Deng Xiaoping is credited with initiating and promoting the economic reforms that transformed China from a poor country to an economic superpower in about four decades. What do we mean when describing China as one of the great economic success stories in history? Is economic growth the same as development? In answering these questions, three concepts are helpful. First, how do we measure the size of the economy or value economic activity? Second, how rich are people in the economy? What is the income of the average person? Third, what other non-monetary factors should be taken into consideration in assessing the development of a country?
In principle, to measure the size of the economy, all one has to do is add up the value of everything that is produced, or add up everybody’s incomes. Adjusting for transfers to and from other countries, total output should equal total income. In practice, it’s difficult. Some types of output are difficult to value, such as IT services, and not all incomes are observed. There are particular difficulties in poor countries, where a large share of the population is engaged in subsistence agriculture or informal sector activities. National Statistics Offices compile data from many sources, combined with informed guesses, to estimate the size of the economy.
The most common measures are gross domestic product, GDP, and gross national product, GNP, which is a share of GDP owned by people in the country. And it’s also referred to as gross national income, or GNI. Once we have a measure of the size of the economy, for international comparison, a common currency is required to adjust for price differences. For this, we use purchasing power parity US dollars, dollar PPP, for a particular year. So for example, 2005 dollar PPP would equate the price of the same basket of goods in 2005. Table 8.1 shows how China’s GDP has grown from 1988 to 2011, compared to India and the UK.
GDP, in dollars current, is not in PPP, so it does not adjust for differences in prices. We can see that China appears economically smaller than the UK in 1988 and 1997. The effect of using PPP is obvious in 1997. The Chinese economy was actually more than three times larger than the UK economy in real prices. By 2011, the Chinese economy was almost five times the size of the UK in PPP terms. The Indian economy was almost twice the size of the UK economy. This reflects the rapid growth rates for China, averaging about 10% per annum for the three decades after 1980.
This was much more than about three times the rate for the UK, and almost twice the rate for India. China may now have a much larger economy than the UK, but the average Chinese person is much poorer. This is because China has such a large population relative to the UK. We can see the implications by dividing GDP by population to get the indication of the PPP income of the average person in different countries. Table 8.2 shows China’s GDP per capita from 1987 to 2011, again, compared to India and the UK. The figures are PPP and show that relative per capita income in China was less than 20% of the level in the UK in 1987 and 1998.
India was even poorer. The Chinese economy may be much larger, but average income in 2011 is still below a quarter of the level in the UK. It is still a remarkable improvement since the 1980s, and incomes in China have risen faster than in India. Of course, incomes in all countries have been rising. While the UK has more or less maintained its rank around 20th in the world, China has improved to 90th, and India has fallen back in the ranking to 133rd.
Now, the PPP income of the average person is only one indicator of the well-being of individuals in different countries. To get a broader measure of development, we want to include elements of the quality of life. One commonly-used measure is the Human Development Index, HDI. The HDI combines indicators of access to resources, captured by PPP income per capita, and educational attainment, and health status. Each is measured relative to the best-performing country in the world. A country that had the maximum level of achievement on each of the three would score 1. The HDI for any country is how close it is to that maximum, so 0.5 is halfway.
Table 8.3 shows China’s HDI in 1988, 1998, and 2012, compared, again, to India and the UK. Although China’s HDI has improved slightly relative to the UK, it has fallen behind a little relative to the global maximum. The HDI in India is much lower, but it has increased. China’s relative position has deteriorated slightly, India’s HDI rank has not improved, and the UK has actually fallen back relative to other rich developed countries. One thing to note is that the improvement in China’s rank by per capita income has not been matched by a similar improvement in its Human Development rank. There are many other indicators of welfare or development that could be considered.
On some of these, such as reducing the percentage of the population in poverty, China has done very well. India has not. On others, China has done badly. For example, income inequality, especially rural-urban, has increased, and pollution and environmental degradation have become very serious challenges. Achieving economic growth does not ensure the same level of improvement in the welfare of the population. Growth is not the same as development. The Chinese experience illustrates this. Development economics studies why this may be the case. Why is it so difficult for even rapidly-growing economies to achieve significant improvements in the well-being of the population?