Bernardo M. Villegas
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How Large Is Chinese Economy?

           For at least the last five years, the Chinese economy has been ranked as the second largest economy in the world, GDP-wise.  I have been presenting a table entitled "The Most Powerful Economies in the World," where the U.S. is ranked first with some $14 trillion in GDP, and China as second at about $8 trillion.  There was a widely held opinion that China, growing at four to five times faster than the U.S., will overtake the largest economy by the year 2019.  I felt that it may take longer because I subscribed to the skepticism of some international analysts that China is overstating its GDP growth estimate, which is supposed to be at 7.5% currently.  There are those who think that a more realistic estimate is at about 4%, which makes the Philippines the fastest growing economy in East Asia today,  at more than 7%. 

          Whatever the current growth rates of the Chinese economy may be,  the Financial Times surprised the financial world last April 30 by announcing that China will overtake the US as the world's largest economy before 2014 is over.  As the Financial Times put it, "This is a historic moment since the US has been the global economic powerhouse since 1872."  The report came from the International Comparison Programme, a coalition of the world's leading statistical agencies, hosted by the World Bank in Washington.  Data for advanced countries come from Eurostat and the Organization for Economic Cooperation and Development (OECD) while a series of regional offices, usually national statistical agencies, provide the equivalent data for the rest of the world.  We can be proud that our own National Statistics Office is one of the most professional and objective statistical agencies in the developing world, thanks to a succession of very professional directors and other officials, starting with Dr. Tito Mijares in the 1960s. 

          The new estimates are based on what is called the purchasing power parity (PPP), which is a measure of what money can buy in each of the domestic economies.  In comparing the domestic production of goods and services among different countries, the PPP is the correct exchange rate to use if one wants to determine the volume of goods and services that money buys in any economy.  For example, in the Philippines, using P45 to $1 may significantly understate the domestic production especially of services.  Having resided in various countries, I can give very specific examples of how unreliable market foreign exchange rates can be in converting the GDP in peso terms to one in dollar terms.  I have had very decent and comfortable haircuts in Makati for P100, $20 in Barcelona and $30 in Boston.  Using haircuts as a basis for computing the forex rate, it would be P5 to $1 in Barcelona and P3.33 to $1 in New York, definitely not P45 to $1 as the market exchange rate would suggest.  There are dozens of ordinary goods or services which are non-tradeable between countries, such as bus fares, Big Macs, laundry services, parking fees, dental services, etc. which would yield exchange rates very much stronger for the Philippines than the P45 to $1 used for GDP comparisons.  That is why, the Philippine GDP per capita is grossly understated at the usual $2,200 per capita per annum one reads in current reports.  The figure in PPP terms can be anywhere from $5,000 to $6,000.

          By the same token, the Chinese GDP can be significantly understated if the market forex rate is used, especially since the Chinese Government has been deliberately managing their exchange rate to keep it artificially weak.   It is, therefore, believable that in terms of just the absolute size of the total economy, China will surpass the US this year and race farther ahead in the years to come, considering that the US economy, like all the advanced economies, won't grow at much more than 2% annually in the foreseeable future while China and the emerging markets can expect to grow at double or triple that rate during the same period.  In the case of the Philippines, we can sustain our GDP growth rate at 7 to 9% for years to come on the bases of OFW remittances, BPO/KPO earnings, spending on infrastructures, growth of manufacturing enterprises being established by Japanese, Korean and other foreign companies, private investments in housing and other real estate sectors, and the rapid growth of domestic and foreign tourism.  In the final analysis, however, the real test of integral human development is not the size of the GDP nor its rate of growth but the way it is distributed among all the people so that dehumanizing poverty is totally eliminated.  Both China and the Philippines have a long way to go on this count.  As the Financial Times report points out: "Clearly, economic size is far from everything.  Because China has 1.3bn people compared with the 300m or so in the US, living standards in the US, Japan and most of Europe still far exceed those in China and India."   For comments, my email address is