12 Oct 2014

The Biggest Economy

imageAn IMF report last week projects China to be the world’s largest economy, totting $17.6 trillion with the US of A coming second with $17.4 trillion. This should not be a surprise to many as at the start of the year, the World Bank also foretold this occurrence. 

The fact that the comparison is based on PPP (Purchasing Power Parity) is also well known, as well the fact that in non-adjusted GDP terms China is around $6 trillion behind USA. 

What is surprising is that there goes on a debate about who holds the crown of the largest economy.

I have viewed reports of Bankers and Financial Institutions countering the title attributed to China, even when presented the caveat that it is adjusted for PPP. Yet, this fact seems unpalatable to some, and the importance of PPP is now being debated.

What does claim to the crown to the largest economy mean? Surely the answer lies in the meaning behind how the words “largest” and “economy” are defined and interpreted. And if these interpretations include the balancing of the purchasing power of the per capita earning in each country, then should it be disturbing?

In top-line figure terms, USA is going to remain the largest per capita earner for a long while, but surely if elsewhere, one can get more bang-for-the-buck, should not that also have sincere consideration and appreciation? There are multiple metrics and there will be multiple crowns to wear. Let’s try and understand on of the differences.

Taking an example, within India – an average Mumbaiker will normally earn more for the same job as a person in Ganganagar (a small town in Rajasthan). The wage discrepancy between these jobs at two locations could be as high as 50%. In real terms, the person in Mumbai would earn almost double the figure in rupee terms, but the person in Ganganagar could be maintaining a parity in quality of life. The housing, food, so on is much cheaper in Ganganagar and the person there could be relatively better off though earning less. When this translates across taxation borders, and to manufacturing bases, then the cost of living equates the difference in earnings. For example, in Jammu & Kashmir, the income tax exemption provided, adds to the people’s capability to spend more, while still retaining a right to other living benefits provided by the government.

Coming back to the largest economy and claims thereof. Depending on which measures were applied, PPP Real or Nominal terms, the mantle is open for claim by nations accordingly. People may debate that PPP metrics are not realistic or that China uses different yardsticks to measures its debts and hence its GDP. The projections of the IMF could well be shushed away, but the reality remains that the aspired quality of life and its realisation for the Chinese people, is a graph with a closing gap.

Yet, such development has social and cultural repercussions too.

What seems more important to me, is the fact that more people in China (a larger population), have many more things within their reach – this means that aspirations are closer within individual grasp. In turn this means that these aspirations get fed – when your dreams are within grasp they tend to grow and that in turn translates into greater demand (and possibly lead to frustration in the future).

If one can afford less, one’s demands are fewer and China is reaching a stage where many more of their people are going to want to hold much much more in their hands. If this yearning is not properly fulfilled, there will be a different kind of unrest, economic and social, to handle.

Higher purchasing capability is a demand driver in an economy and this will have to be met with suitable growth on the supply side of affairs. Fulfilled demands normally lead to more flights of fancy, which in turns helps develop the economy, or can cause despondent unrest, an anti-incumbency of the current affairs, if that expression is allowed here.

If growth happens faster than the socio-economic landscape can cope with, it is dangerous for the people concerned as well those who think they are stand isolated. Power, be it the purchasing variety or in other conventional terms, tends to corrupt the psyche. Growth in all formats is always welcomed, but it should be carefully structured to be holistic across domains.

I trust the Chinese governance systems and leadership will handle this happy turn of events and manage it into many other gainful happenings. Congratulations to China for having pipped the world’s largest economy in this one aspect. It is a sign of other events, yet to take shape.

India will compete in the number game a little further along the time scale, but it too is surely and steadily headed there. We must stay both sure and steady on this path – the elephant needs to break a wide swathe and not only cut a few fine lines.

-Pawanexh Kohli

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