Journal : GDP & China’s Economy Unraveled

Economy, yes, but what are we talking about …

This is a blog post from 2010 but still meaningful and extremely clarifying …

Well, taking my cue from Deepak Nayyar’s lead article in TOI today, October 6, 2010, I’d like to talk about what it all means for well – being of the poor.

The Gross Domestic Product is the overall economic output … value creation or production and its transaction or consumption, tracked via expenditure or income method. In the latter are five components : Rents; Interests; Profits; Statistical Adjustments for income taxes, dividends and undistributed profits; and, Wages.

Economists love to pitch for GDP growth, as being the best antidote for poverty. It is, but with reservations, and not before we’ve had a look at how the components to GDP stand in proportion to each other. And, then, the information would have to be judged alongwith measures of income inequality to obtain a reasonably wholesome picture of the how the economy is working for the people it impacts.

Consider China : the data through the spectacular growth years reveal …

–  GDP growth @ 5% p.a. during 1951-80 and 10% p.a. during 1981-2008.

–  GDP per capita growth @ 3% p.a. during 1951-80 and 8.8% p.a. during 1981-2008.

In 2008, it was 20 times that in 1960 at constant prices.

–  In 2005, China still had 469 million people, about half a billion or 15% of world population, under the poverty line income of $2 per day.

Which seems paradoxical !

The explanation lies in its rapidly rising inequality, measured by the Gini Coefficient. At a value of one, the whole of the income would accrue to one person; at zero, the coefficient would mean that the income was divided equally amongst the people.

–  In China, the Gini Coefficient rose from 0.29 in 1980 to 0.36 in 1990,  0.39 in 2000, and to  0.47 in 2004.

From being amongst the lowest income inequality countries in the world in 1980, China has risen to be amongst the highest in 2004 … over a relatively short span of 25 years !

To understand, let’s look at the wage and profit components in China’s GDP between late 1990s and late 2000s :

–  the share of wages fell from around 53% to 40%, 

while that of profits rose from about 19% to almost 32% !

Which is to say that corporate profits are high and household incomes are low.

Even the interest rates on household bank deposits are kept low so that the corporations can get cheap credit.

The costs of energy inputs, natural resources and land are also subsidised for the corporates.

The taxes are low too and state – owned firms do not pay much in dividend to the government.

China’s private consumption, as a proportion of GDP,

dropped from around 48% in late 1990s to about 36% in late 2000s.

This proportion is 70% in the US and 64% in India.

Thus, overall, China’s economy is working best for relatively few in business

and is not working for the ( half a billion ) people.

To sign off : Economic growth, GDP or its per capita, are important macro measures

but they are not indicators of poverty alleviation or living standard, especially in the context of well – being of the poor.

Even with China’s amazing growth, it would mean a lot more for the common man if it were not just export – led but was spearheaded instead by private consumption by its own people.


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