catch up with the developed world very suddenly, an option that was not available to the US in the 1800's when we were already at the leading edge of technology.

china's growth will look spectacular (though is also likely overstated) as they play catch up, but already we are starting to see signs of stress in their economy.

manufacturing wages have hit their lewis point and are beginning to rise parabolically with huge retention bonuses (40-50% of annual wages) paid last year.

at the same time, 30% of last years college grads could not find work.

this differential highlights how much is missing from the chinese business ecosystem and shows what will limit them going forward.

 
At 2/28/2011 10:54 AM, Blogger Jet Beagle said...

Per capita GDP is probably the best measure we have right now. But we need to be cautious in our use of those numbers.

The relative size of the retiree populations and the relative size of the youth populations have not been constant across history. That's true for the U.S. and for China. As the retiree population increases, we should expect a slowing of per capita GDP growth. On the other hand, a declining birth rate temporarily yields an increase in per capita GDP.

A better measure, IMO, would be GDP per working age population. Not sure that is available for the 19th century U.S.

 
At 2/28/2011 11:19 AM, Blogger PeakTrader said...

Morganovich, a problem with China reaching the "Lewisian Turning Point" (or labor shortages) is China's skill level hasn't risen much to justify higher wages, in part, because it gave up too much in the global economy to maintain abnormally high growth rates, which restricted improvements in its labor force:

The end of cheap Chinese labour?
Jul 18th 2010
The Economist

"As costs have risen in China, long the world’s shop floor, it is slowly losing work to countries like Bangladesh, Vietnam and Cambodia — at least for cheaper, labor-intensive goods like casual clothes, toys and simple electronics that do not necessarily require literate workers and can tolerate unreliable transportation systems and electrical grids.

Li & Fung, a Hong Kong company that handles sourcing and apparel manufacturing for companies like Wal-Mart and Liz Claiborne, reported that its production in Bangladesh jumped 20 percent last year, while China, its biggest supplier, slid 5 percent."

 
At 2/28/2011 11:38 AM, Blogger morganovich said...

peak-

the flip side of that may be that increasing wages at han hai and foxconn from $130 a month to $170 a month is unlikely to be enough to make them uncompetitive.

that's about $1.33 per day which means it's likely only couple of pennies per phone.

 
At 2/28/2011 11:51 AM, Blogger morganovich said...

though i do agree that they will face significant competition from the neighbors, especially as new plant sites are chosen, but wages are not the only issue - infrastructure to support a plant (power, transport, safety, political stability) matter a great deal as well.

it's difficult to imagine building a plant in yemen or venezeula regardless of how inexpensive the labor was.

 
At 2/28/2011 1:16 PM, Blogger juandos said...

Hmmm, interesting comment on Chinese labor skills...

I wonder how they compare to those of India which I think might be China's biggest competitor in Asia in the not to distant future...

 
At 2/28/2011 4:04 PM, Blogger VangelV said...

I asked this question before. Who's better off?

If you look at debt and purchasing power the differences are not as large as you and Mark are suggesting. While the rural population in China is still struggling and very poor the moves by manufacturing companies into the interior have made things much better for many people who no longer have to work in cities thousands of miles away just to be able to save enough to improve the lives of their children.

There is no doubt that the average Chinese individual has much better access to better food, entertainment, and health care than the average American in 1878. Also keep in mind that the comparison should be made between total compensation after taxes, fees, duties, etc. Take a look at a Chinese engineer and his wife make $15,000 a year while living in a company provided apartment that is theirs to use for life where all utilities are paid for and where health care and daycare expenses are taken care of. Is that family worse off than that of an American engineer's family making $85,000 per year but loses 53% of that income to taxes at all levels, pays for daycare expenses, as well as transportation, mortgage, utilities, and other living costs the Chinese family does not deal with. It is likely that the Chinese family is saving 30-50% of its earnings while its American counterpart is drowning in debt and has little equity or savings.

Obviously, many of these type of articles and commentaries are not written by anyone who has actually been to China and seen how people live.

 
At 2/28/2011 5:31 PM, Blogger Mr. Econotarian said...

It should also be kept in mind that China is two separate countries, the modern one and the ancient one, and citizens still have to get an internal passport to go between them!

Modern Chinese cities probably have GDP per capita of the US in 1960, whereas ancient china probably has a GDP per capita of the US in 1840.

One China has some of the world's highest skyscrapers and bullet trains. Another china has non-mechanized subsistence rice farming. It will take a long time for ancient china to be integrated into a modern economy. But no doubt it will occur.

I still say "good for China", this is much better than starving 20-40 million of its people to death during the Great Leap forward...

 
At 2/28/2011 5:44 PM, Blogger Hydra said...

A better measure, IMO, would be GDP per working age population.

======================

Good idea.

 
At 2/28/2011 5:47 PM, Blogger Hydra said...

It will take a long time for ancient china to be integrated into a modern economy. But no doubt it will occur.


==============================

Incentive counts.

The house of Saud was riding around on camels with their entire treasury in a sack, not so long ago.

Saudi Arabia still has a long way to go, but considering they started from the 12th century in 1915.....

 

Post a Comment

Links to this post:

Create a Link

<< Home