False Security from PPP Recalculation

Rand’s analysis of the restatement of the purchasing power parity (PPP) calculation for China is incomplete. As I’ve pointed out before, the revised 2006 PPP calculation with the economy measured at PPP nearly three times instead of four times as large as at official exchange rates still leaves China with a $2.5 trillion dollar economy (2006) at official exchange rates and $6 trillion if you consider most of what we and the Chinese buy is cheaper in dollars to buy in China than it is in the US. The relevant numbers for long term strategic security are the industrial production growth rate (from the CIA World Factbook on Intelligence) at 22%/year, the labor force of 800 million of which 45% do agriculture (2005) versus less than 1% for the US and the 11%/year real growth rate.

This indicates that China has a lot of head room as its agricultural sector mechanizes and rationalizes farm size. It has a lot of head room because per capita GDP is either $1,900/year at official exchange rates or $4,500/year at PPP. At 8% faster GDP growth than the US, it will catch us in 10 years in PPP or by 2030 at the official exchange rate. At that point it will still have substantial headroom to grow for another decade much faster than the US because per capita GDP at that point will only be 1/4 the US per capita GDP.

Like finding out that Iran doesn’t want a bomb, this new statistic is a red herring. China is still on the rise. It’s vainglory to hope they just topple themselves like Russia. Just because Iran doesn’t want a bomb (if it doesn’t) it still has a nuclear program and could have one if it wanted in a quite short period of time. Just because we recalculated the statistics to show that China has a smaller economy, it is still growing fast and with the revised calculations rates likely to grow even faster.

I am sure that single-party government will be a drag on China, but they can still field a super power’s worth of hardware once they exceed our GDP. It may take them a while once they are spending as much as the US is on defense to catch up to our technology level, but a tech advantage is not always decisive. Especially if they start outspending us 2 to 1 a decade later while their per-capita GDP is still half of ours.