Don't Ignore the Anecdotes







China is Still Number Two
JEFFREY FRANKEL
MAY 5, 2014
CAMBRIDGE – Headlines around the world this week trumpeted a watershed moment for the global economy. As the Financial Times put it, “China poised to pass US as world’s leading economic power this year.” This is a startling development – or it would be if the claim were not essentially wrong. In fact, the United States remains the world’s largest national economy by a substantial margin.
The story was based on the April 29 release of a report from the World Bank’s International Comparison Program. The ICP’s work is extremely valuable. I eagerly await and use their new estimates every six years or so, including to look at China.
The ICP data compare countries’ GDP using purchasing-power-parity (PPP) exchange rates, rather than market rates. This is the right thing to do when looking at real (inflation-adjusted) income per capita in order to measure people’s living standards. But it is the wrong thing to do when looking at national income in order to measure the country’s weight in the global economy.
The bottom line is that, by either criterion – per capita income (at PPP exchange rates) or aggregate GDP (at market rates) – the day when China surpasses the US remains in the future. This in no way detracts from the country’s impressive growth record, which, at about 10% per year for three decades, constitutes a historical miracle.
At market exchange rates, the American economy is still almost double the size of China’s (83% larger, to be precise). If the Chinese economy’s annual growth rate remains five percentage points higher than that of the US, with no significant change in the exchange rate, it will take another 12 years to catch up in total size. If the differential is eight percentage points – for example, because the renminbi appreciates at 3% a year in real terms – China will surpass the US within eight years.
The PPP-versus-market-exchange-rate issue is familiar to international economists. This annoying but unavoidable technical problem arises because China’s output is measured in renminbi, while US income is measured in dollars. How, then, should one translate the numbers so that they are comparable?
The obvious solution is to use the contemporaneous exchange rate – that is, multiply China’s renminbi-measured GDP by the dollar-per-renminbi exchange rate, so that the comparison is expressed in dollars. But then someone points out that if you want to measure Chinese citizens’ standard of living, you have to take into account that many goods and services are cheaper there. A renminbi spent in China goes further than a renminbi spent abroad.
For this reason, if you want to compare per capita income across countries, you need to measure local purchasing power, as the ICP does. The PPP measure is useful for many purposes, such as knowing which governments have succeeded in raising their citizens’ standard of living.
Looking at per capita income, even by the PPP measure, China is still a relatively poor country. Though it has come very far in a short time, its per capita income is now about the same as Albania’s – that is, in the middle of the distribution of 199 countries.
But Albania’s economy, unlike China’s, is not often in the headlines. That is not only because China has such a dynamic economy, but also because it has the world’s largest population. Multiplying a middling per capita income by more than 1.3 billion “capita” yields a big number. The combination of a large population and a medium income gives it economic power, and also political power.
Similarly, we consider the US the number-one incumbent power not just because it is rich. If per capita income were the criterion by which to judge, Monaco, Qatar, Luxembourg, Brunei, Liechtenstein, Kuwait, Norway, and Singapore would all rank ahead of the US. (For the purposes of this comparison, it does not matter much whether one uses market exchange rates or PPP rates.) If you are shopping for citizenship, you might want to consider one of those countries.
But we do not consider Monaco, Brunei, and Liechtenstein to be among the world’s “leading economic powers,” because they are so small. What makes the US the world’s leading economic power is the combination of its large population and high per capita income.
It is this combination that explains the widespread fascination with how China’s economic size or power compares to America’s, and especially with the question of whether the challenger has now displaced the long-reigning champion. But PPP exchange rates are not the best tool to use to answer that question.
The reason is that when we talk about an economy’s size or power, we are talking about a broad range of questions – and a broad range of interlocutors. From the viewpoint of multinational corporations, how big is the Chinese market? From the viewpoint of global financial markets, will the RMB challenge the dollar as an international currency? From the viewpoint of the International Monetary Fund and other multilateral agencies, how much money can China contribute, and how much voting power should it get in return? From the viewpoint of countries with rival claims in the South China Sea, how many ships can its military buy?
For these questions, and most others involving total economic heft, the indicator to use is GDP at market exchange rates, because what we want to know is how much the renminbi can buy on world markets, not how many haircuts or other local goods it can buy back home. And the answer to that question is that China can buy more than any other country in the world – except the US.
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.
A futile war on drugs that wastes money and wrecks lives
By George Soros
The scale of human wreckage means nations need to look at their policies, writes George Soros
The war on drugs has been a $1tn failure. For more than four decades, governments around the world have pumped huge sums of money into ineffective and repressive anti-drug efforts. These have come at the expense of programmes that actually work such as needle exchanges and substitution therapy.
This is not just a waste of money, it is counterproductive.
The London School of Economics has just completed perhaps the most thorough account of the war on drugs done to date. The conclusion, backed by five Nobel Prize-winning economists: it has done more harm than good.
Drug prohibition has created an immense black market, valued by some at $300bn. It shifts the burden of “drug control” on to producer and transit countries such as Afghanistan and Mexico. This approach also fails to grapple with a basic truth: drug markets are highly adaptive. Repress the business in one country and it springs up elsewhere.
Consider Colombia. When its law enforcement agencies made progress cracking down on the country’s cocaine trade, much of the criminal business and the violence that goes with it moved to Mexico. The LSE report estimates that after 2007, Colombia’s interdiction policies accounted for more than 20 per cent of the rise in Mexico’s murder ratef drugs
Bogotá had a lot of mayhem to export. The explosion of the illegal drug market between 1994 and 2008 “explains roughly 25 per cent of the current homicide rate in Colombia. That translate into about 3,800 more homicides per year on average that are associated with illegal drug markets and the war on drugs”, according to the report. This type of violence takes a massive economic toll; corporations relocate, foreign investment dries up, industries decline and citizens flee in search of a better life.
The costs are not limited to producer countries; consumer nations suffer as well.
This is especially so in the US, which has less than 5 per cent of the world’s people but almost 25 per cent of the planet’s incarcerated population. Most are drug and other non-violent offenders for whom drug treatment and other alternatives to incarceration would probably prove cheaper and more effective in reducing recidivism and protecting society. Worldwide, 40 per cent of the 9m people who are incarcerated are behind bars for drug-related offences – and that figure is only likely to rise, as arrests of drug offenders in Asia, Latin America and west Africa are increasing steadily.
Despite the epic scale of human wreckage, services that could save lives and cut down on the costs to society go underfunded, or not funded at all.
For years, my Open Society Foundations have supported harm-reduction programmes such as needle exchanges – a proved, cost-effective way to prevent HIV transmission. One country found that for every $1 invested in needle exchange, $27 is returned in cost savings. That is no small matter, considering the billions of dollars spent treating HIV. We have seen similar returns on investment with supervised drug injection rooms and medication-assisted treatment of opiate addiction. Yet despite these benefits, the US Congress continues to block federal funding for needle exchanges.
Several governments around the globe fight to prevent any mention of harm reduction in international forums, lest it clash with the predominant drug war ideology.
Yet change is still possible. In 2016 the UN General Assembly will review the current state of the drug- control system. For too long the UN has worked to enforce a “one-size-fits-all” model around the world, based on a belief that prohibitionist policies alone would solve the global drug problem.
The LSE report, to be released on Wednesday, recommends that governments give top priority to proved public health policies, moving to minimise harm in illicit markets, and mandating “rigorously monitored policy and regulatory experimentation”. I heartily concur.
Governments the world over need to weigh the costs and benefits of their current policies, and be willing to redirect resources towards programmes that work. This will save lives – and save money along the way. We have a once-in-a-generation opportunity to fix a broken global framework for coping with the drug crisis. The costs of doing nothing are too great to bear.
The writer is chairman of Soros Fund Management and a philanthropist