China is Still Number Two

CAMBRIDGE – Headlines around the world last week trumpeted a watershed moment for the global economy. As the Financial Times put it, “China poised to pass US as world’s leading economic power this year.” This is a startling development – or it would be if the claim were not essentially wrong. In fact, the United States remains the world’s largest national economy by a substantial margin.


The story was based on the April 29 release of a report from the World Bank’s International Comparison Program. The ICP’s work is extremely valuable. I eagerly await and use their new estimates every six years or so, including to look at China.

The ICP data compare countries’ GDP using purchasing-power-parity (PPP) exchange rates, rather than market rates. This is the right thing to do when looking at real (inflation-adjusted) income per capita in order to measure people’s living standards. But it is the wrong thing to do when looking at national income in order to measure the country’s weight in the global economy.

The bottom line is that, by either criterion – per capita income (at PPP exchange rates) or aggregate GDP (at market rates) – the day when China surpasses the US remains in the future. This in no way detracts from the country’s impressive growth record, which, at about 10% per year for three decades, constitutes a historical miracle.

At market exchange rates, the American economy is still almost double the size of China’s (83% larger, to be precise). If the Chinese economy’s annual growth rate remains five percentage points higher than that of the US, with no significant change in the exchange rate, it will take another 12 years to catch up in total size. If the differential is eight percentage points – for example, because the renminbi appreciates at 3% a year in real terms – China will surpass the US within eight years.

The PPP-versus-market-exchange-rate issue is familiar to international economists. This annoying but unavoidable technical problem arises because China’s output is measured in renminbi, while US income is measured in dollars. How, then, should one translate the numbers so that they are comparable?

The obvious solution is to use the contemporaneous exchange rate – that is, multiply China’s renminbi-measured GDP by the dollar-per-renminbi exchange rate, so that the comparison is expressed in dollars. But then someone points out that if you want to measure Chinese citizens’ standard of living, you have to take into account that many goods and services are cheaper there. A renminbi spent in China goes further than a renminbi spent abroad.

For this reason, if you want to compare per capita income across countries, you need to measure local purchasing power, as the ICP does. The PPP measure is useful for many purposes, such as knowing which governments have succeeded in raising their citizens’ standard of living.

Looking at per capita income, even by the PPP measure, China is still a relatively poor country. Though it has come very far in a short time, its per capita income is now about the same as Albania’s – that is, in the middle of the distribution of 199 countries.

But Albania’s economy, unlike China’s, is not often in the headlines. That is not only because China has such a dynamic economy, but also because it has the world’s largest population. Multiplying a middling per capita income by more than 1.3 billion “capita” yields a big number. The combination of a large population and a medium income gives it economic power, and also political power.

Similarly, we consider the US the number-one incumbent power not just because it is rich. If per capita income were the criterion by which to judge, Monaco, Qatar, Luxembourg, Brunei, Liechtenstein, Kuwait, Norway, and Singapore would all rank ahead of the US. (For the purposes of this comparison, it does not matter much whether one uses market exchange rates or PPP rates.) If you are shopping for citizenship, you might want to consider one of those countries.

But we do not consider Monaco, Brunei, and Liechtenstein to be among the world’s “leading economic powers,” because they are so small. What makes the US the world’s leading economic power is the combination of its large population and high per capita income.

It is this combination that explains the widespread fascination with how China’s economic size or power compares to America’s, and especially with the question of whether the challenger has now displaced the long-reigning champion. But PPP exchange rates are not the best tool to use to answer that question.

The reason is that when we talk about an economy’s size or power, we are talking about a broad range of questions – and a broad range of interlocutors. From the viewpoint of multinational corporations, how big is the Chinese market? From the viewpoint of global financial markets, will the RMB challenge the dollar as an international currency? From the viewpoint of the International Monetary Fund and other multilateral agencies, how much money can China contribute, and how much voting power should it get in return? From the viewpoint of countries with rival claims in the South China Sea, how many ships can its military buy?

For these questions, and most others involving total economic heft, the indicator to use is GDP at market exchange rates, because what we want to know is how much the renminbi can buy on world markets, not how many haircuts or other local goods it can buy back home. And the answer to that question is that China can buy more than any other country in the world – except the US.

Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University.

Copyright: Project Syndicate, 2014.
www.project-syndicate.org


Image credit: testing/Shutterstock

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Homo sapiens have been on earth for 200,000 years — give or take a few ten-thousand-year stretches. Much of that time is shrouded in the fog of prehistory. What we do know has been pieced together by deciphering the fossil record through the principles of evolutionary theory. Yet new discoveries contain the potential to refashion that knowledge and lead scientists to new, previously unconsidered conclusions.

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Rethinking humanity's origin story

The frontispiece of Thomas Huxley's Evidence as to Man's Place in Nature (1863) sketched by natural history artist Benjamin Waterhouse Hawkins. (Photo: Wikimedia Commons)

As reported in New Scientist, the 8- to 9-million-year-old hominin jaw bones were found at Nikiti, northern Greece, in the '90s. Scientists originally pegged the chompers as belonging to a member of Ouranopithecus, an genus of extinct Eurasian ape.

David Begun, an anthropologist at the University of Toronto, and his team recently reexamined the jaw bones. They argue that the original identification was incorrect. Based on the fossil's hominin-like canines and premolar roots, they identify that the ape belongs to a previously unknown proto-hominin.

The researchers hypothesize that these proto-hominins were the evolutionary ancestors of another European great ape Graecopithecus, which the same team tentatively identified as an early hominin in 2017. Graecopithecus lived in south-east Europe 7.2 million years ago. If the premise is correct, these hominins would have migrated to Africa 7 million years ago, after undergoing much of their evolutionary development in Europe.

Begun points out that south-east Europe was once occupied by the ancestors of animals like the giraffe and rhino, too. "It's widely agreed that this was the found fauna of most of what we see in Africa today," he told New Scientists. "If the antelopes and giraffes could get into Africa 7 million years ago, why not the apes?"

He recently outlined this idea at a conference of the American Association of Physical Anthropologists.

It's worth noting that Begun has made similar hypotheses before. Writing for the Journal of Human Evolution in 2002, Begun and Elmar Heizmann of the Natural history Museum of Stuttgart discussed a great ape fossil found in Germany that they argued could be the ancestor (broadly speaking) of all living great apes and humans.

"Found in Germany 20 years ago, this specimen is about 16.5 million years old, some 1.5 million years older than similar species from East Africa," Begun said in a statement then. "It suggests that the great ape and human lineage first appeared in Eurasia and not Africa."

Migrating out of Africa

In the Descent of Man, Charles Darwin proposed that hominins descended out of Africa. Considering the relatively few fossils available at the time, it is a testament to Darwin's astuteness that his hypothesis remains the leading theory.

Since Darwin's time, we have unearthed many more fossils and discovered new evidence in genetics. As such, our African-origin story has undergone many updates and revisions since 1871. Today, it has splintered into two theories: the "out of Africa" theory and the "multi-regional" theory.

The out of Africa theory suggests that the cradle of all humanity was Africa. Homo sapiens evolved exclusively and recently on that continent. At some point in prehistory, our ancestors migrated from Africa to Eurasia and replaced other subspecies of the genus Homo, such as Neanderthals. This is the dominant theory among scientists, and current evidence seems to support it best — though, say that in some circles and be prepared for a late-night debate that goes well past last call.

The multi-regional theory suggests that humans evolved in parallel across various regions. According to this model, the hominins Homo erectus left Africa to settle across Eurasia and (maybe) Australia. These disparate populations eventually evolved into modern humans thanks to a helping dollop of gene flow.

Of course, there are the broad strokes of very nuanced models, and we're leaving a lot of discussion out. There is, for example, a debate as to whether African Homo erectus fossils should be considered alongside Asian ones or should be labeled as a different subspecies, Homo ergaster.

Proponents of the out-of-Africa model aren't sure whether non-African humans descended from a single migration out of Africa or at least two major waves of migration followed by a lot of interbreeding.

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Not all anthropologists agree with Begun and his team's conclusions. As noted by New Scientist, it is possible that the Nikiti ape is not related to hominins at all. It may have evolved similar features independently, developing teeth to eat similar foods or chew in a similar manner as early hominins.

Ultimately, Nikiti ape alone doesn't offer enough evidence to upend the out of Africa model, which is supported by a more robust fossil record and DNA evidence. But additional evidence may be uncovered to lend further credence to Begun's hypothesis or lead us to yet unconsidered ideas about humanity's evolution.