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China’s Economic Crown Comes With An Asterisk

Goldman Sachs chief Lloyd Blankfein may have his doubts. I certainly have mine. But the International Monetary Fund says the United States no longer has the world’s leading economy.

That distinction, at least according to the IMF, now belongs to China.

That news comes with a few caveats. It is based on the Fund’s estimates for economic output in 2014. The year is not quite over, and economic statistics typically lag by at least a few months, so there will be no official figures to confirm or challenge the IMF staff’s estimate for some time.

The quality of statistics, naturally, also varies widely from country to country, and sometimes even within countries. The United States has an extensive, open and transparent government-run data-gathering apparatus. There can be quirks and defects in our figures, sometimes due to budget constraints and sometimes due to disputes over methodology. Witness, for example, our decennial quarrel over alleged census undercounts in the inner cities. But by and large, our statistics are trustworthy and trusted.

Not so in China, where information of all sorts is subject to extensive government controls, and much that is considered public domain elsewhere - such as the size of government-held stockpiles of oil and other commodities - is treated as a state secret. According to the Beijing government, China’s economic output has slowed significantly but is still growing at an annual rate of 7 percent, which is far faster than any other large economy on the planet. Yet while Chinese demand sent commodity prices soaring on global markets just a few years ago, those markets (notably oil) are stagnant or falling, sometimes dramatically, right now.

If Chinese economic growth is actually far below the official target, we can safely assume that this, too, is a state secret. I am not saying this is the case. (Nor was Blankfein.) I am just observing that Chinese statistics are not directly comparable to our own. My policy would be to verify, then trust.

There is another caveat in the IMF methodology itself. It uses “purchasing power parity” to account for widely varying price levels in different countries. Thus, as MarketWatch columnist Brett Arends recently observed, a Starbucks beverage served in Beijing counts the same as the identical beverage served in Minneapolis. It sounds reasonable. For some purposes, it is.

Then you look at the results in the IMF rankings. China is projected to be first, with 2014 economic output - measured in dollars adjusted for cross-border purchasing power - of $17.6 trillion. The United States comes in second at $17.4 trillion. So who is third?

Not Germany, and not Japan, though those two nations are often placed right behind America and China in economic measure. Not France or the United Kingdom. Not a commodity powerhouse like Saudi Arabia. The number-three position goes to India, at a projected purchasing power economic output of $7.3 trillion. Japan follows at $4.8 trillion, and Germany lags at $3.6 trillion.

If you want to believe that India’s economic output is nearly half that of the United States or China, or twice that of Germany, go right ahead. It’s nonsense, however. India’s economy is grossly inefficient, with tens or hundreds of millions of people doing things that get done much faster in more developed societies, or don’t need to get done at all.

IMF methodology tends to bias in favor of countries with larger populations, a ranking in which China and India are by far the globe’s top two. A better measure of national wealth is gross domestic product per capita or, arguably, per citizen when looking at countries that rely heavily on imported labor, such as some in the Middle East. Total economic output is better measured by the IMF’s approach - but we still need to be aware of its limits, just as with any other statistical method.

In the end, statistics may reflect reality with varying degrees of accuracy, but they don’t directly control it. China may or may not have the world’s largest GDP this year - but if it does not, it soon will. With four times America’s population, it only needs to have per-capita output a quarter as high as ours to match our total. For all its governance’s shortcomings and its statistical inadequacies, China is far more productive than India, and it is quite reasonable to assume that it can double its economy’s current size in due time.

This, by itself, is no reason for concern. The more a country has, the more it has to lose, and therefore the more constraints exist on its ability to either isolate or oppose the rest of the world.

But I don’t think China will have a smooth glide path to an indisputable position as the world’s top economy. There are going to be setbacks there, as for any nation. We may not hear about all of them, however. They won’t necessarily show up in IMF statistics. For now, such setbacks are still treated in Beijing as state secrets.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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