India and China and the Meaning of GDP

There's been discussion a couple times in the comments sections on this blog about the economic development going on in India compared to China's. Comparing the two countries is interesting since both Asian countries have populations over 1 billion and are beginning to get things turned around.

I heard a nice discussion about the two countries on NPR a couple days ago:

Image from Time

MICHELE NORRIS, host: It's been said, most notably by Winston Churchill, that democracy is the worst form of government, except for all the others. But while India has the world's largest democracy, it also has widespread poverty and a host of other economic problems. And now some Indian citizens find themselves looking enviously at a neighbor that has a very different sort of government: China.

David Kestenbaum with our Planet Money team brought back this story from India.

DAVID KESTENBAUM: You know how you take a trip, and sometimes the most interesting thing is that it makes you see your home differently? That happened to newspaper columnist Karan Thapar. He recently left his home - India's capital, Delhi - which can feel kind of crowded and broken down. He went to China, Beijing, and what he saw made him jealous.

Mr. KARAN THAPAR (Newspaper Columnist): There was nothing that I could find that seemed poor or Third World or shabby or dirty. The buildings are immaculate, they're resplendent. The roads are eight-lane wide and awe inspiring.

KESTENBAUM: It was particularly painful, he says, because if you think of the two countries in a race, when the starting gun fired, they were both at the same place. In the late 1940s, India became independent, and the People's Republic of China was born. Both were equally poor then, but in the race, China is now way out in front.

Both countries are about the same size, over a billion people, but China is three times richer.

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On the one hand, you have a "benevolent dictatorship" bringing the masses of China up from poverty. On the other hand, you have a representative democracy not steering things in India quite as effectively.

Glorifying the Chinese Communist Party for its economic successes (see Thomas Friedman) can be tiring. But at the same time, one has to give credit where credit is due. China's economy is growing like crazy while much of the world's is in bad shape. The Chinese government is very swift and decisive. And its people are benefiting a lot from its decisions.

Besides China though, one-party states have a very poor track record on economic development. At the end of the NPR story, they mention that China's rise is unique amongst non-democracies. There does, in fact, appear to be something to the notion of "capitalism with Chinese characteristics."

One thing Chinese leaders love to point to is the country's sustained and robust GDP growth. Averaging over 10% GDP growth for a decade is, indeed, impressive. But what does GDP growth actually mean? How does that GDP percentage number we hear all the time relate to life on a daily basis?

A New York Times Magazine article from a week or two ago asks this question and had a very insightful discussion.

Here are a couple sections of the article that I particularly appreciated:

Image from Google
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But criticisms of G.D.P. go deeper than just its use, or misuse, by politicians. For years, economists critical of the measure have enjoyed spinning narratives to illustrate its logical flaws and limitations. Consider, for example, the lives of two people — let’s call them High-G.D.P. Man and Low-G.D.P. Man. High-G.D.P. Man has a long commute to work and drives an automobile that gets poor gas mileage, forcing him to spend a lot on fuel. The morning traffic and its stresses aren’t too good for his car (which he replaces every few years) or his cardiovascular health (which he treats with expensive pharmaceuticals and medical procedures). High-G.D.P. Man works hard, spends hard. He loves going to bars and restaurants, likes his flat-screen televisions and adores his big house, which he keeps at 71 degrees year round and protects with a state-of-the-art security system. High-G.D.P. Man and his wife pay for a sitter (for their kids) and a nursing home (for their aging parents). They don’t have time for housework, so they employ a full-time housekeeper. They don’t have time to cook much, so they usually order in. They’re too busy to take long vacations.

As it happens, all those things — cooking, cleaning, home care, three-week vacations and so forth — are the kind of activity that keep Low-G.D.P. Man and his wife busy. High-G.D.P. Man likes his washer and dryer; Low-G.D.P. Man doesn’t mind hanging his laundry on the clothesline. High-G.D.P. Man buys bags of prewashed salad at the grocery store; Low-G.D.P. Man grows vegetables in his garden. When High-G.D.P. Man wants a book, he buys it; Low-G.D.P. Man checks it out of the library. When High-G.D.P. Man wants to get in shape, he joins a gym; Low-G.D.P. Man digs out an old pair of Nikes and runs through the neighborhood. On his morning commute, High-G.D.P. Man drives past Low-G.D.P. Man, who is walking to work in wrinkled khakis.

By economic measures, there’s no doubt High-G.D.P. Man is superior to Low-G.D.P. Man. His salary is higher, his expenditures are greater, his economic activity is more robust. You can even say that by modern standards High-G.D.P. Man is a bigger boon to his country. What we can’t really say for sure is whether his life is any better. In fact, there seem to be subtle indications that various “goods” that High-G.D.P. Man consumes should, as some economists put it, be characterized as “bads.” His alarm system at home probably isn’t such a good indicator of his personal security; given all the medical tests, his health care expenditures seem to be excessive. Moreover, the pollution from the traffic jams near his home, which signals that business is good at the local gas stations and auto shops, is very likely contributing to social and environmental ills. And we don’t know if High-G.D.P. Man is living beyond his means, so we can’t predict his future quality of life. For all we know, he could be living on borrowed time, just like a wildly overleveraged bank.

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Most frequently in our conversations, Stiglitz gravitated to the philosophical questions of measuring progress. What are the best indicators beyond G.D.P.? How do you actually pick the most important ones? As Stiglitz recounted, Sarkozy gave the commission freedom to tear apart G.D.P. as its members saw fit. No doubt, the French president saw political advantages in the undertaking. With a more comprehensive set of indicators, a leader trying to steer a course through a faltering economy could conceivably point to successes in areas other than jobs or productivity. “I can tell you what Sarkozy told me about what motivated him,” Stiglitz said. “What he said was that he felt this tension — he is told to maximize G.D.P. but he also knows as a good politician that what people care about are things like pollution and many other dimensions to the quality of life. Those dimensions aren’t well captured in G.D.P. And that puts him in a difficult position. When he comes up for election, people are going to grade him on G.D.P., but people are also going to grade on the quality of life. And so he sort of said, Can’t you in some way resolve this tension by constructing measures that don’t pose these dichotomies?”

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Suppose you’re driving, Stiglitz told me. You would like to know how the vehicle is functioning, but when you check the dashboard there is only one gauge. (It’s a peculiar car.) That single dial conveys one piece of important information: how fast you’re moving. It’s not a bad comparison to the current G.D.P., but it doesn’t tell you many other things: How much fuel do you have left? How far can you go? How many miles have you gone already? So what you want is a car, or a country, with a big dashboard — but not so big that you can’t take in all of its information.

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Listening to the news, we often hear GDP statistics. The United States had a GDP of 5.4% in the last quarter of 2009 and 3.2% in the first quarter of 2010. But from what I hear and understand of what's going on in the US economy outside of news reports, those numbers don't seem to have much connection with reality. Generation Y can't find work, Generation X is facing a serious recession during their prime-time working years, and Baby Boomers can't retire or sell the suburban houses they purchased in route to achieving the American Dream.

Taken at face value, those recent US GDP numbers of sound pretty decent. Factor in the context of the life outside of the numbers though and they don't seem as meaningful.

I think this same principle of looking at GDP compared to "real life" in China leads to similar results.

China's economic miracle continues (11.9% in the first quarter of 2010). Millions of people's lives are improving. Whether that improvement comes in the form of migrant workers working in a factory, a family owning a small store front, or international business going on in a first-tier city, there is a lot of great stuff going on in China right now.

Despite all of the great economic growth though, life in China can be difficult and confusing.

Evan Osnos, a China writer for The New Yorker, wrote the following when discussing the continued school attacks that've been going on in China recently:

Whatever the combination of marginalization and mental illness, these cases are a reminder of how disorienting Chinese life can be in 2010. For those already fragile, there is not much to lean on. A Xinhua story about Zheng Minsheng, who murdered eight children outside their primary school last month, described him as “a ‘loser’ without a job or a wife and already middle aged.” Perhaps the best diagnosis of this phenomenon comes from an unnamed twenty-eight-year-old factory worker that a Los Angeles Times reporter encountered at the hospital in Taixing after the attack there Thursday: “This man was obviously sick,” the worker said. “But our society is very complicated. The economy has changed so quickly. It is hard to know where you are.”

Read the entire article

GPD tells us how fast our economies are going. But it fails to tell us much of anything else. Knowing the speed at which one is traveling is, obviously, important. There's a lot more to the health of a nation and its people though.