(AFP) – Nov 14, 2007
WASHINGTON (AFP) — China's economy is 40 percent smaller than most recent estimates, a US economist said Wednesday, citing data from the Asian Development Bank and guidelines from the World Bank.
Albert Keidel, a senior associate at the Carnegie Endowment for International Peace and a former US Treasury official and World Bank economist, made the comments in a report published by the US think tank and in a commentary in the Financial Times.
Keidel told AFP he made the calculations based on a recent ADB report that made its first analysis of China's economy based on so-called purchasing power parity (PPP), which strips out the impact of exchange rates.
"The results tell us that when the World Bank announces its expected PPP data revisions later this year, China's economy will turn out to be 40 percent smaller than previously stated," Keidel wrote.
"This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities such as growth, public investment, pollution control and poverty reduction."
The ADB data was the first using purchasing power analysis, according to Keidel.
Based on this new analysis, he said "the number of people in China living below the World Bank's dollar-a-day poverty line is 300 million -- three times larger than currently estimated."
Keidel told AFP that under these calculations, China's gross domestic product (GDP) would have been roughly five trillion dollars in 2005, compared to some 12 trillion for the United States on the same basis.
This would still mean China's economy is moving ahead of Japan as the world's second largest economy, but might not overtake the United States until around 2030.
"These calculations are not just esoteric academic tweaks," Keidel wrote.
"Based on the old estimates, the US Government Accountability Office reported this year that China's economy in PPP terms would be larger than the US by as early as 2012. Such reports raise alarms in security circles about China's ability to build a defense establishment to challenge America's," he said.
The use of PPP began in the 1950s in an effort to compare economies without the distortion of exchange rates that could be influenced by trade or investment flows.
Keidel said his analysis has little meaning for the debate on whether China's yuan is undervalued, as many economists say.
"The PPP shouldn't be used to check whether the commercial exchange rate is valid," said Keidel, who has argued that it is not clear whether the yuan is vastly undervalued.
But he said the data helps explain why Chinese authorities are paying little heed to calls by Washington and Europe to boost the yuan.
"Our focus in the US on trade and exchange rates is secondary or tertiary in their view," he said.
Keidel said the US Congress and administration officials "should recognize the limitations and opportunities revealed by these more accurate data."
"For example, risks to its impoverished rural hinterland from a sudden large revaluation of its currency loom larger in Beijing's eyes than in Washington's," he added.
Keidel had been deputy director for the Office of East Asian Nations at the US Treasury and was previously a senior economist in the World Bank office in Beijing.
Based on the new data from ADB, Keidel said the World Bank is in the process of revising its estimates on the Chinese economy. He said the ADB report earlier this year drew little attention but that "the Chinese have never before participated in a survey that allowed these comparisons."
In Beijing, the World Bank's lead economist for China, Bert Hofman, said he thought it was too early to use the PPP as a basis to revise the size of China's economy.
"I think it's still at the moment at a research stage," Hofman told AFP.
"There is a big international effort going on about international price comparisons ... to correct differences in price levels across countries (in order) to give a better comparison across economies," Hofman said.
That effort is "still very much work in progress," he said. "It's too early to tell what the final implications will be."
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