[OPE-L] The limits of a smaller, poorer China

From: GERALD LEVY (gerald_a_levy@MSN.COM)
Date: Thu Nov 15 2007 - 08:53:49 EST

The limits of a smaller, poorer China
By Albert KeidelPublished: November 14 2007 02:00 | Last updated: November 14 2007 02:00In a little-noticed mid-summer announcement, the Asian Development
Bank presented official survey results indicating China's economy is
smaller and poorer than established estimates say. The announcement
cited the first authoritative measure of China's size using purchasing
power parity methods. The results tell us that when the World Bank
announces its expected PPP data revisions later this year, China's
economy will turn out to be 40 per cent smaller than previously
stated.This more accurate picture of China clarifies why Beijing concentrates
so heavily on domestic priorities such as growth, public investment,
pollution control and poverty reduction. The number of people in China
living below the World Bank's dollar-a-day poverty line is 300m -
three times larger than currently estimated.Why such a large revision in the estimates of China's economic
condition? Until recently, China had never participated in the careful
price surveys needed to convert accurately its gross domestic product
into PPP dollars.The World Bank's estimates based on summary data from the late 1980s
probably overstated China's PPP gross domestic product even then. Up
to now, the bank has revised its estimate very little. In the
meantime, China has repeatedly raised the prices of food, housing,
healthcare and a range of other non-traded goods and services. These
reforms should have lowered the PPP adjustment, but the bank left it
basically unchanged.Last month, Robert Zoellick, World Bank president, argued that the
bank should continue to lend to countries such as China, India and
Brazil because they still had large shares of the world's poor.The new, more accurate statistics describing a smaller, poorer China
strengthen this argument. The ADB's announcement also indicates that
the number of dollar-a-day poor in India is closer to 800m than the
current estimate of 400m.These PPP adjustments affect poverty measures because the World Bank's
dollar-a-day poverty line is a PPP dollar poverty line. Reducing PPP
consumption estimates drops large numbers of additional households
below the poverty line.For China, the correction needs to be made back to the 1980s and
1990s, when instead of World Bank estimates of roughly 300m people
below the dollar-a-day poverty line, the number was more likely more
than 500m. China has made enormous strides in lifting its population
out of poverty - but the task was perhaps more gargantuan than most
people thought and progress has been overstated by bank estimates.These calculations are not just esoteric academic tweaks. Based on the
old estimates, the US Government Accountability Office reported this
year that China's economy in PPP terms would be larger than the US by
as early as 2012. Such reports raise alarms in security circles about
China's ability to build a defence establishment to challenge
America's.Well-informed analysts know that PPP calculations are a poor measure
of a country's potential military base, but with the corrected China
PPP statistics, the whole question is moot. China is just not that big
now and will not get that big any time soon.Given uncertainties about China's political and security evolution,
this more moderate picture of China's economic size is reassuring. It
means that the US and other developed nations have more time to engage
China and interact with its fledgling institutions. There might be no
better place to start than with military-to-military relations.The immediate international interest, however, is for China to succeed
in its still daunting internal development challenges. Such
opportunities might be manageable if engagement focused on a needy
sub-region such as Sichuan Province, where the US has a flourishing
Peace Corps programme. The goal is to promote economic development
conducive to political moderation.Close contact with China's development process on the ground might
also help us understand better the lessons China's experience might
have for so many poor countries where development is stalled.Finally, both Congress and the Treasury department should recognise
the limitations and opportunities revealed by these more accurate
data. For example, risks to its impoverished rural hinterland from a
sudden large revaluation of its currency loom larger in Beijing's eyes
than in Washington's. Acknowledging this could smooth negotiations.The writer is senior associate at the Carnegie Endowment for
International Peace. He was acting director of the US Treasury
department's Asia Office

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