Curiously, Sheridan describes the exchange rate-converted GDP number for China as being in ‘real dollars’ – in fact, the result of converting China’s GDP in local currency units into $US using the exchange rate yields nominal dollars. In order to obtain a valid comparison in ‘real’ dollars, it is necessary to allow for the obvious fact that, on average, the Chinese currency equivalent of the $US will buy more in China than those dollars will buy in the US – though this is not necessarily true of all components of expenditure or of all regions and cities.
Sheridan accepts uncritically the white paper projection of real increases in Australian defence spending of 3 per cent annually up to 2018, thereby recognising the principle that comparisons of spending in one country over time must be corrected for differences in price levels. For the same reason, comparisons between countries at the same point in time must also be corrected for price differences – I don’t understand why Sheridan, and many others, cannot see the inconsistency in their position.
GDP is a measure of output, and cross-country comparisons of GDP must be informed by an understanding of what the statisticians’ concept of GDP measures. The white paper refers to an undefined concept of ‘economic strength’, which it says ‘is also a function of trade, aid and financial flows.’ According to these ‘market-exchange measures’ the white paper asserts that ‘the US economy is likely to remain paramount.’
This is certainly not obvious. So far as the value of exports in $US is concerned, the US dropped from first place in the world in 2000 to third place in 2007, after Germany and China. In contrast, China’s place on the export league table rose from sixth in 2000, after the US, Germany, Japan, France and Canada, to second in 2007.
China led the world in ‘high-tech exports’ in 2006 ($US 271 billion), with the US running second ($US 219 billion) and Germany third ($US 155 billion). (IMD World Competitiveness Yearbook 2008, p. 438).
So far as investment flows are concerned, it may be questioned whether the US’s huge and continuing current account deficit is an indication of ‘economic strength’. According to the latest IMF estimates, the US will run a cumulative current account deficit of $2.8 trillion over 2009 and the next five years, while China will have a cumulative current account surplus of $3.8 trillion over the same period. These numbers imply a massive increase in the international indebtedness of the US, and a correspondingly large increase in China’s net international assets.
I do not suggest, as Greg Sheridan has, that the argument about relative economic strength in the white paper is ‘incoherent’ and ‘silly’ – but I do believe that the authors should have paid closer attention to the meaning of the economic measures upon which they relied, and offered a more detailed analysis to underpin their conclusion that the US ‘is likely to remain dominant.’ If they are somewhat distrustful of comparisons using the statistician’s GDP measure (with PPP converters derived from the International Comparison Program), they should consider the implications of physical indicators of production of the kind that provided measures of relative economic capacity before macroeconomic aggregates such as GDP came to dominate discussion of relative ‘economic strength.’
Two such items that bear upon future economic and military potential are steel and cement. China is, by a large and increasing margin, the world’s largest producer of both commodities. The country’s crude steel production rose from 1.7 times to 5.0 times the corresponding US level between 2001 and 2007, and its cement production rose from 6.8 to 14.6 times that of the US level over the same period (UN, Monthly Bulletin of Statistics, December 2008). There is also evidence of rapid growth in China’s consumer goods industries.
Ian Castles is Visiting Fellow in the Crawford School of Economics and Government at the ANU and was a former Commonwealth Statistician.
Thanks Ian, for reminding people some basic statistics regarding international comparisons.
Figures and numbers can be very misleading when misapplied or interpreted, irrespective when intentions their users might have. Now we have one of the most highly regarded authority figures in statistics shows us how easily that can happen.
Greg Sheridan should be one of the leading commentators on defence and security issues in Australia, probably well regarded and respected among certain circles. It is fascinating that he could be so wrong in using and interpreting statistics, especially in his area of expertise, military power and security.
One would wonder how some experts can show such shallow depth of understanding in their own areas of expertise. The precursor leading to the Iraq war and the pre-empty invasion by the coalitions of willing will always serve as a stark reminder on what costs could be if the so called experts in defence and security got their understanding of the very facts terribly wrong.
Further to my comments yesterday, it seems that there is a need to develop some measures or indicators of “power”, for an more informed and transparent 21st century. It will be much more difficult, but if developed they will be very useful and helpful.
I think any such measures are likely to be a combination of a number of different sub-indicators. Potential sub-indicators might include: economic indicators such as GDP, trade; demographic indicators such as population and man power indicators; wealth indicators such as financial and physical assets; natural endowment indicators such as land and mineral reserves; social stability indicators; military and intelligence indicators; and so on. One could also develop some dynamic indicators. In the end, one may not necessarily need so many sub-indicators, maybe a handful will serve most purposes.
I remember some people in China in the past (maybe still now) used the term comprehensive/composite national power, although I don’t know what they meant and what they included in that.