Human Side Of Economics

(Last of three parts)

China has done wonders eliminating dehumanizing poverty in a record time of 20 years, from 2000 to 2020. Can we then expect China to continue this ”human miracle” by becoming the richest nation in the world also in no time at all?

Most probably not. China is still way, way behind the richest large nations in the world like the US, Germany, the UK, France, and Japan who, in 2019, had, according to the World Bank, per capita incomes of $65,281, $46,259, $42,300, $40,494, and $40,247, respectively in comparison to China’s $10,260 in the same year.

In trumpeting its economic success, China may even make the legitimate claim that its total GDP in absolute terms, using Purchasing Power Parity (PPP) in measuring income is already larger than that of the US. GDP comparisons using PPP are considered more useful than those using nominal GDP when assessing a nation’s domestic market because PPP takes into account the relative cost of local goods, services, and inflation rates of the country, rather than using international market exchange rates which may distort the real differences in per capita incomes. According to the IMF, in 2020, China’s GDP in PPP terms was $24.162 trillion compared to the US’ of $20.807 trillion. It may be asserted that in PPP terms, China has now the largest GDP in the world. Such a fact, however, is mainly attributed to its large population, almost four times that of the United States. Even in PPP terms, the per capita income of the US is still 3.4 times that of China. It will take a while, if ever, for China to match the per capita income of the US.

To further restrain the Chinese leaders from prematurely claiming economic victory over the United States, or for that matter over other OECD countries with much larger per capita incomes than China, we should again consider that in calculating its poverty incidence as of 2020, China uses a poverty line of about $2.25 a day. Even if the World Bank uses a lower threshold of $1.90 a day, what can $2.25 a day purchase for an individual? To get an idea, let us convert this amount into Philippine pesos which would be about P122, obviously a pittance considering today’s living standards in a middle-income economy. For upper-middle-income countries like China, the World Bank reckons that a reasonable poverty line is $5.50 a day. In an article by Indermit Gill, writing for Brookings Institute (Jan. 25, 2021), it was reported that China is almost as well off today as the United States was 60 years ago when it became a high-income economy.

In 1960, the US first adopted an official definition of poverty, classifying people as poor if their daily consumption was less than $21.70 in 2011 prices, four times what the World Bank today considers reasonable and about 10 times what China believes is adequate. In 1960, using the $21.70 cutoff, fewer than a quarter of all Americans lived in poverty. But by this criterion, between 80% and 90% of Chinese people would today be considered poor. Given these standards, China is years — if not decades — behind schedule. President Xi Jinping and company have no reason to be complacent.

To have a reasonable chance to match the economic power of the US in the coming years (or decades), China is well advised to heed the following, as recommended in the Brookings paper:

• Forget the flattery. China should not get used to being praised for reducing poverty in record time. As the country prospers, the praise becomes progressively less admiration and more flattery. China should seriously consider the experience of the US from 1920 to 1960, especially the achievements and limits of poverty programs in Southern states. No serious Chinese student of economic history will find comparisons with the US flattering.

• Forget $1.90 a day or even $2.25 a day. These poverty thresholds are no longer interesting and relevant and repeated references to them may actually be counterproductive. They are not appropriate for an upper-middle income country about to become an advanced economy. Since the 1960s, the US has been using a poverty line that is 10 times higher. China should use its centenary celebrations of the CCP to crank up ambition, not to go on about doing what Vietnam and Taiwan had done when they were a lot poorer.

• Forget “precise relief.” Even at $15 a day, poverty incidence in the US, Japan, and South Korea when they made their transitions to high income, was less than 10%. Using this higher rate, poverty incidence today in China would be 75% for the whole country and 90% in rural China. With these more realistic numbers, China is decades behind in poverty reduction. To catch up, China needs a radically more ambitious strategy than targeted relief.

The greatest threat to China’s ambition to become a “First World Country” in the near future is the very high probability that it would fall into the so-called Middle Income Trap like many countries in Latin America, such Brazil, Venezuela, and Argentina. These countries reached upper-middle income levels decades ago and have stagnated since.

Since 1960, just 15 economies have escaped this trap, among which were the tiger economies of Asia such as Japan, Hong Kong, Taiwan, and South Korea. Major reasons for falling into this trap have been losing competitiveness in exports of manufactured goods because of rising wages, suffering from low investments, inability to innovate and move up the technology ladder, poor labor market conditions, slow growth in the secondary sectors of the economy, and lack of investment in infrastructure, education, and research in science and technology. In fact, it is believed that China’s Belt and Road initiative and Made in China 2025 are strategies to avoid the Middle Income Trap.

Countries that fell into the Middle Income Trap did so because they were unable to invest sufficiently in infrastructure, innovation, and research, and high quality education, among other reasons. China did not suffer from such inadequacies. The main factor that could imprison China in the Middle Income Trap is its rapidly ageing population that can be mainly attributed to the brutal one-child policy that was enforced for decades. Although this policy was relaxed in 2016, there has been little success in convincing couples to have more children, not too different from the experience of Singapore that has been trying for decades to reverse its low fertility rate without any success. A Time Magazine article on Feb. 7, 2019 reported that in 2018 there were close to 250 million people over 60 years old, constituting 17.9% of the total population. By 2050, it is estimated that 330 million Chinese will be over 65. Its population will peak at 1.44 billion in 2029 before entering unstoppable decline, according to the Chinese Academy of Social Sciences. This population bomb will seriously constrict its labor force, put excessive burden on its already very inadequate pension system and greatly dampen its domestic market.

Add all these to the very high debt burden, which is over 200% of GDP, and you have a formula for long-term stagnation. China’s biggest problem today is that it has started to age rapidly before becoming rich. The rich countries of today experienced rapid population decline only after they reached levels of GDP per capita of $20,000 or over. Lesson for the Philippines: make sure that at least our middle-class families will continue to have an average of three children (if the fertility rate falls below 2.1 babies per fertile woman, the population starts its long-term decline). Our demographic dividend is still our major engine of growth: a young, growing and English-speaking population. Without such a demographic dividend, we would not have the more than $30 billion annually of remittances from OFWs which constitute some 10% of our GDP, the large earnings of the BPO-IT workers, and the huge domestic market on which is based the number one source of GDP growth, which is consumption expenditures. 


Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is Professor Emeritus at the University of Asia and the Pacific, and a Visiting Professor at the IESE Business School in Barcelona, Spain. He was a  member of the 1986 Constitutional Commission.