India, China downsized in global economic sweepstakes
19 Dec 2007, 0241 hrs IST , CHIDANAND RAJGHATTA , TNN
WASHINGTON/NEW DELHI: The World Bank says China and India are not what they are pumped up to be. The Bank has "downsized" the economies of the two Asian giants by nearly 40% under new metrics, which it says are more reliable and accurate than previous estimates.
The International Comparison Program (ICP) data, released by the World Bank on Monday, lists new estimates of purchasing power parities (PPPs) for 100 countries benchmarked to the year 2005. According to the new data, India's GDP in PPP terms was $2.34 trillion in 2005 and in nominal dollar terms was $778.7 billion.
Prior to the revision, India's GDP in PP terms was $3.8 trillion in 2005 and had grown to over $4 trillion in the current year. As a result of the revisions, India's share in global GDP in 2005 — which has also been revised downwards from more than $68 trillion in the earlier estimates to just under $55 trillion — came down sharply from 6.2% to 4.3%.
This would make India the world's fifth largest economy in 2005 behind the US (which accounted for 22.5% of the global GDP), China (9.7 %), Japan (7.0%) and Germany (4.6%).
In the earlier estimates, India was a comfortable fourth, well ahead of Germany and close behind Japan. Even under the revised PPP figures, India is likely to have overtaken Germany this year, having grown at about 9% for two successive years.
PPP is an apples-to-apples comparison of buying power in different countries taking into account price differences. The Bank said the new data was based on a study in which India participated for the first time since 1985 and China for the first time ever. The earlier estimates were therefore based on data that was outdated or incomplete or both.
For the new study, which the Bank said was the most extensive and thorough effort ever to measure PPPs across countries, teams in each region identified characteristic goods and services to be priced. Surveys conducted during 2005 collected prices for more than 1,000 goods and services to arrive at the new numbers. All previous PPP estimates were extrapolated from other figures, the Bank said.
The revised estimates also downsized China's economy, although it remained the second largest economy behind the US. China's economy under the new metrics was $5.3 trillion in PPP in 2005 terms against the $8.8 trillion estimated earlier. It share of world GDP came down from 14.5% in the earlier estimates to 9.7% in the latest figures.
One interesting fall-out of the revised estimates is that they dilute India's and China's demand for increased voting weight at the World Bank and IMF based on their economic size under the old PPP figures. Although there has been a consensus in the Bank-Fund that PPP should be taken into account to determine voting muscle, the latest results are a setback for the Asian giants in terms of potential voting clout.
The revised estimates show that between them the US, China, Japan, Germany and India — the five largest economies — account for nearly half of the world's GDP as measured by PPPs. The BRIC countries — Brazil, Russia, China and India — now account for almost exactly 20% of global GDP against the earlier estimate of close to 26%.
The revised figures mean that per capita GDP in PPP terms in India is down to $2,126 just over half the figure of $4,091 for China. Brazil has a per capita PPP GDP that is more than twice that of China at $8,605 and Russia's number is $11,866 showing the very wide range of levels of affluence within the BRIC countries.
These are by far the poorest among the 10 biggest economies, with even sixth ranked Italy having a per capita GDP in terms of PPP of almost $28,000 and the US at $41,670 heading the list within these 10.
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Related link:
http://www.nytimes.com/2007/12/09/opinion/09sun4.html?ref=opinion
Editorial Notebook
China Shrinks
By EDUARDO PORTER
Published: December 9, 2007
Few people noticed, but China got smaller the other day. According to new estimates, the colossal Chinese economy that has been making marketers salivate and giving others an inferiority complex may be roughly 40 percent smaller than previously thought: worth $6 trillion rather than $10 trillion. That means it lost a chunk roughly the size of Japan’s output.
What happened was a large statistical glitch. When comparing the size of economies, economists mostly avoid using the standard currency exchange rates seen in bank windows.
These fluctuate too much, driven by housing woes, trade deficits or presidential popularity.
Economists prefer to use what is known as “purchasing power parity” — or P.P.P. — a rate that adjusts for price differences between countries.
Take a 40 yuan serving of noodles at an eatery in Beijing. If the same dish cost $4 at a comparable restaurant in New York, the noodle P.P.P. would be 10 yuan to the dollar.
Calculated using a large basket of goods and services, this ratio allows for a more consistent comparison of economies.
The problem is that the World Bank’s measure of China’s rate, everybody’s benchmark, had been based on a 1980s survey of Chinese prices. This year, the World Bank did its own survey to update the measure. While the bank has not published it yet, Albert Keidel of the Carnegie Endowment for International Peace extrapolated the figure from another set of exchange rates published by the Asian Development Bank.
It turns out that things in China are more expensive. It’s as though we discovered that the real price of the noodles in Beijing was 50 yuan, yielding a P.P.P. of 12.5 yuan to the dollar rather than 10. That means the Chinese are relatively poorer and China’s economy is smaller than everybody thought.
This is not a mere technicality. Suddenly the number of Chinese who live below the World Bank’s poverty line of a dollar a day jumped from about 100 million to 300 million, roughly the size of the United States population. And if you thought China’s energy consumption was dismally inefficient, consider that it still uses the same amount of energy to produce 40 percent less stuff. The reassessment does not just involve China. India is also likely to be downsized.
And, by the way, global growth has very likely been slower than we thought.
I don’t think China’s leaders have said anything about the recalibration. But they should be pretty pleased. China has been known to enjoy throwing its weight around, but being big also exacts a cost. If a country is that wealthy, others can demand that it start pulling its weight and play more by the international rules. If China is less wealthy, and less a rival, maybe some members of the United States Congress will not press it so hard to revalue its exchange rate.
Using the earlier estimate, China’s economy was due to surpass the $13 trillion American economy in about five years. At $6 trillion, it may look somewhat less scary.