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Citation: The Economist Oct 12 1996, v341, n7987, p35(3)
Title: How poor is China? New research suggests that poverty
in China is more widespread, and the economy much
smaller, than previously thought.
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COPYRIGHT 1996 The Economist Newspaper Ltd. All rights reserved.
IN RECENT years it has become accepted wisdom that China is an economic
superpower in the making. Reputable economists have predicted that the Chinese
economy could be the largest in the world by 2001. Businessmen have panted at
the potential of a market of 1.2 billion consumers. The World Bank has lauded
China's achievements in reducing the proportion of its population living in
poverty to less than a tenth.
There is only one snag. Many of the numbers on which these claims were based
appear to have been wrong. A recent World Bank report, "Poverty in China; what
do the numbers say?", has substantially revised the statistics put out in
other Bank publications. The new figures reduce estimates of the size of the
Chinese economy by over 25%. And the Bank has also decided that the proportion
of the Chinese population living in poverty is closer to a third, rather than
the 7% or so that was commonly cited until recently.
These revisions do not mean that the Chinese economic miracle is a mirage.
Chinese growth rates remain among the highest in the world. The country's
trade and official reserves continue to swell impressively. But the new
figures do suggest that China is further behind the developed countries than
had been widely assumed.
The world of statistics can often seem faintly unreal. But the estimates put
out by the World Bank and others matter because they affect the real world.
China's international rehabilitation after the Tiananmen massacre of 1989 was
significantly influenced by awe at the Chinese boom. Disgust at the killings
was balanced by respect for the government's increasingly well publicised
achievement of lifting hundreds of millions of people out of poverty. Respect
of a different sort was created by the idea that China might be the dominant
economic power of the next century. And the lure of Chinese markets has
created a business lobby keen to get on with China.
If some of the gloss is now taken off the Chinese miracle, will that damage
China internationally? Not necessarily. Indeed in some ways it might now suit
China to be "poor" rather than "rich". One of the biggest international issues
facing today's China is the question of the terms on which it will join the
World Trade Organisation. The richer it is seen to be, the faster America and
other members will expect it to liberalise its trade rules. So a reminder that
much of China remains very poor is actually quite helpful to the Chinese
authorities.
Lies and damned lies
In its recent poverty report, the World Bank has made two important changes.
First, it has raised the income level below which a Chinese is deemed to be
poor from $0.60 cents a day to $1.00 a day. This has had the effect of
increasing the number of Chinese deemed to be poor from fewer than 100m to
well over 300m. Second, the report has lowered estimates for Chinese income
per person, measured on a purchasing-power-parity (PPP) basis, which adjusts
for the local cost-of-living. The Bank's 1996 World Development Report puts
Chinese GDP per person, measured on a PPP basis, at around $2,500 in 1994. The
new report puts the figure at $1,800.
This change shrinks the estimated size of the Chinese economy dramatically.
For example, writing in 1992, Lawrence Summers, who was then chief economist
at the World Bank, argued that the size of the Chinese economy was already
"greater than that of Germany or Japan". At that time he put Chinese GDP per
person at $2,500 on a PPP basis. Extrapolating America's and China's current
economic growth rates into the future, Mr Summers went on: "If this growth
differential continues, Chinese total output will exceed American total output
in 11 years." Unsurprisingly, such a bold prediction from such an eminent
source excited much comment. "The Rise of China", a bullish bestseller by
William Overholt, a banker, picked up on Mr Summers's prediction, as did The
Economist.
The new figures, however, put the date when China becomes the world's largest
economy further into the future. At current growth levels, it would now take
about 20 more years. In any event, using PPP for extrapolations of this sort,
as Mr Summers and others have done, may be misleading. Adjusting incomes for
purchasing power is crucial for gauging relative poverty, because it shows how
a nominal income of a few hundred dollars-which would mean destitution in
America-can translate into an acceptable standard of living in China.
But when it comes to buying western goods, or indeed companies, it is Chinese
wealth measured at the real exchange rate, not at PPP, which is of concern to
businessmen. Similarly, to extrapolate PPP-based estimates of GDP is probably
misleading because rapid economic growth in China, combined with flourishing
exports, will almost certainly lead to an appreciation of the Chinese
currency, which will narrow the gap between GDP measured on a PPP and on a
nominal basis.
It may be for this reason that some Bank officials now seem to be eschewing
PPP as a basis for the politically loaded business of measuring the relative
sizes of the Chinese and American economies. Pieter Bottelier, the head of the
World Bank office in Beijing, makes a back-of-an-envelope calculation using
current exchange rates. This suggests that China's economy is now roughly 10%
of America's and may catch up in about 40 years' time.
The poverty report is fairly mysterious about the basis on which it has
revised the PPP figures, simply citing "better data". When it comes to
measuring the numbers of poor Chinese, however, it argues that both the new
and the old figures are "right" in different ways. The 60-cents poverty line
is a Chinese standard, the $1-a-day line is better for international
comparisons.
Maybe so. But in the past, the Bank was not always shy about using the Chinese
figure as the basis for international comparisons. For example, in a report on
poverty in Vietnam issued in 1995, the Bank observed, "Poverty is considerably
higher in Vietnam (51%) than in China (9%), Indonesia (15%), the Philippines
(21%) or Thailand (16%)." To some people these figures always seemed
implausible. They entailed believing, for example, that, although GDP per
person in Thailand (measured on a nominal basis) was five times that in China,
the proportion of people living in poverty in Thailand was double that in
China. Anybody who had looked around in the two countries would have found
that hard to swallow.
Back in the real world, that a third of the population of China is still
living in poverty poses more than a humanitarian problem for the Chinese
government. Whichever yardstick you use for measuring poverty, the statistics
seem to show that the biggest inroads were made in the early 1980s, just after
private farming was allowed. For the past decade, the reduction of poverty has
slowed. Meanwhile, as a manufacturing-led boom has taken hold on the coasts,
the gap between the booming eastern cities and the poorer inland areas has
widened. That gap may prove to be the biggest economic and political challenge
now facing the Chinese government.
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