Chinese Living Standards, International Perspective: The World Bank’s PPP Debate

Emerging economies are catching up with advanced economies, but differences of living standards remain far apart.

A new report by the World Bank’s International Comparison Program (ICP) suggests that the purchasing power of China’s renminbi is significantly stronger than exchange rates indicate, based on 2011 prices. Measured by its currency’s purchasing power, the report concludes that China will soon become the world’s largest economy.

China’s National Bureau of Statistics participated in the study, but rejected its conclusion, expressing “reservations” about the study’s methodology.

The ICP provides useful data to compare living standards in different countries. But if it is used inappropriately to compare economies, the conclusions will be flawed.

Chinese living standards, 1980-2013

Initially, the ICP, which is implemented every six years, was designed to make possible comparisons of living standards in different countries, which are characterized by broadly varying prices.

The ICP figures are estimated according to purchasing power parity (PPP), which compares buying power in different countries. However, despite China’s world-historical growth performance, per capita income differences (at 2005 PPP) remain deep between the mainland and advanced economies.

In 1980 – at the eve of Deng Xiaoping’s economic reforms and opening-up policies – Chinese GDP per capita (PPP) was $253. In the United States, the comparable figure was $12,576; in Japan, $8,611 and in Europe somewhere between the two.

In other words, Chinese living standards were then only 2 percent of those in the US; and 2.5-3 percent of those in Europe or Japan.

Last year, the comparable per capita income in the US was $51,749; in Japan, under $36,000; in the EU, about $34,500; and in China, less than $9,900.

By this measure, Chinese living standards remain 20 percent of those in the US; and less than 30 percent of those in Japan or the EU, on average.

Tourists know best

Even today, US living standards remain five times higher than those in China. In turn, living standards in Japan and EU are almost three times as high as in the mainland.

Furthermore, the concept of the purchasing power parity allows us to compare individuals’ and households’ living standards in different countries. But it should not be used to compare different aggregate economies.

After all, the PPP concept is not useful, when you travel abroad. As every tourist knows only too well, foreign destinations do not exchange money on the basis of purchasing power parity. Only hard cash will do.

Based on GDP (nominal) per capita, Chinese living standards remain less than 12-13 percent of those in the US and Japan; and less than 19 percent of those in the EU.

In due time, China’s economy will catch up with the US. However, it will take far longer for Chinese per capita income to catch up with living standards in major advanced economies.

Size and regional disparities

Then, there is the issue of size. When England industrialized and its urbanization rate exceeded 50 percent, the size of its population was barely 30 million. In the US, that rate occurred in the 1910s, when its population was barely 100 million. In contrast, when China achieved a comparable rate in 2011, its population exceeded 1.3 billion.

Industrialization and urbanization also tend to go hand in hand with unbalanced development and income polarization. Moreover, when the UK and the US industrialized, per capita income differences were not yet as steep across and within countries as they are today.

Due to the huge size of its population, regional divergence has been particularly steep in China. In 2013, GDP per capita (PPP) was $21,400-$23,300 in Tianjin, Beijing, and Shanghai; under $8,000 in Sichuan, Jiangxi, and Anhui; and less than $6,000 in Yunnan, Gansu and Guizhou.

Per capita income (PPP) in the poorest Chinese administrative regions is 25-30 percent relative to their more prosperous counterparts in the mainland. That ratio, in turn, is comparable to one between the overall Chinese living standards relative to the US, EU, and Japan.

The uses of misguided practices

If it is misguided to compare entire economies on the basis of purchasing power parity and Chinese living standards remain a fraction of those in advanced economies, why are PPP figures used to compare economies?

First, the practice may be misguided, but very much in self-interest. Take, for instance, climate change. In advanced economies, climate change is often defined in terms of aggregate economies, which downplays the fact that, on a per capita basis, advanced economies are causing much more pollution.

Second, misguided comparisons steer attention away from absolute and relative poverty in emerging economies. The World Bank measures international poverty by $1.25 (RMB 7.81) per day, which is not enough for a single daily meal in China, not to speak of housing or other expenditures.

Perhaps there is something inherently outrageous that major advanced economies are increasingly concerned about poor countries becoming too prosperous, but not about rich countries being too wealthy – or too pricey even for their own good?

The original release was published by China Daily on May 8, 2014