Wednesday, December 21, 2005

Big Enough to Know Better

Fareed Zakaria, editor of Newsweek and author of The Future of Freedom, has written about China's new guess at the size of its GDP. (Hat Tip: Simon World) In his article entitled "Big Enough to Know Better" he comments on the implications of this revaluation:
China is now the world's fourth largest economy, bigger than Italy, France and Britain. If you want a glimpse into the not-so-distant future, note that China is growing more than four times as fast as the next two countries on the list (Germany and Japan) and more than twice as fast as No. 1, the United States.

While some, to include the Wall Street Journal (subscription required, excerpted here) would argue that China is ranked sixth in light of this new information (not fourth)*, a bigger cause for concern in Asia is its relation to Japan. From The Standard:
'By the end of next year, the Chinese economy will be half the Japanese economy,' said Ken Courtis, vice- chairman for Asia at Goldman Sachs Group. 'The whole balance of power in this region is shifting.'

Macroblog looks at the two economies and concludes that such a difference in growth rates (roughly 10% vs. 2%) is to be expected. The inevitability of such a shift won't make the geopolitics of the gradual regional power redistribution, should it occur, any easier.

Zakaria posits:
My guess is that China's problems will stem not from failure but success. China has grown for three decades at a pace no other country has ever sustained... Every time you see a gleaming new highway in China, remember that there were homes, shops and farms where it now runs. The government moved those people, gave them something equivalent (often an hour away) and kept building. Every time you see a new factory, remember that the community around it might have protested, but that rarely stopped construction. Every time you see a dam, remember that it displaced whole villages and towns. It is the very fact that local or political forces cannot stop development that explains China's supercharged growth.

He concludes:
Beijing knows that it needs to open up, not crack down. But can a Leninist system do that? Two weeks ago, in Dongzhou, local authorities responded to protests against a new power plant by reportedly shooting 20 or more people and then tried to cover up the incident in a manner that would have made Stalin or Mao proud. Beijing has somehow found a way to do centrally planned capitalism. But now it seems to be attempting something far more complex: centrally planned pluralism.

Simon World also makes an interesting conclusion:
Several elements of China's government spending are set for big rises, especially education, health and defence, as these are usually set as a percentage of GDP. However the question will be how the Government will pay for these increases - just because the statistics say there's a jump in GDP, it doesn't mean the money magically appears in the coffers.

Update: Survived SARS is optimistic that this change will make Chinese economic statistics more accurate from here on out. I would argue if you multiply made up figures by .17, the result is equally fictional.

* After further analysis it appears the 4th vs. 6th difference is based on whether or not 2005's estimated nine percent growth is figured in.