Global Agenda: The great leap forward

This curious "event" also highlights how problematic economic statistics have become.

mao zedong 88 (photo credit: )
mao zedong 88
(photo credit: )
In 1958, the late Mao Tse Tung, as he was then known, launched a bold initiative to speed the process of industrialization in China's controlled Communist-style economy, by shifting resources from agriculture to industry. This "Great Leap Forward" proved to be a great disaster, leading to widespread starvation in the countryside in which an estimated 20 million people perished. Half a century later, Mao Zedong, as he is now known, is recognized as one of the cruelest and bloodiest dictators of the 20th century, despite the stiff competition in that field. China, meanwhile, has dumped its controlled economy in favor of the market model. But the legacy of the Communist era has enabled China to make a new, painless and highly dramatic Great Leap Forward. On December 20th, the Chinese government announced that its economy was actually some 17 percent larger than previously estimated. At the end of 2004, the size of Chinese economy was almost $2 trillion, making it larger than that of Italy and, by some measurements, bigger than that of the UK, at number four on the world ranking, compared to number seven using the old numbers. In absolute terms, the Chinese "found" an extra $285 billion, equivalent to the entire Austrian economy and more than twice that of Israel. This little treasure trove was located by means of a census of Chinese companies, which established that there millions of businesses, the great majority of them on the service sector, which had not previously been accounted for. In fact, according to the census data, the service sector now comprises over 40% of the total Chinese economy, rather than only 30% as had been thought, and is the fastest-growing part of an economy which is already growing rapidly. Analysts therefore concluded that the rate of growth of Chinese GDP in recent years was actually even faster than had been reported and that the same would be true in the coming ones. So the next day's news from China, that a government think-tank was forecasting a slowdown in growth for 2006, to a mere 8.6% from an estimated 9.3% this year, was effectively rubbished even before it was published. But how can a country's economy grow by one-sixth overnight? How did nobody see these millions of businesses until now? The answer goes back to Mao's legacy and the vast gulf between controlled and free market economies. China's economic statistics still reflect the Communist approach, whereby GDP is measured from the production side - how much is being produced and supplied. In market economies, the primary measure of GDP is from the consumption side, focusing on demand and what people are buying. The difference is acute in the service sector, where output is difficult, and often impossible, to measure. Furthermore, the businesses in question are small and privately owned, with a strong incentive to remain outside the government net and avoid paying taxes. But they exist, they are thriving and they are a major driver of economic activity. The implications of this "discovery," which had been widely expected, though perhaps not quite on this scale, are enormous. Although this phenomenon is not unprecedented - even a developed country such as Norway adjusted the size of its economy by 11% in 1994 after revamping its statistics - this is China we're talking about so the impact is not merely local, but global. Chinese economic policy-making will have to be adjusted and, in some areas, fundamentally rethought. The idea that the country saves an enormous share of its output must be diluted because consumption is actually much bigger and savings correspondingly smaller. That will feed into the ongoing argument about China's currency and the need (at least in Western eyes) to revalue it. In any event, China is even bigger and is growing even faster than was thought. By the end of 2006, its economy will be half the size of Japan's and the gap will close rapidly, which in turn will feed into regional and global geo-strategic calculations. But this curious "event" also highlights how problematic economic statistics have become - not just in countries moving from controlled to open economies, but also in the universal process of moving from an industrial era to a post-industrial, service-dominated one in which agriculture is a marginal sector of the economy and manufacturing is also a small and shrinking sector compared to the massive but highly fragmented services sector. Precisely because services is where the action is, not just in domestic economies but increasingly, thanks to the Internet, in international trade as well, it is essential to find ways to estimate what is going on in a timely and accurate manner.