Saturday, May 22, 2010

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.

Read or Listen to the rest of this story

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

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.


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?”


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.

Read the Entire Article
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.


Anonymous said...

Meaty post.

I think there is a direct correlation to the GDP and the modern amenities of Beijing that make Karan a bit jealous. A lot of it, I suspect, is veneer.

As is common in the culture, there is a need to maintain image. The old Agassi commercials "image is everything" may have been a bit tongue in cheek in America, but could be taken as gospel in China.

In order to maintain the image of the rising economic dragon and meet the GDP numbers to justify the image, China has dumped a lot of its wealth into infrastructure. Now, this certainly does benefit the masses, but I think everyone here is also quite aware that vast majority of the population struggles to get by amid all the shiny new buildings and in the case of Ordos, empty new buildings.

The question I have, with regards to China and India, are how the middle classes compare in each country. I would agree that at the polar ends of riches and poverty, China is coming out ahead. I must plead ignorance as to the state of the middle class in India, hopefully Ramesh will be by to give us some insight. I am going to go out on a limb and guess that India's middle class might be better off. But again, I really don't know, but base that off of how I believe both economies and governments work.

Ramesh said...

Nice post, as usual Mark.

Indians are, of course, obsessed with the comparison with China, as they come out second best. The Chinese don't care about the comparison. China is clearly way ahead of India in every measure of economic development. The key is not so much the system of government, as good governance. In some states in India (India is a federal country like the US), where there is good governance, things are not different from China. In some other states, things are like Congo. The rich and middle class are comparable to China - its just that there are a lot more people in middle class in China than in India. Its at the poorer end that China has made huge strides. Both in numbers and the scale of poverty India stands decades behind China.

In the long run, I think both countries, following different systems, will succeed.

However I completely disagree with the New York Times take on GDP. In richer countries this debate is valid. In poorer countries there is only one gauge on the dashboard - GDP. You have to first have enough to eat, something to wear and somewhere to live before wanting a more balanced development. That is still denied to millions. So while Sarkozy can wax eloquently on haute couture and French wine, poorer countries should forget about everything else and grow GDP. Once nobody goes hungry they can have the luxury of thinking about something else.

Mark said...

Nice comments.

@Hopfrog - I agree about the image stuff. There's no doubt that the infrastructure investment is helping everybody out. It makes sense that, in developing country, that should be the first thing built. For that, China deserves a lot of credit.

I remember in "The World is Flat," Friedman talked with an Indian man who said, "You can't build skyscrapers in a country without good infrastructure. What happens if the power goes out?" It's a good point. My power was a lot more sporadic in China than it is in America, but it sounds like it, and nearly all infrastructure in China, is head and shoulders better than India's.

@Ramesh - It's great to hear your comments on this post.

I like how you point out that the difference between good/bad governance can be more important than democratic/communist distinction (in the sense of economic development). A simple idea but one I couldn't come up with.

I very much see what you're saying about developing countries focusing on GDP growth. I've talked on here before about how it can be seen as hypocritical for developed countries to lecture developing countries on clean growth when developed countries weren't at all clean getting to where they are!

I do think that the US and other developed countries should look to other indicators for explanation of the economy though.

It's not just about being green. That is part of it. But I always think re-examining our economies and our lives is helpful. An useful, agreed upon, and thoroughly thought out index that took into account a wide array of data would be great.

Richard said...

This site has some good articles on China-India comparisons: Here are a couple I read recently:

Mark said...

Those are good links, Richard. That looks like a site worth keeping up with.

I was thinking tonight about GDP. I was thinking of one of my favorite books - Moneyball.

Moneyball is about baseball. Specifically, it is about the general manager of the Oakland As, Billy Beane, who used (relatively) obscure statistics that others ignored to find value in players that other general managers didn't want.

Looking at things differently allowed Beane to have one of the best teams in baseball with one of the lowest payrolls.

There is a lot to take in about Moneyball. But one of the themes I liked most about the book is that the numbers we use to explain life aren't always very accurate in describing what we want to know.

I think that this GDP article spoke to me in the same way Moneyball did. Using GDP, to me, doesn't seem to have an absolute connection to economic health, which is what I feel it is used to describe.

This may not clarify anything or make this post any better. But I figured I should add this thought.

Anonymous said...

I know it's heresy for an American to admit this, but it seems like China's communist unity is a big reason why China continually grinds forward while India seems a bit more haphazard and fitful. Sometimes you need a strong, heavy hand to smack the ox in the rear and get it moving. Though in China's case, the heavy hand firmly grasps the reigns, too.

Anonymous said...

@Anon, Its only heresy if your afraid to exercise one of America's greatest examples to the world, the right to exercise your freedom of speech.

Sure, China's heavy hand gets things done, but that heavy hand also holds people down. During this great economic boom I am sure you have read all about the factory worker suicides. Clearly not everyone is benefitting from the boom. The heavy hand is though, I can assure you of that. The CCP does a masterful job of walking a grey line, as they are once again displaying in the current Korea situation. What would be refreshing is if they actually did the 'right' things, instead of the things that preserve the status quo.

I don't always agree with Han Han, but he had a pretty interesting blog article the other day.

Anonymous said...

quote:" During this great economic boom I am sure you have read all about the factory worker suicides."

you DO know america has a hell lot more suicides (including children) at every level than china right?

or that india has hundreds of thousands of farmers commiting suicide as well in the news just this year?

while you guys are talking, china just keeps barging ahead. and btw, singapore has been a dictatorship and japan a one party state for a very long time and both have done very well.

Anonymous said...

the problem with democracy is that it just doesn't work when it comes to long term planning or stability.

you can see this in the usa especially, where policies initiated by one administration are then overturned by the next.

in the end, one party state "democracies" (NOT dictatorships) are probably the way to go. it ensures stability over the long haul so long as the party is efficient and responding to external events.

Anonymous said...

Sorry Anon, that is not accurate.

The US has a much higher rate among men, but China has a much higher rate among women and China has a higher overall rate.

Every country, every governance, every economic system will have its ups and downs. With the current economic crisis everyone wants to pronounce the death and failure of capitalism and democracy. I think over the long haul it had done quite well, but I will also agree that it has morphed (particularly on Wall Street, America's real Las Vegas) and is full of flaws.

I think most of us that visit here root for China's success and their "barging" ahead provided that it is not barging ahead for the sake of the powers that be. Its personally also how I feel also about my own country's success.

You make a good point about the policies of each administration being overturned by the next and the inefficiencies of that cycle, I will agree there.

Anonymous said...

"The US has a much higher rate among men, but China has a much higher rate among women and China has a higher overall rate."

the difference in total (13 vs 11 per 100,000 population is probably within margin of error). the point is that the type of government of china has NOTHING to do with suicide rates as implied by the poster. and i'll note quite a lot of liberal countries are way ahead in suicide rates compared to china there, including many european countries and even hong kong.

Anonymous said...

Ugh, why am I such a sucker for trolling. You had me at "probably within margin of error".

Why is it that an anonymous poster can never be wrong?

"government of china has NOTHING to do with suicide rates"

NOTHING... NOTHING.... are you omnicient? Hmmmm... I'd bet my very last cent that indeed you are once again wrong.

Don't bother firing off anymore salvos, I'm getting too old to waste time with people who can't admit when they are wrong.

Anonymous said...

Oh what the heck, I'm not that old.

Here is an open letter signed by sociologists from Chinese Universities.

In this letter, I think the following line spoke volumes...

"We call on the central government to immediately end the model of development that has sacrificed people’s basic dignity."

Now while I am not trying to convince you of anything Anon (you'll only stick to your beliefs and interpret things in a way that supports you beliefs) I do think it is an interesting read for anyone who happens to stumble by here.

I think also considering that China has censored this story and in a country where it isn't popular to point blame at the government, this letter really says even more than what is on the surface.

I'm sure there are also people that don't think America was responsible for the deaths of children during the years of sanctioned child labor just because Uncle Sam wasn't signing the check. But good ole Uncle Sam enjoyed the taxes from the Child Labor Tax Law. To me that made him culpable. I think its pretty clear that China's Sociologists feel the same way about the plight of the migrant worker.

Mark said...

I've spent the past couple days camping/canoeing on central Missouri's Niangua River. I wasn't expecting to see such lively discussion while I was gone!

It's hard for me to address everything that is being discussed here. But it seems to me that a country's macro-psychological health largely boils down to "it's the economy, stupid."

Even in a growing economy, plenty of people still have serious problems (see China). And during a recession when lots are hurting, that's just really horrible psychologically (see most of the world).

What I'm saying is not rocket science or any new ground breaking theory. Maybe it is relevant to the discussion at hand though. Maybe not.

Anonymous said...

I think there are bigger issues than just the growing pains within the economy. Sure, it is a factor, but I think there are a whole range of issues at work here, as seen by the choices of some Chinese citizens who are not effected by the growing economy or the recession...

Anonymous said...

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Let us break this record in 2010!

Be the voice for the millions of poor people living across India.

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Mark said...

This is an interesting article. Somewhat related to what's been discussed here.

Anonymous said...

That is a good read. I wasn't entirely familiar with the hukou system. Again, as with most things China, things are more complex than they appear at the surface.

I suppose a case could be made that the hukou system is needed to avoid more overburdening of the infrastructure, but as a believer in regulated free markets and freedom of choice, I feel if those cities were overburdened then people would not find it profitable to live in them and would find other alternatives. Much as water will always flow around paths of resistance and take the most fluid route.

I personally feel its a convenient excuse to justify preserving a system that is working out very nicely for an extemely affluent minority.

Nice to have some discussion around here!

Anonymous said...

Just had a lengthy conversation with my wife about the hukou system and wanted to add a few things.

She basically conveyed that the hukou system may have been effective in the past, but that the farmers are going to migrate to the cities regardless of the hukou system due to the perceptions and conditions of farm life in China. Hukou or no hukou, the migration will occur, and the only thing the hokou system does is make things more difficult on those migrant workers in their factory cities as they are entitled to less benefits and are charged more for certain things. Basically, she felt the hukou system was just another method for skimming the pot by the local political powers.

The more information I get about this, I think the hukou system is just another term the government can throw out there to justify injustice. The western media has a tendency to latch onto these things and make them bigger than they are.

Interesting thing though, when having this conversation we talked about how guanxi works in the Chinese school system and she seemed shocked to find out that guanxi exists in the America education system too. That yes, sometimes the mediocre students get into the best colleges because of who their daddy is.