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.)