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Size matters, but so does how it is calculated

2014-10-14 12:14 China Daily Web Editor: Qin Dexing

China has overtaken the United States as the world's largest economy this year, according to the International Monetary Fund's latest estimate. But unlike four years ago, when China eclipsed Japan as the world's second-largest economy, this time the news sparked muted reaction and doubts.

Measuring GDP using purchasing power parity, the IMF estimated China's GDP at $17.6 trillion, against $17.4 trillion for the US, ending the latter's position at the top that it held since 1872.

One reason for the doubts is that not everyone agrees about the validity of measuring GDP in terms of PPP.

Domestic media were quick to point to flaws in the PPP calculation, saying this method tends to overestimate developing countries' economic might.

Economists noted that measured by nominal GDP, a more common method of making cross-country comparisons, China's GDP in 2013 was 55 percent of that of the US.

Comparing figures for per capita GDP were even more revealing: China's per capita GDP, standing at $6,807 in 2013, was just 12.8 percent of that of the US.

Even in PPP terms, China's GDP per capita was only 22.4 percent of that of the US.

Some commentators even speculated that the IMF's announcement was meant to "disarm" China by excessively complimenting it. There is no evidence to back up that interpretation. Despite its irrelevance in ordinary people's lives, PPP can help economists understand different nations' economic strengths and overcome exchange-rate distortions.

But even GDP measured in PPP terms is one way to understand the sheer size of the economy, Chinese people know well that the country has many goals beyond the pursuit of GDP.

It is logical that China, with its vast area and the world's largest population, would eventually have the largest economy. But size does not make one great.

"China will definitely be the largest economic power, sooner or later. But that is not what ordinary Chinese care about. At the end of the day, ordinary Chinese care about their incomes," Alfred Schipke, senior resident representative of the IMF in China, said in May after similar economic claims emerged.

Speaking of incomes, China has more reasons to worry than to celebrate. Leaving aside the nation's vast income disparities, household incomes have remained disproportionately small while government income has grown disproportionately large in the composition of GDP.

That has made the transition to a consumption-driven economy move at a glacial pace.

But if income growth accelerates, there is another grave concern: that the country will lose its labor cost advantages while productivity gains stagnate. There are plenty of statistics pointing to just such an outcome-and then there is the rapidly aging population.

The only answer to that, economists said, is more innovation and openness.

Chinese leaders know that, which is why they recently scrapped most of the administrative approvals enterprises were subject to when they made outbound investments. Premier Li Keqiang has reiterated on several occasions that there is only hope for the Chinese economy if 1.4 billion individuals' entrepreneurship and creativity are unleashed.

Much must be done to facilitate that change, and in the age of global competition, slower progress means backsliding. There is little room for self-indulgence.

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