China Is Bigger than America: "Eclipse" versus IMF?
In my book, Eclipse: Living in the Shadow of China's Economic Dominance, I estimated that the Chinese economy overtook that of the United States in 2010 measured in purchasing power parity (PPP) dollars. The International Monetary Fund (IMF) in its latest World Economic Outlook (WEO) predicts that this Il Sorpasso will occur in 2019. The Economist magazine has also dated the overtaking for around 2019.1 Who is right?
Well, now there is an official answer. The World Bank has just released the numbers for PPP-based GDP for the year 2011 for countries around the world based on the elaborate survey of prices that the International Comparison of Prices (ICP) project conducts every five to six years.2 China's GDP measured in PPP dollars has been revised upwards by about 20 percent. The latest estimates, therefore, suggest that the GDP of the United States ($15.5 trillion) was only 15 percent greater than China's in 2011, not 39 percent as the IMF's April WEO indicates. Projecting growth rates for China and the United States from 2011 onwards suggests that China will be the largest economy in the world in 2014.
Three points are worth noting. Since I made the prediction in my book, the United States revised its GDP upwards by about 4 percent, and China grew slower than I had anticipated by a few percentage points. Without these developments, China would have overtaken the United States by 2013, which made my dating of the prediction three years premature compared to the IMF's, which is six years too late.
Second, although my calculations were less inaccurate than those of the official forecasters, I had overstated China's GDP. My upward revision of China's GDP consisted of: (i) a bump up to the 2005 estimate to reflect the argument of Angus Deaton and Alan Heston (2010), who considered that China had overstated domestic prices in the 2005 ICP survey and hence understated the true standard of living/GDP; and (ii) a bump up to the 2011 estimate because in my view the methodology of the World Bank and IMF (and the Penn World Tables) for forecasting the real cost-of-living changes between 2005 and 2011 was imperfect, tending to overstate these changes and hence understate GDP. The question going forward is which of these two steps requires reconsideration.
Finally, the latest estimates involve a 20 percent upward revision of China's per capita GDP in 2011, implying that per capita GDP in the United States is now "only" five times greater than in China rather than six times as previously thought. China's GDP per capita is now estimated at $10,057 compared to $49,782 for the United States.
1. The Economist's calculations relate to GDP measured at market exchange rates. For this measure, the IMF does not envisage the United States overtaking China any time this decade, because even in 2019 (the end-point of IMF projections), its estimate for US GDP is about 50 percent greater than China's.
2. China was part of the new survey. The computation of the purchasing power parities in 2011 followed a slightly, not radically, different methodology than in 2005.