Bryan Caplan  

Asian Development Bank Says I'm Right About China

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I recently doubted that the Chinese economy lives up to its reputation. Now the Financial Times says that the Asian Development Bank is backing me up:

In a little-noticed mid-summer announcement, the Asian Development Bank presented official survey results indicating China’s economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China’s size using purchasing power parity methods. 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 per cent smaller than previously stated.

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 number of people in China living below the World Bank’s dollar-a-day poverty line is 300m – three times larger than currently estimated.

How could an error of this magnitude happen?
Until recently, China had never participated in the careful price surveys needed to convert accurately its gross domestic product into PPP dollars.

The World Bank’s estimates based on summary data from the late 1980s probably overstated China’s PPP gross domestic product even then. Up to now, the bank has revised its estimate very little. In the meantime, China has repeatedly raised the prices of food, housing, healthcare and a range of other non-traded goods and services. These reforms should have lowered the PPP adjustment, but the bank left it basically unchanged.

The lesson: Steve Levitt's quip that "People lie, numbers don't" is once again way off - because all numbers are made by people.

HT: Tyler


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COMMENTS (10 to date)
Heather writes:

I always thought the quip was "Figures don't lie, but liars figure."

matt writes:

"Until recently, China had never participated in the careful price surveys"

Jeez, accurate aggregate economic estimation is essential for industrial revolution, it is at the heart of it.

jakek writes:
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.

I wonder how different China will look in ten years if competition was added to that list. I just came back from a lunch where Bill Lewis, former Founding Director of the McKinsey Global Institute, spoke about his seminal book The Power of Productivity and improving GDP PPP per capita through increasing competition and therefore productivity, not simply more investment, public or private.

Currently my colleagues are in China searching out hedge fund and private equity managers to invest in for our endowment. Given the hot financial status of China and now the ADB news, I am leaning more towards my colleagues view of investing in a 'dry powder' fund for when everything falls apart after the Olympics and scooping up the deals. Here's hoping that China can be one of the first developing countries to keep up it's productivity levels with more competition after the hot money retreats...

Jack writes:

Anyone remember the infamous quote in statistics about numbers being merely what the survey man has collected (or made up!)?

david writes:

A person can use a number to lie, but a number by itself cannot lie. A number can't even talk or write, so how can a number lie?

1 billion years ago there were no people, but there were numbers. As an example, the earth was a certain distance from the sun at this time, and this distance was a number. There was no one around to measure this distance, but it still existed, and it was a number.

stacy writes:

china is now in its fast development as well as some extreme social problems, the "number issue" is merely one of these problems.

Edgardo writes:

Bryan, you are claiming too much. ADB's PPP estimates may be better than others but they are still a gross description of the relative size of the Chinese economy vis a vis other economies and definitively a poor description of China's growth rate in the past 30 years. The extraordinary large changes in China's relative prices in the past 30 years and the expectation of more changes make PPP estimates of little additional value to measure growth. Please ask Tyler (I understand he teaches macro) to explain you how PPP estimates are prepared.
To Matt, the industrial revolution preceded the availability of national accounts for at least 150 years. Only in the late 1930s, the framework for national accounts was set, and only in the 1950s a few countries had good estimates. More important, many countries still don't have good national accounts.

MJ writes:

I agree with Edgardo, pls read the ADB paper first.
The Small China
http://bayesianheresy.blogspot.com/2007/11/small-china.html

Jeff Hallman writes:
1 billion years ago there were no people, but there were numbers. As an example, the earth was a certain distance from the sun at this time, and this distance was a number. There was no one around to measure this distance, but it still existed, and it was a number.

The distance was not a number, is was then and still is a distance. If there had been someone around to measure it, he presumably would have stated the distance in some units, like miles (not likely) or light-seconds (but probably using some other unit of time).

True, numbers don't lie. What people call lying with numbers is actually drawing incorrect or unsupported inferences from some measurements.

John B. Chilton writes:

Some numbers are just made up.

See Undercover Economist:

John Nye and Charles Moul, two economists at Washington University in St Louis, have now checked some basic macroeconomic statistics using Benford’s Law. They find that OECD statistics fit the law quite well, suggesting that GDP data should follow Benford. But African GDP data do not fit. It is not possible to say whether the anomaly is due to fraud or underfunded statistical offices. But it is a reminder that some data should come with a health warning.

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