How many B777’s can you buy with “purchasing power parity”?

Or how many triple bypasses, educations for your kids at Oxford or Ole Miss, or trips to Vegas to see Wayne Newton and Celine Dion? None, of course. Purchasing Power Parity, PPP, is among other things, a way to let poor countries feel better about themselves.

Back in the Pleistocene Epoch, when your correspondent was coming up, countries were compared in terms of GNP or GDP, the total output of the economy measured at the exchange rates of the countries’ currencies. Things are a lot fancier today. Today, PPP is often used as a proxy for the size and power of an economy. PPP doesn’t use exchange rates; it take a “basket of goods” and costs them out in each country. You can see how this distorts and inflates the size of an economy if the basket of goods were bowls of rice and clean shirts. A country with lots of rice and nickel an hour washerwomen would look mighty large compared to the US.

We noted, for example, a few months ago, a column by Mark Helprin in which he waxes concerned about the emerging power of China’s $6.5 trillion PPP economy. No doubt about it, as we have noted several times, China is an emergent economic power. A $6.5 trillion economy sounds pretty big compared to the US’s $11 trillion economy. And it’s not just Helprin. The CIA Factbook, often nicely politically correct, also uses the $6.5 trillion figure.

But China’s economy is really a lot smaller than these numbers suggest. Measured in the traditional way, China’s GDP is maybe $1.65 trillion today (State Dept. estimate). Further, the economic hypergrowth in China is extremely concentrated. For example, according to the Peoples’ Daily, GDP per capita in Shandong Province (#2 in growth) is $2000, while, based on Economist data, GDP per capita in rural provinces may be 10-20% of this (and the Northeast is depressed). Hence, the Chinese economy is pretty small still — 35% of Japan, for example, with 7x the people — and seriously unbalanced.

Moreover, as we noted previously, the banking system is a mess, wherein irrational loans to government companies or favored industries go bad, but are bailed out by the country’s huge forex reserves (over $600 billion(!!) today); Economist, on last year’s bank crisis, soon to be followed by this year’s bank crisis:

This latest scheme undoubtedly looks neat. By pumping $45 billion of its massive $400 billion of accumulated foreign-exchange reserves into the banks, China seems to be making effective use of a ready pool of funds, currently parked in relatively low-yielding assets. Yet repeated capital injections, even clever ones, are not themselves a genuine solution to China’s banking problems. Since 1998, China has spent roughly $200 billion in recapitalising its banks and writing off bad loans, to little avail. Politically directed lending to favoured industries has continued as before, and the old, written-off bad loans were soon replaced by new ones. Today, some independent estimates put the level of bad loans at around $420 billion, or nearly 40% of gross domestic product.

China certainly has the resources to bail itself out of whatever financial crises the herky-jerky industrialization and banking system generate. But those who forecast unbroken strings of near double-digit growth for this land of booms and busts have not paid enough attention to the history of industrializations.

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