I’ve long thought that, based on the fragmentary evidence we have (the huge debt load, the ghost cities, the known mismanagement and calculation problem of planned communist economies, etc.), the size of China’s economy is overstated by 40%. Now, according to the measurements of one pretty good proxy for economic activity, it appears that I was too trusting and optimistic about the size of China’s economy, in that it’s probably overstated by 60%.
Takeaways:
Building on the work (caveat: paywalled) of University of Chicago economist Luis R. Martinez, economist and YouTuber Joeri Schasfoort (guest lecturer at Vrije Universiteit Amsterdam) calculates that China’s economy is overstated by 60%.
Martinez’s original paper calculates the visible difference between official stated GDP growth in 184 different countries between 1992 and 2008, and compared those numbers to the visible nighttime light from satellite imagery, and mapped the correlation. You know that South Korea/North Korea image comparison? That, but for the entire world, and mapped over time.
“Autocratic countries typically reported a whopping 35% higher GDP growth numbers compared to nighttime lights growth. And for China specifically, Martinez states that, based on his analysis, China’s GDP growth between 1992 and 2008 was likely 4.9% per year, rather than its average reported growth of 6.3%.”
“This would mean that instead of soon becoming the second largest economy in the world, China’s economy is only about a third of the size of the mighty US economy. And it also means that predictions such as those made by billionaire investor Ray Dalio that China is soon to overtake the US as the world’s next superpower are way overblown.”
“For China specifically, Martinez states that, based on his analysis, China’s GDP growth between 1992 and 2008 was likely 4.9% per year, rather than its average reported growth of 6.3%.”
“Based on how much authoritarian countries overstate in GDP growth compared to night light growth, Martinez produced what he calls a GDP deflator. This GDP deflator is basically a number by which to reduce official GDP numbers each year based on how authoritarian a country is using his deflator. We extend Martinez’s analysis to the year 2021, and while between in 1992 and 2021, China reported a sky high GDP growth between 14% and 8%, Martinez’s analysis suggests that China actually only grew between 6% and 2%.”
Still impressive growth by world standards.
“You should take these adjusted numbers with a big grain of salt. But that being said, I do actually think that the adjusted numbers are closer to the truth than the official numbers.”
“China is quite unique in that the central government used to set GDP growth targets for provincial governors. And if any of you ever worked in a company with a growth target, you probably know that while they can be effective, they typically also produce a lot of unwanted side effects.”
“Research has already shown that China’s GDP growth targets led to both wasteful investment projects and, more importantly, to us manipulated GDP numbers. Similarly to Martinez’s study, another economist uncovered that in the years that Chinese provincial governments needed to be selected, there were huge differences between the reported GDP figures for that province and data that could not be manipulated such as electricity consumption.”
“When I myself looked into the nightlife data of a paper published in Nature and compared that to the World Bank GDP data, I found that indeed China has reported much higher GDP growth compared to nightlight growth. And for example, its more democratic also rapidly growing and larger neighbor India. So yeah, there is a lot of evidence that China is manipulating its GDP data just as much, if not more, than other autocratic countries.”
“And this is why, with the caveat that this is an extremely rough calculation, in my opinion, China’s GDP is likely 40% of its official figure.”
(Note: Normally I say “Watch the whole thing.” However, there’s some unrelated tragic news at the very end, so if you’re prone to I Haz A Sadz, you might want to stop at 13:08.)
I find this entirely believable. Not only does the ruling class of China have incentives to lie to the world, there are incentives to lie all the way up the ladder. Your boss wants happy news, so you give it to him. I’ll bet the people at the top have no clue what state their economy is REALLY in because their underlings feed them a steady diet of BS.
Has the author considered that maybe the CCP has intentionally held back on the installation of streetlights and so on to accommodate the many amateur astronomers in China who appreciate the dark skies? We have been told that the Party is very careful to not repeat the mistakes of the imperialist hegemon.
The CCP is like the Sorcerer’s Apprentice, summoning things into the world which they don’t understand and can’t control. They want “Communism With a Free-Market Approach”, but do not realize how it all works.
Lemme be blunt: Money isn’t virtue. It isn’t “capital”. It isn’t anything other than a signal, one that represents the voice of reality about it all. You can play games with it all you like, but in the end…? That monetary system is a symbolic signals system that rewards success and punishes failure. Brutally so, oftentimes.
The economy is a proxy for nature, red in tooth and claw. Where nature rewards the successful predator or herbivore, punishing the unsuccessful ones with death at the hands of starvation, the economy just does the same thing at a remove. If you’re a successful predator in nature? You survive. If you’re a successful herbivore, same reward.
The signals of money in the economy are the same. Are you meeting a market need? Are you profitable? These are harsh realities; you do both, you survive and make money. Fail? You don’t survive, and you don’t make money. The more you try to stifle the signal sent, the more distortions you impose upon the reality of the market. Communism and Socialism both seek to substitute human longing for “justice” and “equality” on the economy, when the raw reality is that you can only support both of those delusions so long as there’s enough slack in the system to allow it. If the market fundamentals aren’t met, then the eventual outcome will be the same one imposed by nature. It may take decades, centuries even, but the reality will eventually impose itself.
Chinese Imperial authority mostly committed suicide in the name of a fantastic autarky that they imagined the Middle Kingdom possessed. Reality was, without trade, and without equitable fair trade, they drove the issues that killed their nation and their authority. Absent the arrogance of the mandarin class, China would have remained the powerhouse of world civilization. But, they stifled it all in the name of control, an illusion they loved because that’s the nature of Chinese civilization. At the heart of it all, they love stability and control, not realizing that the only way to gain true stability is to embrace chaos and give up control.
It’ll be the same with Xi’s China. They’re on the same path as the various dynasties that drove China to its knees and kept it there, all in the name of their fantasies about power and control.
In the 1980s. an economist named Campbell from Indiana University published a brilliant analysis of why the Soviet Union was going to fail, and it had to do with information. To boil it down, it’s as T Migtatorius states above, “there are incentives to lie all the way up the ladder. Your boss wants happy news, so you give it to him. I’ll bet the people at the top have no clue what state their economy is REALLY in because their underlings feed them a steady diet of BS.” This was Campbell’s argument — that the Politburo had no clue what was actually going on out there, so they were assigning targets and allocating resources based on what was being distorted at every level all the way up the chain. So Collective Farm #65 would say its productive capacity was 10,000 bushels of wheat when really it was 15,000, and it would get assigned a quota of 12,000. They would go ahead and produce 15,000, then barter the off-the-books 3,000 bushels for other things they couldn’t get through the official system like off-the-books tractor tires and pencils and penicillin (because they ran their own schools and medical care, too). The whole thing was a giant inefficient mess where everyone was lying to everyone else and a lot of the country’s true economic activity took place in the gray market.
Your hypothesis would be more reasonable if they didn’t have other visible evidence (enormous amounts of concrete) that they have not in fact avoided the mistakes of the imperialist hegemon.
As far as I can tell, there is a bit of a cargo cult going on there. They say “We must have industry to become rich”, so there is a lot of industry. But there is useful industry and non-useful. If you construct buildings that are not used, then you are just wasting time and money (although someone is getting rich somewhere).
Adding to the comments so far on the Soviet Union’s economic miscalculation: I think in the 80’s, the SU’s official figures were a GDP half of the US, while the (not skeptical enough) CIA estimated that it was only a third. After the collapse, it was found out to be a *tenth*. So the SU’s military spending wasn’t 15% of GDP, but a whopping 50%.
Don’t know how much the politburo believed their own official GDP figures, but my guess is they probably thought the CIA figures were close to the mark and never guessed that they were stuck in a perpetual WW2-level economic footing. Until it collapsed, of course, Oops.
I have worked in and watched China for years. 20 years of seeing billions of US investors’ money wiped in in Chinese/US Companies wiped out due to fraud and incompetent or paid-off auditors. I listen to one conversation with auditors. The degree of inflation was tied to the size of the audit bill. Driving through parts of western China with miles of 30-floor apartment buildings – empty.
As for the comments about the Chinese not repeating “Western Mistakes,” – heck, they are taking our mistakes and doubling down. Massive pollution in the cities, poorly designed cities, subsidizing energy so it is cheaper than it ought to be. Scheduled to build over 1,000 coal plants in the next 15 years.
The discrepancy does not surprise me at all. It’s good research, and if the light measurement is off by 10% or 15% – China still added a 50% “spiff” to the real GDP.
It is also dangerous for an autocratic leader to rely on information from their kowtowed underlings that is not just a little wrong but massively in error. Its called the Managerial Doom Loop. Wars start that way.
I find this entirely believable. Not only does the ruling class of China have incentives to lie to the world, there are incentives to lie all the way up the ladder. Your boss wants happy news, so you give it to him. I’ll bet the people at the top have no clue what state their economy is REALLY in because their underlings feed them a steady diet of BS.
it would be interesting to know how he calibrates his scale.
Has the author considered that maybe the CCP has intentionally held back on the installation of streetlights and so on to accommodate the many amateur astronomers in China who appreciate the dark skies? We have been told that the Party is very careful to not repeat the mistakes of the imperialist hegemon.
The CCP is like the Sorcerer’s Apprentice, summoning things into the world which they don’t understand and can’t control. They want “Communism With a Free-Market Approach”, but do not realize how it all works.
Lemme be blunt: Money isn’t virtue. It isn’t “capital”. It isn’t anything other than a signal, one that represents the voice of reality about it all. You can play games with it all you like, but in the end…? That monetary system is a symbolic signals system that rewards success and punishes failure. Brutally so, oftentimes.
The economy is a proxy for nature, red in tooth and claw. Where nature rewards the successful predator or herbivore, punishing the unsuccessful ones with death at the hands of starvation, the economy just does the same thing at a remove. If you’re a successful predator in nature? You survive. If you’re a successful herbivore, same reward.
The signals of money in the economy are the same. Are you meeting a market need? Are you profitable? These are harsh realities; you do both, you survive and make money. Fail? You don’t survive, and you don’t make money. The more you try to stifle the signal sent, the more distortions you impose upon the reality of the market. Communism and Socialism both seek to substitute human longing for “justice” and “equality” on the economy, when the raw reality is that you can only support both of those delusions so long as there’s enough slack in the system to allow it. If the market fundamentals aren’t met, then the eventual outcome will be the same one imposed by nature. It may take decades, centuries even, but the reality will eventually impose itself.
Chinese Imperial authority mostly committed suicide in the name of a fantastic autarky that they imagined the Middle Kingdom possessed. Reality was, without trade, and without equitable fair trade, they drove the issues that killed their nation and their authority. Absent the arrogance of the mandarin class, China would have remained the powerhouse of world civilization. But, they stifled it all in the name of control, an illusion they loved because that’s the nature of Chinese civilization. At the heart of it all, they love stability and control, not realizing that the only way to gain true stability is to embrace chaos and give up control.
It’ll be the same with Xi’s China. They’re on the same path as the various dynasties that drove China to its knees and kept it there, all in the name of their fantasies about power and control.
In the 1980s. an economist named Campbell from Indiana University published a brilliant analysis of why the Soviet Union was going to fail, and it had to do with information. To boil it down, it’s as T Migtatorius states above, “there are incentives to lie all the way up the ladder. Your boss wants happy news, so you give it to him. I’ll bet the people at the top have no clue what state their economy is REALLY in because their underlings feed them a steady diet of BS.” This was Campbell’s argument — that the Politburo had no clue what was actually going on out there, so they were assigning targets and allocating resources based on what was being distorted at every level all the way up the chain. So Collective Farm #65 would say its productive capacity was 10,000 bushels of wheat when really it was 15,000, and it would get assigned a quota of 12,000. They would go ahead and produce 15,000, then barter the off-the-books 3,000 bushels for other things they couldn’t get through the official system like off-the-books tractor tires and pencils and penicillin (because they ran their own schools and medical care, too). The whole thing was a giant inefficient mess where everyone was lying to everyone else and a lot of the country’s true economic activity took place in the gray market.
Hairless Joe:
Your hypothesis would be more reasonable if they didn’t have other visible evidence (enormous amounts of concrete) that they have not in fact avoided the mistakes of the imperialist hegemon.
As far as I can tell, there is a bit of a cargo cult going on there. They say “We must have industry to become rich”, so there is a lot of industry. But there is useful industry and non-useful. If you construct buildings that are not used, then you are just wasting time and money (although someone is getting rich somewhere).
Attn editor/proofreader:
Watch for its/it’s.
Attn editor/proofreader:
Watch for its/it’s.
LOL!
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[…] Battleswarm- China’s GDP must have been in some cold water….. […]
Adding to the comments so far on the Soviet Union’s economic miscalculation: I think in the 80’s, the SU’s official figures were a GDP half of the US, while the (not skeptical enough) CIA estimated that it was only a third. After the collapse, it was found out to be a *tenth*. So the SU’s military spending wasn’t 15% of GDP, but a whopping 50%.
Don’t know how much the politburo believed their own official GDP figures, but my guess is they probably thought the CIA figures were close to the mark and never guessed that they were stuck in a perpetual WW2-level economic footing. Until it collapsed, of course, Oops.
[…] Is China’s GDP Overstated By 60%? […]
So, Jim B, you’re saying we’re headed down the same road with cancel culture and “private company’ censorship? Who could possibly that? /sarc
Cargo cult evening. Pretend that by building the trappings of a high-functioning economy one will magically appear, while ignoring the fundamentals.
@M –
Hairless Joe’s comment was, I think, pretty clearly tongue-in-cheek.
I have worked in and watched China for years. 20 years of seeing billions of US investors’ money wiped in in Chinese/US Companies wiped out due to fraud and incompetent or paid-off auditors. I listen to one conversation with auditors. The degree of inflation was tied to the size of the audit bill. Driving through parts of western China with miles of 30-floor apartment buildings – empty.
As for the comments about the Chinese not repeating “Western Mistakes,” – heck, they are taking our mistakes and doubling down. Massive pollution in the cities, poorly designed cities, subsidizing energy so it is cheaper than it ought to be. Scheduled to build over 1,000 coal plants in the next 15 years.
The discrepancy does not surprise me at all. It’s good research, and if the light measurement is off by 10% or 15% – China still added a 50% “spiff” to the real GDP.
It is also dangerous for an autocratic leader to rely on information from their kowtowed underlings that is not just a little wrong but massively in error. Its called the Managerial Doom Loop. Wars start that way.
May that not happen