Friday, March 02, 2012

Per-Capita, the U.S. is a Century Ahead of China

There's been a discussion in the last two issues of The Gartman Letter (subscription required) about the relative size of China's economy on a per-capita basis, and then adjusted for Purchasing Power Parity.  Here are some contributions to that discussion:

1. According to the IMF, China's per-capita GDP in 2011 was $5,200, putting it on par with the per-capita GDP of Angola ($5,061), Macedonia ($5,012) and Algeria ($5,001).

2. Adjusting for Purchasing Power Parity, China's per-capita GDP in 2011 increases to $8,400, putting it on par with Ecuador ($8,335) and Belize ($8,275).

3. Comparing the U.S. to China: Per-capita GDP (in 2011 dollars) in the U.S. first reached a level of $5,200 back in 1850, more than 160 years ago (see chart), and reached $8,400 back in 1905, more than a century ago.

Bottom Line: Yes, it's true that China has made phenomenal economic gains over the last several decades and has become the second largest economy in the  world, and it's true that China will probably surpass the U.S. to become the world's largest economy within the next decade.  But on a per-capita basis, the U.S. is still a full century ahead of China, and it could take many generations of economic growth in China before it even comes close to approaching the per-capita GDP in the U.S.

Let's keep it in perspective.

28 Comments:

At 3/02/2012 11:56 AM, Blogger morganovich said...

a couple thoughts:

looking at how long it took us to go from 8k to 50K is not necessarily instructive.

an enormous number of productivity enhancers have come into existence and are readily available, meaning they ought to be able to do it much more quickly, at le4ast in theory.

in practice, until their political environment changes significantly, china is going to have a very difficult time joining the rich nations club.

you cannot get there by manufacturing. you need to move to an information/knowledge based economy, and china's current political system is very poorly suited to that and will hold them back badly. the great firewall keeps out growth and wealth as well as porn and politics.

further, all indications are that china has reached its lewis point. wages are rising rapidly which is going to make them less competitive as the world's workshop.

so, while in theory, they ought to be able to reach western wealth levels far more quickly than we did, in practice, they seem politically determined to never let it happen at all.

it's going to be very interesting to see how those forces play out.

 
At 3/02/2012 12:00 PM, Blogger Jon Murphy said...

I agree Morganovich.

One area that I counterpoint you on (I don't disagree) is the wages bit. Wages in the eastern part of the nation and port cities (Beijing, Shanghai, Tanjin, etc) are very high. However, wages in the western part of the nation are still very very low. If China wishes to remain a workshop, they may try to incentivize companies to move out west. The obvious problems with that are the major lack of infrastructure and long transportation times.

 
At 3/02/2012 12:23 PM, Blogger Benjamin said...

China's central bank has a "revealed preference" for growth, as opposed to recondite inflation-fighting.

Japan's central bank has engineered 20 years of deflation.

The Tale of Two Countries.

China will become the largest economy on the planet within short order, and the most powerful country on the planet as well. Without firing a shot.

Japan is becoming a backwater nation.

Lessons to the wise.

 
At 3/02/2012 12:51 PM, Blogger morganovich said...

jon-

agreed on the east west dichotomy, but i'm not sure there is as much to do there as you may be thinking.

there has been massive migration from west to east. that has kept labor costs low. that's how a lewis point works.

you get stable wages for a long period, then, suddenly, they spike when there is not more labor to be shifted from rural agrarian pursuits to urban manufacturing.

i'm not sure there is a great deal of available labor left in the west, though i have not seen any really good data, so i could be wrong.

have you seen any actual numbers on that?

 
At 3/02/2012 1:09 PM, Blogger Jason said...

Perspective! What's that?

 
At 3/02/2012 1:22 PM, Blogger cliffwarren said...

Hi Guys,

I have a difficulty rationalizing two things in the economic news of the day.

On the one hand, we hear that China manipulates their currency so that they can continue to lead in manufacturing, take jobs, etc., and so they have millions of people working like dogs for little pay...

Then on the other hand, with regard to the oil market, they're slurping up more and more, millions now going out to buy new Buicks and filling them up at their equivalent of $4/gallon.

Something doesn't add up here. Perhaps there are a couple of bubbles ready to burst?

 
At 3/02/2012 1:25 PM, Blogger Jon Murphy said...

have you seen any actual numbers on that?

I do not, at least not at hand. I'll do some research this weekend and see what I can come up with.

 
At 3/02/2012 1:26 PM, OpenID Sprewell said...

The real interesting part of that chart is the phase change in the '20s, where real GDP per capita only increased by $7-8k in the previous century but has increased by $40k in a bit less than a century since. That shift in growth was presaged by all the volatility of the '20s and '30s, as electricity, globalization, and mechanization fundamentally changed the economy back then. I think the recent milder volatility presages another such phase shift into higher growth, as the computer/internet, further globalization, and soon robotics will kick us into yet another higher gear.

 
At 3/02/2012 1:33 PM, Blogger Buddy R Pacifico said...

Prof. Michael Pettis, at the China Financial Markets blog, predicts:

"By 2013-14 Chinese GDP growth will slow sharply, and by 2015-16 predictions of a sustained period of growth rates at 3% or lower will no longer seem outlandish."

Why? Because of high bank borrowings to finance investments in State Owned Enterprises, especially those at local Communist Party levels. Prof. Pettis elaborates on this:

"With consumption growth constrained and the external environment unsound, increasing investment is the only way to keep GDP growth rates high"

" By definition this results in an unsustainable rise in debt."

So, much lower growth is probably on the horizon, without a move away from SOEs through privitization by China.

 
At 3/02/2012 2:08 PM, Blogger Rufus II said...

100 years ago, we had a wonderful Railroad System, already built.

The Chinese haven't even gotten started, yet. They've got some work to do.

 
At 3/02/2012 2:56 PM, Blogger Junkyard_hawg1985 said...

The comparison in this post is one of Mark's all time greats. Kudos.

One thing China has going for it is that more Chinese (& Indians) view capitalism as the preferred economic policy than Anericans. Keep teaching Americans about free markets Mark. We need it.

 
At 3/02/2012 3:39 PM, Blogger Buddy R Pacifico said...

J.Y. Hawg states:

"One thing China has going for it is that more Chinese (& Indians) view capitalism as the preferred economic policy than Anericans."

What is the state of capitalism in China?

The Economist, on Jan 12, 2012, had an article titled "visible hand" about "the rise of a powerful new form of state capitalism". This is very interesting reading, and helps give insight into the state of "state capitalism" in BRIC countries.

Hawg, are you endorsing a the Chinese national/state model capitalism, where government entities control 80% of exchange listed companies?

Or, are you suggesting that most of U.S. citizenry does not endorse U.S. Capitalism, and further that most Chinese citizens would prefer the U.S. system over their own.

 
At 3/02/2012 3:44 PM, Blogger jeppen said...

So, it took the US 55 years to go from $5200 to $8400. It took China less than 8 years!

China doesn't have to invent technology as they go along. They just have to scale the economy, which it seems you can do at close to double digit rates until you get close to the top.

Taiwan doubled up from $17,400 in 2000 to $35,700 in 2010. It seems China is merely two decades (two doublings) after Taiwan.

 
At 3/02/2012 4:06 PM, Blogger Jon Murphy said...

Or, are you suggesting that most of U.S. citizenry does not endorse U.S. Capitalism, and further that most Chinese citizens would prefer the U.S. system over their own.

If I may interpret for Junkyard_Hawg (and please correct me if I am wrong), I think he is talking more about Chinese attitudes towards Capitalism than American. Americans tend to have a distrust for anything that is not licensed by the government. I mean, how many advertisements do you say that say "fully licensed contractors" or the like. Look at Wall Street and the anger that has come from that. Or even Wal-Mart. The government seems to give things an air of legitimacy. The opposite is true in China. Consumers much prefer the black-market street venders than government stores.

 
At 3/02/2012 4:34 PM, Blogger PeakTrader said...

China's GDP is an illusion. The private sector is small (consumption fell from 45% to 36% of GDP in the past decade). Basically, China is a giant assembly plant.

And there's no "Lewisian turning point." There are over 100 million Chinese working in manufacturing, and one billion peasants making almost nothing.

In the 1980s, many believed Japan was on the verge of surpassing the U.S. economy, although the Japanese lived in tiny rooms they called houses, drove compact cars, paid $5 for a glass of orange juice, $25 for a steak, $15 for a small piece of sushi, etc.

What the Chinese do best is corruption, crony capitalism, misallocate resources, cause negative externalities, prevent creativity, create inefficiency, and export much of its GDP.

 
At 3/02/2012 5:00 PM, Blogger Junkyard_hawg1985 said...

Buddy,

What I am saying is that among individuals, the Chinese people are more capitalistic than Americans. The U.S. system itself is currently much more capitalistic than China based on the Heritage Economic Freedom Index. The difference in the attitudes of the masses is more likely to push China more towards capitalism and the U.S. electorate more likely to push toward socialism. It's not just where you are, but where you are heading that counts.

I'm not endorsing the Chinese state capitalism at all - I strongly oppose it. I support free market capitalism.

 
At 3/02/2012 8:46 PM, Blogger VangelV said...

But on a per-capita basis, the U.S. is still a full century ahead of China, and it could take a least another century of economic growth in China before it even comes close to approaching the per-capita GDP in the U.S.

A century? Come now Mark, China's productivity increased much faster than that of the US because new technology and capital formation have done wonders. China's problem was never its people but its intrusive and corrupt government that kept getting in the way of progress.

While the US is still way ahead of China it should be clear that the American government has become far more intrusive in daily economic life while the Chinese government has loosened up. This is why capital formation has grown as much as it has in China while capital investment has collapsed in the US.

And let us keep in mind that the US has managed to buy much of its standard of living by accumulating massive amounts of debt even as the Chinese have saved. Add the massive drain of military commitments and the American taxpayer is not exactly in great shape. It seems that while the American taxpayer has been paying to defend Germany, Japan, and South Korea the Chinese taxpayer has been accumulating assets in Africa, South America, Europe and all over the world.

China is just a few political steps away from significant progress. Sadly, the US is a few steps away from disaster.

 
At 3/02/2012 9:13 PM, Blogger VangelV said...

Something doesn't add up here. Perhaps there are a couple of bubbles ready to burst?

There are more than a couple. I expect that we will see the UST market go to hell in a year or two. It should have collapsed several years ago but lucky for Americans the EU, Japan, and many countries were worse. What I found fascinating is the fact that the Muni market has not popped yet. Because of the hardships many states and counties postponed or cancelled infrastructure projects. The problem is that the work still needed to be done. Sewer and water pipes certainly do not care about budget difficulties and unless 100 year old iron pipes are replaced there will be significant leaks that take their toll on future budgets. From what I can see we have several different problems converging into a major catastrophe that could take the purchasing power of the USD down by 50% or more. The only hope for the dollar is an economic contraction but such an event is hardly good for taxpayers or government budgets.

China has different problems. Many of their projects were politically motivated and very unwise. I remember staying in a hotel in an empty city near the border with Myanmar in 1996. That city had been built right next to a perfectly good older one but nobody lived there because it was far too expensive. While that eventually turned out there are many such unwise projects all over China that will take years to resolve. China also has issues with railways that are too expensive to run, too many very nice airports in areas that cannot justify them, and too many old factories that need to be closed down.

As one of my pals pointed out, when the Chinese reserves of USDs become worthless they will still have all of that infrastructure to use for years to come. But when the USD collapses how will it be able to pay for the infrastructure that it will need?

 
At 3/02/2012 10:10 PM, Blogger ws4whgfb said...

A per capita comparison might make people feel better but in some cases it is not the right comparison.

One concern about China is as a military competitor. In military spending it is the absolute amount of spending that matters not per capita spending. If the Chinese army is stronger than the US army it doesn't matter what the per capita spending is lower. If China is a bigger country, they can have lower per capita military spending but a greater actual military spending and greater strength.

 
At 3/02/2012 10:27 PM, Blogger Ron H. said...

ws4whgfb: "If China is a bigger country, they can have lower per capita military spending but a greater actual military spending and greater strength."

That's correct. And your point is?

 
At 3/03/2012 8:29 AM, Blogger VangelV said...

One concern about China is as a military competitor. In military spending it is the absolute amount of spending that matters not per capita spending. If the Chinese army is stronger than the US army it doesn't matter what the per capita spending is lower. If China is a bigger country, they can have lower per capita military spending but a greater actual military spending and greater strength.

The US spends more than the next 20 countries, including China, combined. That spending makes the US weak as it commits it to future spending that the Chinese do not have to make. As a result we have seen the US set up capital consuming military bases abroad while China was accumulating producers of natural resources all around the globe.

I think that you have a serious problem with your logic because even though your claim is right on one level it implies something that is not true.

 
At 3/03/2012 11:22 AM, Blogger Buddy R Pacifico said...

J.Y. Hawg,

Thanks for the clarificaton on your capitalism statement.

 
At 3/03/2012 6:08 PM, Blogger PeakTrader said...

VangelV, I've explained before how a strong U.S. military makes the U.S. stronger, not weaker, particularly in the "world order."

What's making the U.S. weaker is the shrinking private sector over the past four years.

For example, Dr Perry's article link posted on Mar 1st states:

"The U.S. industry was selling nearly 17 million vehicles a year on average in the 10-year period ending in 2007.

Last year, the industry sold 12.8 million vehicles.

The average vehicle on the road is a record 10.8 years old."

Over the past four years, the federal government expanded (e.g. spending $1 trillion a year more and regulating more), the private sector shrunk, and now the military has to shrink too.

 
At 3/04/2012 7:44 AM, Blogger PeakTrader said...

Both the recession and depression, over the past four years, could've been avoided if enough dollars from trade deficits were "refunded" to households in the form of tax cuts.

However, the federal government decided to spend those dollars instead.

 
At 3/04/2012 9:16 AM, Blogger PeakTrader said...

ws4whgfb says: "In military spending it is the absolute amount of spending that matters not per capita spending."

Without a fundamentally strong private sector, a large Chinese military will collapse the entire economy, like the Soviet Union.

 
At 3/04/2012 12:47 PM, Blogger Ron H. said...

Peak: "Without a fundamentally strong private sector, a large Chinese military will collapse the entire economy, like the Soviet Union."

Loose translation: "Eventually you run out of other peoples money."

 
At 3/05/2012 5:54 PM, Blogger David said...

It's easy to climb when using the pitons left by those higher up.
What is not not easy is to climb on one's own.

 
At 3/05/2012 5:54 PM, Blogger David said...

It's easy to climb when using the pitons left by those higher up.
What is not not easy is to climb on one's own.

 

Post a Comment

Links to this post:

Create a Link

<< Home