In purchasing power parity terms, on the IMF’s reckoning, China overtook Japan as the world’s second largest economy in 2001.
Developing countries, like China, commonly have much lower prices than rich economies so the purchasing power parity (PPP) calculation of GDP corrects for the underestimation of real income at nominal exchange rate converted values by measuring the same goods and services at the same prices. As the late Ian Castles, former Australian Commonwealth Statistician and international expert on national income accounting, has argued before on this Forum getting these comparisons right is important for policy and not just a not just a matter of taste.
Measured in PPP terms, the difference between China’s GDP and that of Japan has been steadily contracting since the implementation of China’s reforms and China’s share of world GDP has been rising. The PPP measure of China’s GDP reached US$8.77 trillion (or 12.6 per cent of the world output) in 2009, which was just over twice as large as that of Japan’s GDP (US$4.16 trillion) and almost 62 per cent of that of the United States.
So what was all the fuss about at the end of last month?
China has been absolutely larger than Japan, on the sensible measure of these things, since 2001. Although in current prices, America’s GDP is US$14 trillion, Europe’s US$16 trillion and China’s US$4 trillion, in real terms, China is already more than half the size of the United States.
It is the dynamics of the changes under way that matter. Around 30 per cent of the output of all the major Japanese manufacturing firms is actually produced in China, not in Japan. China is already Australia’s largest single trading partner; it is also Japan’s, Korea’s and Taiwan’s, and my projections suggest that by 2020 China will be the largest economic partner of every single country in our region. And it is projected to overtake the United States as the largest economy in the world in the next ten or fifteen years, not the next fifty years.
Certainly, with this growth in the sheer scale of Chinese output, China is the leading edge of a huge shift in the structure of economic power in Asia and the Pacific. In not much more than a decade, there will be a big transformation in the structure of regional and world power, not only economic weight but also the political power that inevitably follows economic power in some form or other, since size matters to political heft.
Yet, though already very big in world terms, China is on average a poor country in per capita income terms and will remain so for many years. China’s relative poverty translates into many economic, social and political weaknesses. It’s appropriate, therefore, that the landmark of overtaking Japanese GDP in current exchange rate terms was greeted with caution and humility in China itself. As Li notes, by a whole range of measures, China has a long way to go to catch up to Japan. In 2009, it was ranked 99th in per capita income by the IMF, with per capita income just 20 per cent that of Japan in real terms or 10 per cent at current exchange rates. And in terms of energy efficiency, equity and other measures of welfare, Japan is way ahead of China. Life expectancy, infant mortality, access to education, electricity consumption in China are today roughly the same as they were in Japan 40 to 50 years ago.
This is an unusual circumstance in international affairs — to have such a big player with such weaknesses at the core of its political economy. The challenge for all will be to manage the growing weight and power of China with understanding of these vulnerabilities and how they might make uncertain strategic and yet constrain behaviour all sides round.
Visiting US China specialist David Shambaugh said at the ANU last week that Chinese policy-makers and think tank analysts, while still setting great store by Russia, didn’t consider Japan (or India, for that matter) to be in China’s power rank. This seems consistent with the above post.
As I’ve said before, it is wonderful for all of us working towards freer trade and investment at the regional and global levels and for the continued economic growth of the world that China has been growing fast economically and that Asia will continue to gain a stronger position in the world economic arena, with all its political and social implications. As part of the global citizen, we are all for any country to become stronger and stand on its own feet, rather than a burden to the rest of the international community. This means, however, that China and for that matter Asia will have to realize their respective responsibility in the international community as economic giants and that China and other Asian countries and territories should reorient their domestic structures in such way as to maximize the economic, political and social wellbeing of the people at home and also orient their international relations in such way as not to be threatening to the rest of the region and the world. This requires that all information and documents related to economic, political and social situations within these societies and, for that matter, in all countries of the world, to the extent permissible from national security standpoint, will have to be open to the people at home as well as to the rest of the world so that everyone in the region and around the world, if interested, will be able to know what is going on within these countries and that there will be a greater window of opportunity for enhanced cooperation in all economic, political and social spheres not only between governments but also among peoples. We must start to further such opening in every country, Japan and Australia included of course. Ryokichi HIRONO, National Graduate Institute for Policy Studies (GRIPS), Tokyo
I think your summary qualifying China’s economic rise is timely, particularly your caution about the need for constrained behaviour all round. I hope it gives pause to an increasing number of Australian political commentators who are ramping up the old Fear of China. They equate Chinese economic power with military might, promote the view that the United States is being forced out of Asia, and claim that this would not be in Australia’s interests. They should consider instead whether joining a US-led policy of containing China sends signals to Beijing that may increasingly be against Australia’s long-term interests.