What came around is due to come back around
Fancy a Big Mac? My shout, provided it doesn't cost me more wherever you are than it does here in Sydneytown. But even if it does, it shouldn't. (See, http://www.economist.com/markets/Bigmac/Index.cfm and http://www.economist.com/markets/bigmac/about.cfm.) That, anyway, is another of those fantastic models on which economists lavish their sexy and fashionable rags du jour, which they pony up the catwalk to the tune of "I'm too sexy for my algorithm".
Which is all by way of introduction to Ross Gittins' economagix for today: http://www.smh.com.au/news/business/quick-and-dirty-conversion-doesnt-cut-it-for-china/2005/09/23/1126982229173.html Like any self-respecting economist, Ross loves to take the micky (but I love you, Mickey) out of politicians, CEO's, lawyers, social do-gooders; anybody, really, who lacks the good grace and attention of Al Gore. You'll remember him: he invented the
Al Gore Rhythm.
"John Howard committed an embarrassing blooper in a speech he gave in New York last week. Mr Howard predicted that "in the next decade, China will likely [(Ross') sic] surpass Germany to become the third-largest economy after the United States and Japan". Oh dear. Did our Prime Minister say that? And to think he said it to the Asia Society, while assuring the rivalrous Americans and fearful Europeans that "China's progress is good for China and good for the world". The trouble is, he was using a terribly outdated and unscientific way of comparing the size of economies. In the process he greatly understated the extent of China's progress. The quick and dirty way is simply to convert each economy's gross domestic product into a common currency - invariably, US dollars - at the prevailing market exchange rates. But that's quite inaccurate and, these days, no self-respecting economist uses that method." The fact that John Howard is not an economist, yet alone self-respecting, was conveniently overlooked by the good Mr Gittins. But let's not transgress.
"The Organisation for Economic Co-operation and Development and others have gone to enormous trouble to determine the differing prices of many goods and services in many countries and so work out a special set of exchange rates that would cause the US dollar to have equal purchasing power in every country. And note that, according to economic theory, these "purchasing power parity" exchange rates are the ones that should [emphasis his, but I would have added it, too, since "should" is an antecedent condition of all economic thought] prevail in foreign exchange markets and eventually will. That is, over the longer term, market exchange rates will conform to PPP." [OK, this time it's my emphasis, to remind us of John Maynard Keynes' decidely uneconomic and uncharitable observation that, in the long run, we are all dead.]
"It turns out that, when you work it out properly (sic [me this time]), China goes from being the seventh largest economy to the second, overtaking Italy, France, Britain, Germany and Japan. When you work it out properly [do we have to do this again?], America's $US11,600 billion-a-year economy goes from being 29 per cent of the world economy to 21 per cent. Japan goes from 12 per cent to 7 per cent. But China goes from 4 per cent to 13 per cent. And India goes from less than 2 per cent to almost 6 per cent, lifting it to fourth position overall.
"How can China and India have such huge GDPs? Well, not because they're rich, but because they're so big. China is the most populous country with 1.3 billion people and India is next with 1.1 billion. This gives them 20 per cent and 17 per cent of the world's population respectively. At present, America's corrected GDP is 60 per cent bigger than China's. That's because it has the third-biggest population in the world - almost 300 million - and is by far the richest country on a per-person basis.
"If the global population in 2005 is represented by 100 people, then five are in the US, 11 in Europe, 20 in China, 17 in India and 14 in Africa. If we project forward to 2050, the global population would have risen by 40 per cent.
But if we standardise back to 100 again we'd see the US proportion of global population has hardly changed. Same for India. Europe's proportion would have fallen to seven. This may surprise you: China's share would fall to 15. Why? Because its One Child policy gives it a fertility rate about as low as ours. And here's another surprise: Africa's share of the 100 would rise from 14 to 21. [My emphasis]"
"Turning from population to economic growth, it's well known that China's GDP has been growing at the annual rate of about 9 per cent for the best part of 25 years. So much so that China now provides the single greatest source of world economic growth. If we project current trends forward to 2050, we find that China's share of global GDP would rise from 13 per cent to 20 per cent, with India's going from 6 per cent to 12 per cent. America's 21 per cent would fall to 14 per cent, while Europe's fell from 21 per cent (note that, at present, the European Union's economy is about as big as America's) to 10 per cent.
"This suggests that China and India are likely to be completing their re-emergence as major powers. Why "re-emergence"? Because, until about 1700, China and India were nearly as rich as Europe in per-person terms. [A big Mac was the same price in Europe, China and India.] In 1700 they accounted for half of global economic activity. The industrial revolution began in Europe and spread to America, but now is reaching Asia."
Having modeled the whole rest of the world, Mr Gittens kicks the can for the people who pay to read him:
"Where does Australia stand in all this? Our 20 million make us the 53rd biggest country by population and give us a share of the world population of less than a third of 1 per cent. But we have the 16th largest economy in the world with a 1.1 per cent share of global GDP that's four or five times larger than our share of population. Why are we rich even though we're not big? Because we have a high level of productivity. That is, we're able to produce a lot of goods and services per person. Why are we so productive? Because we have a relatively highly educated workforce (human capital), because our workers have a lot of machines to work with (physical capital) and because we have up-to-date machines and know how to work them (advanced technology). We also own a lot of valuable natural resources."
It is that last, almost parenthetical, throw-away sounding, qualifier that struck me, particularly given my well table-pounded apocalyptic (and problably way too early) hue and cry about the dot.commodity bubble. He says that Australia is rich because we are so productive.
Productivity is simply the average of our outputs divided by the average of our hourly wages (look, I am NOT an economist but this is pretty close enough for the argument). Australia's greatest outputs are our resources. When those output values are determined by a skewed effect related more to greater demand that available supply (do I really have to cite all my prior post about that?), we end up with a highly skewed and misleading picture of productivity.
But given the Yoda Greenspan proclivity to measure US productivity in a way that is also misleading given the wage-cost deflation of China and India, and the monopoly-boosted output of the IP behind the pc software and chip sectors, at least Mr Gittens is in good company on this one.
Well, as I said, I ain't no economist and I'm sure I got an "F" on this report. Make sure you read the "bio" above: "this is all personal OPINION and, no matter how vigorously expressed, not advice, investment or otherwise. I think, therefore I spam."
PS: did the eyecandy and imagery keep your eyes from rolling back in their sockets thru all this detail? Hope so.