IMF – Enter The Dragon . . . Or Not

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With little fanfare, the International Monetary Fund just released one of the most interesting projections in its history – a study predicting that by 2016, China’s GDP will surpass that of the United States.

Uh . . .

So, how did the IMF arrive at this conclusion, when nearly all prior projections from soothsayers far and wide pegged the transition somewhere in the distant, misty mountains of 2030-2050?

For starters (econo-speak warning!), the measurement IMF analysts used is a bit different.  Rather than conventional GDP totals and nominal currency values, they used Purchasing Power Parity  – AKA the Big Mac Index.  Burger chain prices should be roughly the same from nation to nation, so PPP gives economists  a way to see just what kind of clout a wallet full of RMB (or yen or rand) gives a shopper in another country.  It also lets them end-run the problems of dealing with artificially low currency values – as is the case in China.

Reactions to the report have varied.  Some (mostly politicians) have used the report to call for everything from further spending cuts to “cracking down” on China’s monetary policy.  Others (mostly economists) note that it’s one study using one  method to assess one nation.  Others note that things just aren’t that simple, and that while the trend can be your friend, “at current growth rates” are four of the most dangerous words in English.

Its only natural to be swept away by the awesome velocity of China’s transition.  It’s the most fascinating economic story on earth.  But forecasting is fraught with danger, as any journalist who 20 years ago predicted the Japanese Century can attest.

Even casual Asia-watchers know that there’s much more than meets the eye in China.  For starters, what is one to make of China’s ghost cities – enormous malls and whole cities designed for hundreds of thousands of residents, inhabited only by custodians and security guards?  What of inflation’s effects on the hundreds of millions of inland Chinese excluded from the coastal boom, as food prices rose by 11.4% in March alone?  Transportation gridlock, particularly in coal shipments, is an emerging problem as well.

No one can deny that the unleashed energy and dynamism of more than a billion people has forever changed China in less than a generation, or that its astounding growth seems immutable.  But we’d also do well to remember that the challenges China faces are just as real as the ones we face here at home.  However helpful it is to keep an eye on the trajectory of events, trajectory is not destiny.

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