Wednesday, August 18, 2010

Missing The Point On China's Low Per Capita Income

Mark Perry points out that while China has a large GDP, it's GDP per capita is still relatively low due to its large population (1.33 billion people).

While the observation is correct, the problem is that Perry doesn't quite understand the implication of this fact. He writes that this means that it has a long way to go before achieving "super power" status. But "super power" status has never been about having a high per capita income. If it did, countries like Qatar, Luxembourg and Liechtenstein would be super powers, and no one talks about these tiny countries in that way. Per capita GDP measures how affluent the average citizen is, while total GDP measures what one might call "[economic] super power" status.

Furthermore, the low per capita GDP level of China is in fact a key argument why China is almost certain to surpass the U.S. I was once asked by someone who had heard my prediction that China will almost inevitably surpass the U.S. in total GDP how I was sure that this prediction wouldn't turn out to be as false as similar predictions by some about Japan in the late 1980s. My answer was simple: there are more than ten times as many people in China than in Japan.

And there are more than four times as many people in China than in the U.S., so it is not necessary to assume that China will reach the same per capita income as the U.S. for China to surpass the U.S. in total GDP. It is sufficient to assume that China will reach a per capita income one fourth of America's. And since per capita income is a lot higher than that in other majority-Chinese countries, particularly Hong Kong and Singapore, and to a lesser extent Taiwan, that is certainly not something that Chinese people are incapable of achieving.

And the fact that per capita income is currently so far behind means that Chinese growth will continue to be boosted by the "catch-up effect" for a long time.