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Tuesday, March 2, 2010

Whose GDP is No. 2 misses point


Special to The Japan Times

HONG KONG — News headlines this month proclaimed that Japan is still the world's second-biggest economy, ahead of its neighbor China. Gross domestic product figures for 2009 showed Japan with $5.085 trillion against China's $4.91 trillion.

But every economist knows that there are lies, damned lies and statistics. And these statistics were something of a fluke, were probably untrue in 2009, are certainly untrue now, and don't really matter in terms of the real lives of the people of China or Japan. Nor do they address the difficult questions facing politicians and policymakers.

It is a sad reflection on the quality of the media that all the majors made a big deal of the headline — Japan still ahead of China — and most of them did not get to the fine print: What, if anything, does it actually mean?

Japan unexpectedly survived as No. 2 because its growth in the final quarter rose by an annualized 4.6 percent, to take its performance for all of 2009 to only minus 5 percent instead of the minus 9 percent forecast originally. However, Japan is notoriously prone to revising its figures; the initial figures did not include components of growth later factored in.

As the numbers are in U.S. dollars, they also depend on the value of the yen. A higher yen boosts the size of the Japanese economy, and a lower value shrinks it. Every ¥2 change means a GDP difference of around $110 billion. And let's not talk about the true value of China's yuan, unadulterated by government or market.

The debate about who is No. 2 economic dog to the United States is academic because with China powering ahead at 8 percent plus annually and Japan crawling at 1 to 2 percent, it is a matter of time before Japan yields.

Of course, in real world terms of living standards and what your money will actually buy, China's rip-roaring growth left sluggish Japan standing a long time ago. Adjusted for purchasing power parity (PPP), China's GDP is $9 trillion, according to IMF figures, while Japan is languishing at around $4.2 trillion.

But even this does not reflect the real real world. China has more than 10 times as many people as Japan, so individual Japanese are far richer.

Indeed, China's achievement last year after years of record growth is that it has finally climbed into the world's top 100 in income per capita. According to the International Monetary Fund, China comes 99th with per capita income of $3,566 when measured by market rates, and 97th with GDP of $6,546 when measured by PPP. The PPP measure still leaves China $1,000 per person below Thailand (89th) and Ecuador (91st).

China is unique in that it is both a big economy, increasingly one of the leading movers and shakers of the world, and a developing country. Beijing's leaders have recognized in their global negotiations that they can play with the Group of Two or Group of 20 at the top table or with the developing countries as it suits them.

Both Japan and China are important economic players and their policies matter greatly for the shape of the global economy. In Japan's case, it has immense issues to sort out, starting with how to get the economy moving again to stimulate growth, jobs and taxes before it is bowed down with an increasing aging population. Companies' search for efficiency has led to more and more temporary or casual work, a big drop in household savings, a rise in uncertainty and the ugly prospect again of deflation as ordinary Japanese worry about their prospects and are reluctant to spend.

What is surprising to outsiders is that the policymakers, bureaucrats and politicians alike have buried their heads in the sand rather than squarely face difficulties, including rising government indebtedness, by using the considerable intellectual and economic resources at their disposal.

Japan is also handicapped by an inflexible and inward-looking approach, a failure to understand the rest of the world — exemplified in Toyota Motor Corp.'s failure to understand the damage to its reputation by its slow reaction to fix faults in its cars. Japan has greatly depended on exports, but the savvy global brand exporters are only the tip of a giant domestic iceberg.

China's attitude is criticized even more — and not merely on the vexing questions of trade disputes and the value of its currency. Beijing is going through a kind of adolescent sulky-assertive period. This would be dangerous in itself given China's already giant global boots as the world's biggest exporter.

China also has a hidden iceberg of domestic problems, including massive and increasingly misplaced investment, incipient bubbles, rising inflation, major issues of social and welfare policy — not to mention a yuan that Beijing might prefer to devalue to keep exporting to a world that increasingly is trying to curb its consumer spending.

It is time for more openness from Beijing, a more cooperative front to the rest of the world and cooler heads in assessing and addressing real economic problems. Otherwise, the year of the tiger will be tempestuous indeed, for China first, then for the rest of the world.

Kevin Rafferty is a former managing editor of publications for the World Bank.


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