Maximizing China's living standards

By John Ross
0 Comment(s)Print E-mail, January 19, 2013
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Improving living standards -- or raising consumption in economic terms -- is the most important question in every economy, including China. Investment, technology and other issues are only technical means to achieve this.

In the past period it has therefore been a potential problem that an elementary, but crucial, error on consumption affected China's economic discussion. As this is being corrected, it is important to clarify the high stakes involved. Before outlining the strictly economic issues, their practical implications for China's living standards and economic growth will be shown.

Both statistics and economic theory show that economic growth is the only sustainable way to increase living standards. World Bank data show on average any increase in GDP creates an increase in consumption 87 percent as large. Nothing else even remotely approaches this in raising living standards.

For China this is crucial. At its creation in 1949, New China inherited from its predecessors one of the world's poorest living standards. So low was the starting point that despite China has achieved the fastest economic growth in human history, raising itself from a poor to a middle income country by international classifications, China's consumption per person remains behind advanced economies. To reach the living standards of the most advanced economies, China must grow rapidly for decades.

It is easy to show there is no substitute for this. World Bank figures for 2010, the latest available data, show China's average consumption per person was $2,064. The U.S. figure was $41,320. Certainly this market exchange rate data is distorted. Average prices in China are 42 percent lower than the U.S. But even if a correction is made for this utilizing "parity purchasing powers," China's consumption is adjusted upwards by this amount, China's consumption per person is still only equivalent to $3,522 in U.S. terms -- 9 percent of U.S. levels.

No redistribution of China's existing resources can close this gap. Even if the wholly unrealistic assumption is made that all of China's GDP is consumed, no resources are used for investment, then in price adjusted terms China's consumption per person is only 18 percent of U.S. levels. Only prolonged economic growth can bring China up to advanced economy living standards.

Actually the proposal that China should not invest, and redistribute all income into consumption, would clearly make the situation worse. Existing capital equipment would rapidly wear out, output would rapidly decline and living standards would collapse. China can grow only by investing.

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