India as #1

Since I’ve been making a fool of myself with all these contrarian posts, I might as well get it all out of my system.  When Tyler Cowen asked me for my most absurd belief, one idea that I came up with was that India will have the world’s largest economy in the year 2109.

First let’s ask ourselves why most people would find this prediction a bit far-fetched.  Most of us have never even visited India, but we have seen media images that often show a very crowded and underdeveloped country.  It is very hard to imagine how India’s economy could ever surpass the US.  More astute observers might notice that India does have nearly 4 times the US population, and it is not that hard to imagine that their per capita GDP might eventually reach 30% of US levels. 

But the population advantage of India raises an even greater hurtle.  Right now China has a per capita GDP that is twice as high as India’s.  Even worse, China is growing more rapidly.  And China’s total population is larger than India’s.  So how could India possibly overtake China within the next 100 years?

Before delving into the numbers, I’d like to first try to dissuade you from thinking about this problem in terms of mental images.  To do so, I am going to first talk about two other countries; German and Greece.   Which of those two countries has the largest GDP?  Obviously Germany.  And why is Germany’s GDP much larger than Greece’s GDP?  Most of us have mental images of each country:

Germany:  A manufacturing powerhouse full of sleek Bauhaus-style factories churning out turbines and BMWs

Greece:  A beautiful sleepy backwater, full of fishing ports and mountain villages with donkeys walking down the street.

But it turns out that these images are very misleading–and in fact have little or no role in explaining the wide gap between Germany and Greece’s GDP.  The three institutions cited in Wikipedia’s PPP GDP tables all estimate Germany’s per capita GDP at about $35,500.  Unfortunately, the three sources differ on Greece, ranging from $29,000 to $32,000.  Let’s say it’s $30,500, which would make Germany about 15% richer. 

The means that the reason Germany’s GDP is roughly 10 times bigger than Greece’s is almost entirely due to it much bigger population (80 million vs. 10 million.)  If you had a country of 100 million at Greece’s level of development, then it’s GDP would be larger than that of Germany.  So among developed countries, variation in total GDP is almost entirely determined by variation in population.  So here is my argument in a nutshell:

1.  I believe that in 100 years the US, China, and India will all be developed countries.

1.  I believe that in 100 years China’s per capita income (PPP) will be at least 75% of US levels.

3.  I believe that in 100 years India’s per capita income (PPP) will be at least 60% of US levels.

4.  I believe that in 100 years both India and China will have populations at least twice as large as the US.

5.  I believe that in 100 years India’s populations will be at least 25% larger than China’s.

I’m going to skip over the US comparisons for the moment, as later I’ll argue that China will surpass the US very soon, indeed much sooner than most people realize.  So it’s between China and India.  To make the case for India I have to make two arguments; India’s population will be at least 25% larger than China’s, and its per capita income will be within 20% of China’s.  Let’s start with population:

The truth is that no one has any idea what each country’s population will be 100 years from today.  But nevertheless we do know more than you’d think.  I had trouble finding estimates, but I did notice that over the past decade India seems to have had about 30% more births than China.  India’s infant mortality rate is still higher than China’s, but rates everywhere have come down to the point where it no longer dramatically affects population growth rates.  So we can be pretty sure that 20 or 30 years from now India will have at least 25% more people of child-bearing age than China.  At that point it is anyone’s guess.  I am going to assume that from that point forward the two countries have the same birthrate.  In two ways this is a conservative assumption:

1.  India currently has a much higher birth rate

2.  The richer parts of China have some of the lowest birth rates on earth (Hong Kong and Shanghai, for instance.)

Cutting slightly the other way is that China’s birth rate has recently picked up a bit (from relaxation of the one-child policy) and India’s has dropped a bit.  

Demographers expect China’s population to peak at 1.5 billion (in a few decades), and then start falling.  I have no idea where it is expected to be in 100 years.  India’s population is almost certain to surpass China’s in about 20 years, and we really don’t know where its population will peak.  But again, I see no reason to believe Indian birth rates will fall below those of China (which as I said, are expected to become ultra-low as China gets richer.)  BTW, Hong Kong has perhaps the lowest birth rate on Earth, and they don’t have a one-child policy.

So I think the population part of my argument is very consistent with the best demographic estimates that we have, which admittedly aren’t very good.  What about the rest of my argument; that India will reach about 80% of China’s per capita GDP.  That looks more iffy, especially given the fact that it has fallen from a rough parity with China when Mao died in 1976, to just under 50% of China’s per capita income today.  How can they turn this around?

The answer is that they need to keep growing at 6-8% a year, and wait for China to ”hit the wall.”  Almost every fast-growing economy eventually hits a wall at roughly 80% of US per capita GDP, and then starts growing much more slowly.  The most famous example is of course Japan, which hit the wall in 1990.  But the same thing happened in Western Europe and elsewhere.  The only exceptions are tiny tax havens like Luxembourg, and oil-rich states like the UAE and Norway.  Once China hits that wall, it will no longer be having any population growth, and so its total GDP growth rate will slow to 1-2%, just like Japan.  That may happen sooner than people think.  I’m guessing that places like Korea and Taiwan are no more than 20 years away from that wall, and China is a 20 or 30 years behind those two tiger economies (it’s hard to tell because places like Zhejiang province are even closer to the tiger economies, and western provinces like Gansu are much further away.)

So in about 50 years China will be growing very slowly.  India will be the logical place for the lower wage manufacturing industries, and will be attracting a lot of foreign investment.  Because China will then be highly developed, the “rich world” that India can export to will be something like 3 billion people, not the 1 billion of today.  That is a big market.  With any sort of sensible economic reforms (admittedly a big if) India should be able to continue growing rapidly between 2059 and 2109.  They won’t catch up to China in per capita terms, but they will get close enough to have a larger total GDP.

I’m sure you all remember the 1500 meters part of the 1960 Olympics decathlon:

On Sept. 5, the first day of Olympic decathlon competition ended at 11 p.m. with Johnson leading Yang by 55 points though he had scored highest on only one of the five events. When Johnson hit the first hurdle badly in the next day’s first event, the 110-meter hurdles, he didn’t gain as many points as he had expected. But he made up for that with a personal best of 13 feet, 5½ inches in the pole vault.

… and so it came down to the 1,500 meters. Johnson’s strategy was to stay close, and he dogged Yang throughout. When Yang attempted desperately to pull away in the final lap, Johnson stuck close.

He finished only six yards and 1.2 seconds behind Yang, coming home in a personal best of 4:49.7. Johnson had the gold medal, setting a then-Olympic record of 8,392 points in the process. At the age of 25, Johnson had fulfilled his high school dream.

China’s like CK Yang, they’ll win the per capita race with India.  But India’s like Rafer Johnson, they will stick close enough to China that they’ll eventually have the world’s biggest GDP.

So the message is that one shouldn’t pay too much attention to stories in the media.  Don’t let images of Mother Theresa and Slumdog Millionaire cloud your judgment.  The Indian economy has a lot of growth ahead of it.

Part 2.  When will China surpass the US?

Next year?  Maybe.  In 15 years?  Maybe.  Actually there is no objective answer to the question.  As philosophers would say:  ”There is no fact of the matter.”  This is because there is no well-established agreement as to what we mean by GDP, especially PPP GDP.  In fact, there isn’t even any agreement as to what we mean by “China” and “the US.”  The US isn’t a big problem, as the only significant question is whether Puerto Rico should be included.  But what about Hong Kong, Macao and Taiwan?  Are they part of China?  You may be surprised to find out that both the Mainland Chinese and the Taiwanese constitutions agree that there is only one China, they just disagree as to who should rule over it.  Everyone agrees that Hong Kong and Macao are part of China de jure, but de facto they are separate.  So much so that Hong Kong has an entirely different currency and separate GDP accounts. 

Let’s assume that the region called “China” includes Hong Kong but not Taiwan (this will probably get me blocked in China, despite my cowardly use of the term “region.”)

The 2008 figures show that Hong Kong’s GDP is $215 billion, and $306 billion in PPP terms.  Mainland China has a GDP of $4.4 trillion, and $7.9 trillion in PPP terms.  The US has a GDP of $14.4 trillion (the same in PPP terms.)  Now let’s stop right there.  If you’ve ever been to Hong Kong and China you should immediately be suspicious of these numbers.  The Hong Kong PPP numbers look reasonable compared to the US (although if you put a high weight on real estate then they may be too high.)  But in these figures the PPP adjustment for mainland China is only slightly larger than Hong Kong.  This seems absolutely nuts to me. 

Hong Kong has a per capita income only slightly lower than the US, whereas mainland China is far below even Mexico.  I think China’s GDP figures, which assume its cost of living is 55% of US levels, is way too low.  Here are some examples.  My wife had tailoring done in Beijing, one of the most expensive cities in China.  The shirt was restyled for $1.20.  She told me it would have cost $20 in the US.  I had my shoes re-soled for about the same price.  I went to a very nice barbershop and had a much more elegant haircut than I get at Great Cuts, and I paid $2.25.  BTW, no tipping in China.  Across the street was a much more rundown hole-in-the-wall type barbershop.  The sign said 5 yuan (75 cents) for haircuts.  That place was much more typical of what haircuts would cost across the vast interior of China, indeed even that is an overestimate. 

Why am I boring you with all these stories?  Because the service sector in China is perhaps 10 times larger than the nominal figures would show.  Remember all those articles talking about how only 40% of the Chinese economy is consumption?  What would happen if you added up all the services produced in China in PPP terms (i.e. US prices).  The Chinese haircut industry alone might be larger than the economies of many small countries. 

A few years ago the World Bank re-did their PPP estimates for China, and dramatically shrank the size of the Chinese economy.  Instead of assuming the Chinese cost of living was a third US levels, the assumed it was half (and now with the yuan appreciation, 55%.)

In 2010 the US GDP will be about $14.5 trillion.  China’s nominal GDP will be about $5.2 trillion.  If the World Bank were still using the old 3-1 conversion for Chinese PPP, they would already be the world’s largest economy, even without $300 billion from HK.  Let’s assume the HK numbers are about right, is there a reasonable case to be made that Mainland China’s PPP economy will be $14.2 trillion in 2010?  Assuming $5.2 nominal GDP, that would require a 2.73 conversion factor, somewhere between the old and new estimates from the World Bank.

I don’t think there is an objective answer to the question of which ratio is “right.”  The World Bank was criticized for drawing their new estimates from richer coastal cities.  Places like Shanghai have a cost of living that is dramatically higher than the vast interior of the country, where most people live.  Before I had read about the World Bank estimates I had formed my own guesstimates of about 3 to 1 from casual empiricism.  I based that on conversion ratios ranging from 1 to 1 for products like Buicks (made in China and very popular there) to perhaps 3 to 1 for food, to perhaps 10 to 1 for labor-oriented services.  Because the basket of goods consumed in each country is so different there is no objective answer to the question of which country has the bigger GDP. 

I think the best way to approach this issue is to use Rorty’s maxim “truth is what your colleagues let you get away with.”  Truth is socially constructed.  So imagine a timeline with a bell-shaped distribution above it.  The distribution shows the point in time when each economist thinks China has surpassed the US.  At the left end in 2010 is me, a China booster who (shamelessly) wants to get credit for being first to notice that America’s more than 100 year reign as number one is over.  The mode occurs when the World Bank says that China has achieved what Italians call “Il Sorpasso.”  And at the far right of the distribution, well into the 22nd century is Lester Thurow.  The mode occurs around 2016.  Mark your calendars.

To conclude:

In one year either China or the US will be number one, India or Japan number three.

In 50 years China will be number one, and either India or the US will be 2nd.

In 100 years either China or India will be number one, and the US will be 3rd.

Does any of this matter?  No, but it is interesting to think about.


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68 Responses to “India as #1”

  1. Gravatar of Bababooey Bababooey
    18. November 2009 at 17:50

    Instititutions, education, culture, language/writing, health, religion, Krugman’s Nobel prize winning theories, neoghbors & geography immaterial impact on your first prediction? And if they have no impact in differentiating China’s future from India’s, is that because India & China are so similar in those regards or because those things no role in GDP growth?

    And if those items are immaterial, why does the US, with less population, have greater GDP currently than China or India? Or Japan and Mexico?

  2. Gravatar of Bababooey Bababooey
    18. November 2009 at 17:54

    There should be a “have” after geography & “play” before “no role” Yech, sorry.

    And correct spelling of “neighbor”

  3. Gravatar of Scott Sumner Scott Sumner
    18. November 2009 at 18:41

    bababooey, Yeah, there is so much more that would be needed to explain my hypothesis. I buy into the “end of history” argument, where we are entering a new policy environment. The reasons for the huge current gaps between countries are institutional. But globalization is gradually smoothing those differences. That’s why Asia is catching up to the West (and Japan.) There are also huge cultural differences between countries, which may affect the rate at which they can create pro-growth institutions. Chinese cultures have already achieved high levels on per capita GDP. So there culture seems well-suited for modern market economics. India is still an open question.

    There will have to be enormous changes in India for my prediction to come true. Within about 50 years they will have to be developed enough so that almost all Indian children are being educated. If that doesn’t happen, then I will be wrong. How developed is that? At least middle income.

    But also remember that countries like China and India are in many ways jumping from the 19th to the 21st century, without experiencing the 20th. They don’t have to spend vast sums building hugely expensive telephone landline infrastructure. These countries are going from no phones at all (for most people) to most people having a cell phone in just a matter of a few decades. In the early 1990s only a couple percent of Chinese even had landlines. Now there are close to 500 million cell phones, and the number is still rising fast. There are advantages to developing late.

    I admit that it is very possible that India will hit a wall, as Mexico did. (The caste system could be a problem.) But for some reason I don’t expect it to happen. I can’t give you a good reason, however. I am much more confident about China, again because of the success of places like Taiwan.

  4. Gravatar of Saliency Saliency
    19. November 2009 at 08:28

    China has a far broader distribution of wealth then India. China’s larger middle class is central to why its GDP growth will outperform India’s.

    GDP is related to productive populations not populations in general. India can only cram so much productivity into its small middle class. In order to continue to grow at a fast rate it will need to expand its middle class.

    If it expands its middle class it will lower its population growth.

  5. Gravatar of David Heigham David Heigham
    19. November 2009 at 09:46

    Am I alone in doubting whether growing (shrinking) the population necessarily raises (shrinks) GDP?

    My hunch is that developing economies “hit the wall”, in the sense of shifting growth down a gear or two, because they have let vested interests/institutional inflexibilities accumulate. Like Scott, I see that as a greater risk for the Communist mandarins than the adaptive if rickety political structure of India. I guess that the dominant PLP in Singapore has escaped becoming a mandarinate through its careful tolerance of at least a small political opposition; and Taiwan has to thank its effective two party system.

  6. Gravatar of johnleemk johnleemk
    19. November 2009 at 09:52

    David,

    It’s not that the PAP tolerates the opposition — they’re more repressive than many developing countries in terms of freedom of speech and political organisation. It’s that the PAP co-opts any reasonable opposition into the establishment — the de facto dissent comes from within the PAP behind closed doors. The other thing is that Lee Kuan Yew and the PAP instituted a national myth of “meritocracy” — it’s hard to find anywhere else in the world where people believe so fervently that the smartest must govern.

  7. Gravatar of Justin Martyr Justin Martyr
    19. November 2009 at 10:44

    Interesting post. You did leave out one fact that tilts the balance further towards China: culture. There are really only two cultures with a track record of economic development: Christianity and Confucianism. The wealthy Asian cultures are based on Confucianism. Hindu and Buddhist Asian nations are not as wealthy. China is Confucian and India is Hindu. Christianity is spreading through both nations but it is about 8% in China compared to at most 2% in India. I expect that productivity will be higher in China because of this.

    See The Central Liberal Truth by Lawrence Harrison for more discussion.

  8. Gravatar of AnonProfessor AnonProfessor
    19. November 2009 at 11:32

    India’s English-speaking, Westernized elite is absurdly left-wing. Their history books tell a pack of lies, downplaying, for example, the historical destruction of Hindu temples in an attempt to build a “secular” society, whilst funding Hajj trips for Muslims whose ancestors converted by the sword. Meanwhile, they stupidly boast of high property prices in Mumbai, ignoring that the only reason is massively inefficient restrictions on building. India will continue to be the poorest, most illiterate nation (with the exception of its even worse neighbors, which together comprise the historical “India”) outside of Africa.

  9. Gravatar of JSK JSK
    19. November 2009 at 11:36

    The three institutions cited in Wikipedia’s PPP GDP tables all estimate Germany’s per capita GDP at about $35,500. Unfortunately, the three sources differ on Greece, ranging from $29,000 to $32,000. Let’s say it’s $30,500, which would make Germany about 15% richer.

    Subtract East Germany and run the numbers again.

  10. Gravatar of ssumner ssumner
    19. November 2009 at 13:51

    Saliency, You are right that China will grow faster for the next few decades. Then India will grow faster. India’s middle class will expand rapidly.

    David, Thanks, but I am not convinced it is a greater risk for China, I picked 100 years as that is enough time (in this rapidly evolving globalized economy) for countries to sort out some of their political problems.

    For instance, right now North Korea is poorer than India. But I expect that in 100 years it will be richer, as I expect them to change their system.

    johnleemk, I agree.

    justin, In the short run culture plays a big role, but it remains an open question as to its effect in the long run. First it was believed the Protesant religion was key. Then Japan was added as an honorary member of the club. Then Spain started growing fast and Ireland got richer than Germany, so maybe catholicism isn’t so bad. Then some other East Asian cultures developed so it was no longer just Japan, but the whole confucuian culture. It sounds like I am mocking these views but I’m not. I think these things do matter, it’s just that I also think they can be overcome. Indians living in other countries do well, why can’t they do well in their own country? To me the biggest wild card is caste. If that is a stubborn problem then maybe India ends up like Brazil. I don’t know enough to have an intelligent opinion, indeed I’m not sure anyone really knows for sure.

    AnonProfessor, Their left wing ideology is what has held them back so far, although I would focus on their economic views. I don’t see their (positive) attitude toward moslems as being as big a problem as you do. Indeed I’m not sure it’s much of a problem at all.

    JSK, West Germany has a per capita GDP (PPP) of less than 37,500 (I couldn’t get exact numbers–I used pop. estimates of 15 million in the east and 67 million in the west. And eastern GDP per capita is 72% of the west (But I don’t know if that is PPP.) So perhaps W. Germany’s 23% richer than Greece.

    So I claim China will be 25% richer than India. Is this comparison reasonable?

    As an aside, I don’t like excluding regions. Suppose the US excluded its poorest regions? And we are much more ethnically diverse than Germany. The two Germanys have been together for almost 20 years. If the East is still poor, that reflects the German economic system. But in the end I think you are right, as our mental images of the German manufacturing powerhouse do come from Western Germany.

  11. Gravatar of RPM RPM
    19. November 2009 at 14:07

    Where can I get my hands on some of these PPP dollars that are apparently an appropriate basis upon which to create a ranking of nations by GDP size on a global basis?

  12. Gravatar of Justin Martyr Justin Martyr
    19. November 2009 at 14:23

    Hi Scott,

    I think your criticisms make sense, and as someone who defends the importance of culture I’ve jumped through a contortion or two like that, myself. But one look at the World Values Survey graph shows clear cultural patterns which are quite durable and stable.

  13. Gravatar of caveat bettor caveat bettor
    19. November 2009 at 14:49

    Scott: If this is your most absurd belief, then you are the least absurd person I know. I’m not sure that it’s as easy for China or India to jump from a per capita GDP of $4,000 to $40,000, as it was for Deng Xiaoping to jump from $400 to $4,000. So I’d take the other side of your trade.

    Speaking of trades, I’m about to submit a proposal to Intrade on the NGDP futures contracts. Will update you accordingly.

  14. Gravatar of RPM RPM
    19. November 2009 at 16:33

    “Does any of this matter? No, but it is interesting to think about.”

    You’re right, it doesn’t matter, because you’re using an inappropriate measure.

  15. Gravatar of rrm364 rrm364
    19. November 2009 at 16:37

    @ saliency The income distribution of India is actually substantially better than in China. China has a gini cofficient of 47 while India has one of around 37. That’s about the difference between the US and Brazil.

    @Justin Martyr While in general “Confucian” and “Christian” cultures have done better, Mauritius has been one of the fastest growing countries in the past few years and is mostly Hindu.

    @anonprofessor- Trying to put the views into a left-right spectrum can be a little complicated. For instance, the Congress party, avowedly left wing, has two branches, one a traditional left wing fabian socialist wing (which is right now marginalized) and the other and pro-reform wing led by the current prime minister. One sees a simillar situation with the main BJP opposition. As far as politics is concerned, the bigger worry would be about the regionalist/caste/religious parties that are more interested in aquiring rents than anything else. These parties have gained power in most states and could potentially to a lot of damage to India.

  16. Gravatar of johnleemk johnleemk
    19. November 2009 at 18:14

    rm364,

    I don’t know as much about India as others, but I have a similar impression as you. The problem is less one of central economic policymaking and more one of fighting rent-seekers. Some regional governments have been more forward-looking; others are regressive. The poorest places I have ever been in are Kolkata in West Bengal and rural villages in Burma — and I don’t think it’s a coincidence that both have been under radically socialist/communist governments for a long while (Burma is picking up the pace since it abandoned socialism some decades ago, and I think it can be a Southeast Asian powerhouse given the right institutions).

    Re Mauritius, it’s actually only around 50% Hindu, though that is still substantial. What I find impressive is that they’ve made significant progress in spite of religious, ethnic and cultural diversity. They’re the island that could prove to be the democratic rejoinder to Singapore.

  17. Gravatar of OGT OGT
    19. November 2009 at 20:14

    I am not convinced PPP is the best way to compare national GDP’s. It’s true that productive economies tend expend some of that wealth competing over positional goods like real estate, as any good Massachusetts resident can tell you, or home goods.

    But, for example, the BEA estimates the spatial price index for all of the states and major metro area in the US. As one would expect this shows that Mississippi is much cheaper to live in than MA. It makes sense to use that deflator if we are going to compare living standards in the two places. But does it make sense to deflate the entire GDP by that index, I’d argue not.

    The same goes for Greece and Germany. I suspect Greece only looks closer to Germany, because you’re using the wrong figure. Or China and the US.

    As the wikipedia article states:

    Using a PPP basis is arguably more useful when comparing differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of different countries, rather than just a nominal gross domestic product (GDP) comparison.

    For example, all of the 1.25 haircuts in the world aren’t going to help China pay for its high speed rail investment. That barber needs to have a higher opportunity cost to his labor in order for those investments to pay off.

  18. Gravatar of rob rob
    19. November 2009 at 21:20

    You are too Hegelian. The immense progress humanity has made over the past millennium was nothing but a super bubble. World GDP in 100 years will be less than today, as it reverts to the mean. (Please see my book: “Shorting Stocks for the Long Run”).

    Honestly, I’m not convinced humanity is any better off since our hunter-gatherer days (though I wouldn’t want to have been a gatherer). We now live too long and our lives are too boring.

    Once cheap energy disappears, we will revert half a century. Compound that with cycles of political backwardness and endless warfare… Sure, progress has had a long winning streak, but warfare and bad politics haven’t yet retired.

  19. Gravatar of Doc Merlin Doc Merlin
    20. November 2009 at 00:43

    @rob

    I love you neo-malthusians. Hope you put money on your predictions (short) so I can make more money on short squeezes.

  20. Gravatar of John Smith John Smith
    20. November 2009 at 00:51

    Your price comparisons to make a point is utterly useless. It really matters how much an average person makes and compare that to what things cost. China has kept yuan from appreciating against the dollar. If the yuan would be traded it would most likely be at par with the USD at which point your hair cut would cost about 15 USD and not 2.25. Still cheaper but not by that much. But that would make Chinese goods very expensive and would probably cause the downfall of the government. However, you should prepare your self for the eventuality that the yuan will rise at least 7 fold over the next few years. They can absorb only so many dollars. Hence them getting so upset about the 0 percent interest rate. They just don’t know what to do.

  21. Gravatar of azmyth azmyth
    20. November 2009 at 05:25

    Rob: It’s a good thing there’s Somalia. If you really want to have a life expectancy of 35 and die in a gunfight, there are plenty of places in the world that you’ll like. I prefer to have a life expectancy of 78 and sit around discussing economics.

    Technology is the one thing you’re forgetting. Do you really think people will just forget how to make fertilizer and computers and all those other things that make modern lifestyles possible? I’ve read Malthus, and he doesn’t assume technology will decrease, just that population will tend to increase faster than food production. Even in that case, he lists many ways that humanity can save itself from the Malthusian trap. Perhaps Malthus wasn’t optimistic, but if you consider he wrote the essay in 1798, he didn’t really have reason to be. People always forget that Malthus wrote before the industrial revolution.

    A free copy of his essay:
    http://www.econlib.org/library/Malthus/malPlongCover.html

    Scott: I really don’t think this belief is all that off. I would actually give India a fair shot at surpassing China in GDP per capita because of their stronger cultural attachment to democracy and open discussion. The catch up game is all about how fast you can mimic technology but once you hit the “wall”, it’s all about innovation which the Indians have proven themselves moderately good at. Perhaps the Chinese culture will become more open and free thinking. I hope they will, but I just don’t know.

  22. Gravatar of Philo Philo
    20. November 2009 at 09:27

    “I think the best way to approach this issue is to use Rorty’s maxim ‘truth is what your colleagues let you get away with’. Truth is socially constructed.”

    Scott’s infatuation with Rorty is truly baffling. Everybody, including Scott, knows that “your colleagues” (who, exactly, are they?) will sometimes let you get away with assertions that are *not true*. Social opinion is “socially constructed” (this is trivial); truth is not. And the rest of Scott’s paragraph merely suggests that the best estimate available to uninformed people like me of when China’s GDP will surpass America’s is the modal (median?) estimate of observers who are at least semi-informed (but how did Lester Thurow get in there?). This sensible view in no way depends on Rortyism.

  23. Gravatar of Jing Jing
    20. November 2009 at 11:03

    RRM364 regarding differences in income distribution between India and China. Those oft cited gini-index figures are not truly what they appear to be. Single figure national indices hide as much as they show and in this case, they hide a lot. The gini-index figure for India is not what most people claim it measures. It is often cited as as a measure if income inequality, but for India it actually measures is consumption inequality. Poorer people consume more as a relative percentage of their gross incomes and richer people less. In some cases, more than their total incomes.

    Pranab Bardhan writes about this very topic here.

    http://business.rediff.com/column/2009/sep/07/how-unequal-a-country-is-india.htm

    There is a lot of complacency in India about this issue, or perhaps it is simply purposeful obliviousness. Anyone who has been to both Delhi and Beijing or really any city in either countries will notice that there is a massive disconnect between the abstract notion that China is more unequal than India and what they can observe with their own eyes. It isn’t simply that Beijing is a much more prosperous city than Delhi, but rather the observable wealth gaps among it’s denizens is much more in the latter than the former.

    India is in reality a much more divided society than China, socio-economically speaking. A single oft-cited figure claiming to be something it’s not does nothing to mitigate this truth. As Professor Bardhan pointed out, the inequality isn’t just in income, but in a wide range of quantifiable interrelated factors that put India in the league of Latin American countries.

  24. Gravatar of rrm364 rrm364
    20. November 2009 at 13:54

    @ Jing First of all, China and India both produce consumption inequality figures (while the one’s in Latin America and the US are income) and I actually think consumption is a much better measure of well-being than income. For instance, someone making $1,000 a month and who recieves $200 in government benefits is better off than someone who makes $1100 in my mind.

    I think the reason Mumbai (I haven’t been to Delhi in ages) seems so much more unequal is because it is so much more unequal. Sounds strange, but in China the political elite keep the poor outside of coastal urban areas through the hukou sysytem. Although the hukou system is starting to breakdown, most of China’s inequality is spatial (regional and urban/rural) and so the rich cannot see the poor. In India, the poor are politically more powerful. For instance, I don’t think a slum like Dharavi could exist in Shanghai very long, but since the poor vis a vis the wealthy have a surprising level of political power in India, Dharavi cannot be moved.

    I’m not trying to say the poor are actually politically powerful in India. Rather, all of the rent-seeking coalitions have poor constituencies as vital members, and so all the rent-seeking coalitions are stealing from the poor. That said, in China its the party and bureaucracy that ultimately call the shots, and (ironically) neither of these institutions have the poor as key constituents.

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. November 2009 at 18:13

    None of this should be too surprising. According to Angus Maddison’s historical GDP data India led the world in GDP before 1500 and China led more or less uninteruptedly from 1500 until about 1911 when the US took the lead.

    The 20th century was most likely an aberration. Dr. Sumner’s predictions sound very reasonable.

  26. Gravatar of rob rob
    20. November 2009 at 19:06

    @ Doc:

    “I love you neo-malthusians. Hope you put money on your predictions (short) so I can make more money on short squeezes.”

    No, I don’t really believe anything I wrote above. But I do think it is good to consider such contrarian bad ideas, if only to distract one from more popular bad ideas.

  27. Gravatar of Ankash Ankash
    21. November 2009 at 02:19

    China has a head start compared to India in reforms. India started reforming its economy in the 90′s.

  28. Gravatar of David Heigham David Heigham
    21. November 2009 at 07:56

    Scott,

    For China I am appealing to a (pretty inexect) historical precedent. Mandarin defensiveness seems to have stopped the Chinese economy taking off in the late 15th – early 16th century. I doubt if the next generation or three of mandarins will be able to stop Chinese growth, but I think it is odds on that they will seriously handicap it over some decades; until the very deep rooted system alters.

  29. Gravatar of Jing Jing
    21. November 2009 at 09:24

    RRM364, do you have any evidence that gini-coefficient figures from China are based off of consumption? I have seen none, all I know is that the Indian figures are consumption derived but are passed off as income out of simple laziness.

    You’re entire argument that the Chinese socio-economic system attempts to keep the poor out of her cities is illogical. Urban-rural migration in China for the past decade has been four to five times faster in China than in India. Within a few brief years China’s population will be 50/50 when it comes to the proportional of urban to rural population while India’s is still at 30/70. If the CCP were attempting to keep China’s teaming peasants out of her cities, then they have failed at it.

    You are right in that China’s inequality is very spatially oriented. If you were to simply try to calculated one for Zhejiang alone, it would not seem particularly out of the ordinary. However, all things change when you use a larger national scope and include Zhejiang and Ningxia in the same sample.

    Mr. Sadowski, Maddison’s historical GDP data is mostly useless. Sufficient for coffee table banter but little else. For one thing, the margin of error on the data is so large as to make relying on it unfeasible. I don’t know how he chose to define the respective nations he did, as many of them have waxed and waned in size in a few thousand years. Do the people who lived within the geographic confines of India today count as Indians a thousand years ago? Even the best estimates for population size are near +/- 50% and how you choose to define the geographic boundaries of pre-modern populations is subject to even more debate. If you’ve looked closer at the figures, you’d find the comparisons between historical gdp’s mostly irrelevant. Madisson’s estimates put pre-industrial per capita incomes within an extremely tight band that shouldn’t be surprising given subsistence agriculture was the normal livelihood for the majority of human civilization. Whether the Roman’s had a per capita income of 505 nominal dollars and the Persians had one of 499 is ultimately inconsequential. The claim that India and then China were wealthier than everyone else is technically true, but empty. Indians and ancient Chinese weren’t wealthier than anyone else, they were all as poor as everyone else, with variances in per capita incomes between ancient peoples according to Maddison less than one finds today between individual American states. The difference was, was that the geography and fertile land was able to support greater populations and thus by aggregate they were wealthier. This has no consequence on the economies of Today as we live in an industrial world where wealth is only loosely tied to the fecundity of people’s fields.

  30. Gravatar of jsalvatier jsalvatier
    21. November 2009 at 12:45

    Sumner! Robert Waldman is a monetary stimulus doubter and his post cries out for your rebuttal: http://angrybear.blogspot.com/2009/11/quantitative-easing.html

  31. Gravatar of jsalvatier jsalvatier
    21. November 2009 at 12:47

    In case you don’t think it’s worth responding to him. He is an actual economist http://econpapers.repec.org/RAS/pwa224.htm and I believe Angry Bear is quite widely read.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. November 2009 at 16:39

    Jing,
    I think you’re in the minority when you say Maddison’s data is mostly useless. It’s widely cited, even by people who are arguably far brighter than me.

    As for your point that wealth in the modern world owes little to field fecundity that is of course true. But my impression is that the historical distribution of world output has had a fair amount of persistence despite periodic variations in the rate of technological progress.

  33. Gravatar of Jing Jing
    21. November 2009 at 18:43

    Mr. Sadowski, I should have been more specific. Not all of it is useless, but the data before the 18th century is extremely suspect. In fact, it’s probably more or less a crapshoot. One way of estimating per capita incomes is to measure the historical record for consumption of universal goods such as salt and alcohol, staples like wheat and rice, tax records, land transaction records, etc. However to do so requires the expertise of specialized historian while Maddison is an economist. I doubt he is proficient enough in languages as diverse as Latin, Aramaic, Old Church Slavonic, Sanskrit, Middle Chinese, let alone non Eurasian languages to have gathered such information first hand. Furthermore such data has to be carefully evaluated for accuracy as not everything that is written is necessarily true. Sure for every old Chinese imperial record which reads Bureaucrat X collected Y taels of silver in taxes in county Z in year this or that, you’ll have ten more which are simply The harvest was good, we ate a lot of meat. Also one people maybe the biggest drinkers in the world while others maybe teatotallers living in marble palaces. Cultural context and patterns have to be accounted in each and every case which makes any sort of precision nigh impossible.

    To give you an example. Maddison has an estimate of Germany’s per capita GDP at 688 international dollars from his website in year 1500(I unfortunately don’t have access to the full book but only the excel database he provides for free). A rather precise figure. Too precise really. Germany technically didn’t even exist then being really a collection of assorted duchies, free cities, principalities etc some of which are no longer even German. Do his estimates come from Tyrol? Swabia? Thuringia? The upper Palatinate? Is it a population adjusted mean from all German principalities within the same year?

    Are you beginning to see the problems inherent in such imprecision? I can off the top of my head say that the moon at any given moment is several hundred kilometers away from Earth and that Mars is several million more. This maybe correct (or not, someone double check me on this) but for the purposes of calculating a good trajectory for a Lunar mission, it’s about as useful as tits on a bull. I tend to view Maddison’s estimates of global GDP the same way, it’s a rough estimate that provides a good launching point for a general discussion or better yet more detailed study, but to rely on it to draw conclusions with any sort of certainty is I feel not possible. It’s why I felt poleaxed when you described the entire economic progress of the 20th century as an aberration.

  34. Gravatar of Moretti Moretti
    22. November 2009 at 07:01

    And Brazil???

  35. Gravatar of TomOfTheNorth TomOfTheNorth
    22. November 2009 at 10:12

    India, schmindia…..All of the REAL progressive thinking is happening down-under!

    http://outsidethe-cardboard-box.tumblr.com/post/249074091/the-new-australian-school-of-economics-wonkish

    ( a little econo-blasphemy from Outside the(Cardboard) Box blog)

  36. Gravatar of bil. A. bil. A.
    22. November 2009 at 23:02

    A bit off topic, but how was your Houston visit? Did you enjoy our lack of zoning? Did you happen to drive through the large section of the city where the road signs and everything else is written in English and Chinese?

  37. Gravatar of NH NH
    23. November 2009 at 22:14

    Very interesting and provocative article. A couple of factors not mentioned that will affect this hypothesis -

    A.: Peak oil (specifically, the end of cheap oil and then the rapid decline of existing reserves) which will one can supposes drastically alter the ability of countries like Indian and China – or the US and Japan for that matter – to expand their economies, or even feed their populations.
    B.: Declining fertility rates in industrialized countries – this will alter both the consumer base and the labor pool as countries will increasingly turn to immigrants and automation to sustain production While scrambling to accommodate an aging population.
    C.: Environmental factors ranging from global warming to declining quantities and quality of fresh water, with China and India both likely to suffer far more than the US. Also, resource depletion beyond oil from tin to Francinium.

    Any of the above could topple your apple cart and rearrange the destiny of the wealth of nations. Anything number of other things could also happen. By 2109, the US may in fact have a larger population and economy by virtue of factors like the availability and quality of resources, both human and environmental. Or, we could all be riding horseback and fighting wars with bows and arrows and GDP would be irrelevant.

    It’s a long ride to 2109. Love the article by the way.

  38. Gravatar of ssumner ssumner
    24. November 2009 at 20:02

    RPM, PPP dollars aren’t very accurate, nominal dollars are even worse. If we use nominal dollars then Germany’s GDP rose 100 billion-fold in the early 1920s. Is that plausible?

    Justin Martyr, I don’t have time right now to study that closely, but I’ll try to look at it later. I notice that India’s cultural values are almost identical to Poland’s. Will Poland be at least 80% as rich as China in 2109? I think so. Having said that, I agree that culture might prevent India from doing as well as I predict.

    Caveat bettor, Then I guess I will have to find an even more absurd belief. I thought my blog was already full of absurdity. Thanks for the Intrade inquiries.

    rrm364 and johnleemk, Thanks for the info.

    OGT, I think you misunderstand the purpose of PPP comparisons. The question of whether haircuts can pay for high speed rail is not relevant. Haircuts are final goods, and should be included in any comparison of real GDP between countries. Any nominal comparison of the haircut industries in the US and China will massively understate the size of the Chinese industry, probably by 10 or 20 fold. That means China’s GDP is much bigger than official figures show. BTW, China won’t have any problem paying for high speed rail lines. They are already being built very quickly.

    rob, How can you say the cavemen had more fun? They didn’t have economic blogs to read.

    Doc Merlin, I couldn’t tell if rob was joking, but I doubt he was completely serious.

    Note to all jokers: Use smiley faces, as I often miss the humor. :)

    John Smith, No, PPP comparisons do not require knowledge of what people earn. And no, the yuan would not be in parity with the dollar in a free market. I have predicted for many years that the yuan would gradually appreciate due to the Balassa-Samuelson effect. But parity is not plausible, even in the long run.

    azmyth, I suppose that is possible, but don’t sell the Chinese culture short. Aren’t Singapore and Hong Kong already richer than Germany and Japan? Both have Chinese cultures.

  39. Gravatar of ssumner ssumner
    24. November 2009 at 20:27

    Philo, There are two issues here.

    1. The is no objective was of ascertaining truth, other than what we as a society believe to be true. There is no standard against which to compare society’s beliefs. It makes no sense to contrast when economists believe China is number one, and when it “really is” number one. When people say something like that, the “really is” is usually just an implied prediction about what economists will believe at a later date.

    2. ‘Real GDP’ is especially socially constructed, as it is very hard to even define what the term means. Should we include household production, for instance. If we did, the Chinese rural economy would suddenly look much bigger.

    Jing, I am not qualified to speak to this issue, but there is one other point that adversely impacts China in the data. Both very poor and very rich countries often look more equal than countries that are changing rapidly. China had both regional diversity, and economic diversity (capitalism plus communism.) Those in the capitalist economy often make much more than those in the socialist economy. As China gets richer it will eventually become more equal (and developed.) As India gets richer it may get more unequal for a time–indeed that process may have already begun, as you noted.

    rrm364, I agree with your point about spacial diversity. It is also my impression that China puts on a more positive image partly because of zoning rules. It seems to me that tourists rarely see the low income housing that is scattered in the suburbs of China’s big cities. (I saw some of this on my recent visit.) But also remember that China’s poor are richer than India’s poor. People often mix the terms “poverty” and “inequality.” On reason why Jing sees less extreme poverty in China is because there is less extreme pverty in China. You don’t see many flimsy shacks in China.

    Thanks Mark,

    rob, Just as I thought, you were only half serious.

    Ankash, That’s a good point.

    David Heigham, Actually, they are already seriously handicapping Chinese growth right now. Fortunately, they are gradually reducing the harm that they do.

    Jing, China’s government slows the move to the cities by its policy of preventing farmers from selling their land. But I agree that there is nonetheless a move to the cities. I don’t think anyone really knows the urban/rural split right now–I wish I knew. Do you know of reliable data?

    Those fertile river valleys play little role in modern wealth, as you say. Interestingly, however, they say a lot about where people live today, and where much of the world’s population will still be living in 100 years.

  40. Gravatar of ssumner ssumner
    24. November 2009 at 20:27

    I’ll do the rest tomorrow.

  41. Gravatar of rob rob
    24. November 2009 at 21:56

    “rob, Just as I thought, you were only half serious.”

    Truth is, I don’t always know if I am being serious or not. I often find possibility more interesting than probability. Sometimes joking is a good way to explore a possibility. Most people want to always put their best foot forward: but maybe their bad foot had the better idea. (Aesop paraphrased) Sometimes I like asking stupid questions: they often yield smart answers. Other times I say something serious — then I realize it is stupid — and then I want to pretend I was joking. I have no beliefs, no ideology: just poking around for interesting ideas. I like this site because it is full of smart, interesting ideas, however absurd they may be…

    Emerson quote of the night: “We recognize in genius our own rejected thoughts.”

    I’m no genius. Maybe Emerson should have added: “We recognize in fools our own rejected thoughts.”

    Perhaps genius is mainly good editing.

  42. Gravatar of OGT OGT
    25. November 2009 at 11:37

    Sumner- Respectfully, I think you’re misunderstanding the PPP GDP comparisons. I certainly accept that the relative contribution of various home goods and services, such as haircuts, is overstated in the US compared to China in nominal GDP. However, deflating the entire GDP by PPP is a mistake I think if one is looking at actual productivity of different countries’ economies, and their relative weight within the global economy.

    The point is that the price of those non-tradable home goods that are resistant to productivity increases will increase proportionately to the increase in productivity gaining sectors. Land prices are chief here, but it applies to many services (like our hair cuts). This is more or less the Penn Effect.

    If we think about what happens in a place like Silicon Valley when software development takes off, nearly the first thing that happens is there is an increase in land prices. The increase in land prices, rents, and effective demand for all kinds of services leads to an increase in CPI. So that the increase in living standards will be less than the increase in productivity.

    Further, in China those high speed rail lines are not paid for, the investment needs to be paid back with a return on investment. By your argument the Bridge to No Where was a good idea because once it was built it was there. However, if we follow the Balassa-Samuelson effect the low price of haircuts is acutally a sign of relatively low productivity in economy that is not compatible with justifying the expense of high speed rail. Even if they technically have the money to do so.

    (Full disclosure because I am of the opinion that consumption is systematically surpressed in China, yuan/dollar conversion is distorted and the US is experiencing financial lead Dutch Disease I doubt that the $1.25 price of a haircut is an accurate reflection of our relative productivity).

  43. Gravatar of Scott Sumner Scott Sumner
    25. November 2009 at 16:47

    jsalvatier, Thanks for the tip. The problem is lack of time. It might take me an hour to explain all the problems with the paragraph that starts “long ago.” I’ll try to comment on it at some point.

    Moretti, I don’t know what sort of future Brazil will have. Because their population is much smaller than the big three, they obviously won’t lead in total GDP.

    bil A, All I had time to see was a couple museums and a battleship. I was extremely impressed by the freeway system. It’s the best I have seen, and far better than systems in Chicago and big coastal cities. I stayed in the suburb of Katy, Texas, where you can buy a house for under $400,000 that would cost well over a million where I live. In purely material terms the middle class has a far higher standard of living in Houston than Boston.

    I wish I had seen the Chinatown. Overall I think San Antonio is a nicer place to visit for a day, but I’d prefer to live in Houston, as SA seemed rather boring. Unfortunately my wife doesn’t like hot muggy weather.

    I didn’t see enough of Houston to notice much difference from other sunbelt cities, so I can’t comment on the lack of zoning. My hunch is the bigger difference is not between Houston and other sunbelt cities, but rather between planned newer suburbs like Katy and Woodlands, vs older suburbs with lots of ugly strip malls. Is that right?

    I was also impressed by the way that Houston accepted 100,000 refugees from Katrina. The guy I stayed with had been to New Orleans to help fix up damaged houses. I’m told the Houston churches played a big role in this. There is no way that Boston would accept 100,000 refugees with open arms, especially if most were poor and/or minorities.

    Houston could benefit from having a first rate technical university. I suppose A&M is the closest one.

    NH, My hunch is that many of those issues will affect each country, and hence wouldn’t greatly impact their relative ranking. I.e. both may grow by less than I assume, but India may still overtake China.

    Most economists think worries about resource depletion are exaggerated. All the scare stories in the past proved overblown. I am less worried about peak oil, than I am that demand from Asia will rise so rapidly that even if we aren’t at peak oil, prices might rise sharply. When that occurs, however, oil production will increase from hard to get areas. The US is still the world’s third largest oil producer, despite having had relatively low reserves for many decades.

    rob, I like people who explore the counterintuitive. I actually agree with you that it is possible the early humans were happier. They were probably much less neurotic than we are, as they were evolved to live that lifestyle. Still, I’d just as soon keep my 1080p TV.

    OGT, I think you misread my response. I did not endorse the high speed rail projects, I just said that China could afford them. That doesn’t mean they should build them.

    I am well aware of the Balassa-Samuelson effect, indeed that was implicit in my entire argument. I agree that Chinese wages and land prices will rise sharply as they develop

    You said;

    “However, deflating the entire GDP by PPP is a mistake I think if one is looking at actual productivity of different countries’ economies, and their relative weight within the global economy.”

    I strongly disagree. Without the PPP comparison China looks smaller than Japan. But China obviously plays a much bigger role than Japan in the world economy, which is why we need the PPP comparisons. For instance, a boom in China has a big impact on world commodity prices, because the Chinese economy is so massive. A boom in Japan does not have a big impact on world commodity prices.

    I don’t think the US is experiencing any sort of Dutch disease, and if it were I can’t imagine how it would have been caused by an undervalued yuan.

  44. Gravatar of wow wow
    25. November 2009 at 22:23

    But India have the best Programmers on the World :-)

  45. Gravatar of StatsGuy StatsGuy
    26. November 2009 at 02:43

    “I don’t think the US is experiencing any sort of Dutch disease, and if it were I can’t imagine how it would have been caused by an undervalued yuan.”

    For all the reasons we discussed in this thread…

    http://blogsandwikis.bentley.edu/themoneyillusion/?p=2719

  46. Gravatar of OGT OGT
    27. November 2009 at 07:15

    Sumner- I won’t add too much more on the Dutch Disease, since I think Statsguy covered it in his linked comment. But I wouldn’t ascribe the US Dutch Disease to the yuan peg. But that’s a symptom of the problem with reserve currency status of the US, which is the base cause of US Dutch Disease.

    If our choices are nominal GDP and PPP to assess the relative international size and weight of countries it seems the international economists are missing something, especially since exchange rate GDP is the only relevant measure to examine the financial flows that are central to the global economy. A better measure may be to take the non-tradable output out of GDP, comparing only tradable goods and financial services.

  47. Gravatar of bil. A. bil. A.
    27. November 2009 at 11:28

    Glad to hear you enjoyed your Houston visit.

    I would agree about middle class living standards, and would extend that to the lower class as well (at least in comparison w/ the only other place I’ve lived – Fairfax). The cost of living is so much lower that it takes much of the strain away from being low income. I used to live in a decent $500/month 1-bedroom apartment within walking distance from the museums, outdoor theater, and zoo.
    It is just a subjective impression, but there seems to be less ‘class tension’ as well – maybe because the income distribution is closer to uniform (i.e. less bimodal than say northern virginia, I could be wrong, haven’t seen any data)?

    Yea, there was some post-Katrina grumbling, and the crime rate did spike up afterward, but there is definitely a bit of the ‘southern hospitality’ ethic here. I know several people who volunteered for the Katrina relief efforts.

    You are right about the difference between the planned communities and strip-mall land. There is also a couple of independent cities within Houston city limits that have zoning. My guess would be that you get ‘better’ zoning when you have to compete with a large unzoned city surrounding.

    One of the things I like is that in the inner-loop area you have areas where the old houses along a (now major) thoroughfare are ‘mom-and-pop’ businesses.

    The humidity isn’t for everyone. When the debate was raging about what to name our then-new pro football team, I was alone in rooting for the “Houston Humidity”, but we got stuck with the quite horrible “Houston Texans”.

  48. Gravatar of ssumner ssumner
    27. November 2009 at 17:20

    statsguy, The Dutch disease is not about current account deficits, it is about comparative advantage. Holland had a comparative advantage in gas production, so this led to less manufacturing. The demand for dollars (actually T-bonds) is assumed to lead to our current account deficit. But current account deficits do not reduce manufacturing output.

    And I aslo I doubt whether the current account deficit is caused by the foreign preference to hold dollars as reserves. Australia consistently runs a current account deficit just as large as we do (as a share of GDP) and not many countries hold the AUS$ as reserves. I think we would run CA deficits even if most central banks preferred to hold other forms of reserves.

    OGT, I don’t know what you mean by exchange rate GDP. Nominal and PPP are the only two that I am aware of. And the tradable goods sector is useless if you are trying to compare the size of economies. German exports more than the US, is their economy bigger than ours?

    bil A, Thanks, all those comments make sense to me. I also sense more mixing of different classes in both Houston and San Antonio, but obviously I just had a quick visit.

  49. Gravatar of OGT OGT
    28. November 2009 at 21:26

    Sumner- I mean nominal GDP as calculated at market exchange rates. Tradable goods doesn’t mean goods that are imported or exported only ones that could be, or goods that are regularly traded. For example, a US citizen buying a Ford made in the US or US corn are still tradable goods purchases, even with no border crossing. Haircuts and real estate of course are not.

    The theory is that tradable goods will more closely reflect the Law of One Price, because arbitrage is much easier. This has been generally supported by empirical evidence.

    Part of Balassa-Samuelson effect is that it’s the non-tradable goods sector that is inflated by the increase in productivity and income in the tradable sector. PPP GDP attempts to get around this adjusting the local haircut’s value to a global standard, but the value of haircuts given is irrelevant to Greece’s ability to purchase something like durable goods or blue jeans.

    Because tradable goods could be traded and sold for foreign exchange, their value should more accurately reflect an economy’s productivity.

    I came to this problem thinking about the cost of living differences in the US. Implicitly a PPP adjusted GDP for Flint or Detroit MI would rise, all else equal, as the real estate market implodes. That would make sense if the fall was due to fabulously efficient construction techniques, but that’s never the case. Interestingly, to me, at least, the BEA studies estimated that 70% of the difference in the spatial price index can determined by the differences in rent, indicating the difference in prices is largely a pass through of land prices.

    http://www.bea.gov/papers/pdf/aten_estimates_state_metro_2005.pdf

  50. Gravatar of Doc Merlin Doc Merlin
    2. December 2009 at 14:05

    “Houston could benefit from having a first rate technical university. I suppose A&M is the closest one.”
    It has one, several actually if you count the research centers. In terms of medical graduate research, you have the medical center and MC Anderson.

    Rice university although small is cutting edge when it comes to sciences, particularly their nanotech research. U of Houston has an awesome superconductivity research center.

  51. Gravatar of Philo Philo
    3. December 2009 at 15:58

    “The[re] is no objective way of ascertaining truth, other than what we as a society believe to be true.” I *think* this is obviously false, since I know perfectly well whether (for example) I have a toothache right now without consulting society’s opinion (which, of course, is nonexistent). But there is that wild-card term ‘objective’. Perhaps you will say that using my senses is not “objective,” that it is “subjective.” Well then, using my memory, or my reasoning power, or any other faculty that might get me knowledge, will also be “subjective”; all possible means of acquiring knowledge (after all, this would be acquisition *by a subject*) will be “subjective.” So what? Who ever thought otherwise? But I’m guessing at what you might mean by ‘objective’.

    “There is no standard against which to compare society’s beliefs.” Bryan Caplan alleges that “society” believes all sorts of economic fallacies. Is he wrong to *complain* about this, to *disparage* these beliefs? If society believes it, it must be true (according to you).

    Well, maybe not quite. “When people say something like that [distinguishing between society's belief and what really is true], the ‘really is’ is usually just an implied prediction about what economists will believe at a later date.” And what date might that be? Eventually society will die out (I suppose), so the date can’t be *too far* in the future. But surely it is obvious that speakers have no particular date in mind.

    All this philosophizing is just a distraction from your excellent economizing.

  52. Gravatar of ssumner ssumner
    4. December 2009 at 07:57

    OGT, I agree that tradable goods prices make the PPP formula work better, but it is a horrible technique if you are trying to determine the size of an economy. The economies of developing countries would look smaller than they really are, because the relative price of non-traded goods in much lower in those economies. So you might have the right answer, but not for the question I am asking—which is how big are China and India’s economies.

    I agree that PPP GDP estimates are not useful for looking at the ability of an economy to buy tradable goods. But that is a different question.

    Philo, You misunderstood my argument. There are many societies. There is the society of high school dropouts, who on average have one view of economics. There is the society of economists, who have another. And there is the society of people who can feel a particular toothache first hand. That society has one member. I don’t disagree with what you say. I meant that when the society of economists thinks China has become number one, it will be true for that society. Perhaps at that time the society of dentists will have different views on China’s GDP. But the press won’t pay any attention. In any case, there is no objective way to determine whether the society of economists are wrong about China. There are only other (and perhaps differing) views from other societies.

    As for objective and subjective, there isn’t really any point in debating the issue. 2500 years of philosophical debate hasn’t even established what these terms mean. Humans just aren’t smart enought to understand these concepts.

    BTW, I agree with Bryan that society believes all sorts of fallacies. Or in other words, I differ from the majority view on all sorts of issues. Or in other words, I predict that the consensus will gradually shift in my direction over time. When I say something is “actually true,” I mean that I predict that society will eventually come to regard it is true. And that is also what Galileo meant before he was put to the stake. And he was right, sort of. (His theories are now regarded as being approximately true, not precisely true.)

  53. Gravatar of TheMoneyIllusion » India as #1: Even sooner than I thought TheMoneyIllusion » India as #1: Even sooner than I thought
    10. October 2010 at 05:31

    [...] themselves started calling current policy “restrictive.”)  I finally ended up with a post predicting that India would have the largest economy in the world 100 years from now.  [...]

  54. Gravatar of India Will Be #1 Even Sooner Than I Thought | The Prospective Investor India Will Be #1 Even Sooner Than I Thought | The Prospective Investor
    10. October 2010 at 07:53

    [...] themselves started calling current policy “restrictive.”) I finally ended up with a post predicting that India would have the largest economy in the world 100 years from now. [...]

  55. Gravatar of India as #1: Even Sooner than I Thought India as #1: Even Sooner than I Thought
    10. October 2010 at 19:39

    [...] officials themselves started calling current policy “restrictive.”)  I finally ended up with a post predicting that India would have the largest economy in the world 100 years from now.  [...]

  56. Gravatar of TheMoneyIllusion » On or about December 1978, the world’s ideology changed TheMoneyIllusion » On or about December 1978, the world’s ideology changed
    14. January 2011 at 15:17

    [...] US.   A few weeks back I speculated that they would enter the tunnel in 2012 and exit in 2019.  Last year I expected them to enter the tunnel in 2010.  I think the best way to approach this issue is to [...]

  57. Gravatar of Kristi Voights Kristi Voights
    16. July 2011 at 08:07

    When I initially commented I clicked the “Notify me when new comments are added” checkbox and now each time a comment is added I get several e-mails with the same comment. Is there any way you can remove me from that service? Thanks!

  58. Gravatar of Economic View: Economic View: Forget Europe. Worry About India. – Online AFGHAN Economic View: Economic View: Forget Europe. Worry About India. - Online AFGHAN
    5. May 2012 at 12:57

    [...] but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will [...]

  59. Gravatar of Never Mind Europe. Worry About India. « open-blog-bd Never Mind Europe. Worry About India. « open-blog-bd
    6. May 2012 at 03:17

    [...] but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will [...]

  60. Gravatar of Never Mind Europe. Worry About India. | Hot Penny Stocks Online Never Mind Europe. Worry About India. | Hot Penny Stocks Online
    6. May 2012 at 22:23

    [...] but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will [...]

  61. Gravatar of Pyne Pyne
    7. May 2012 at 09:37

    Apparently India’s biggest weakness lies is its systemic inability to deliver universal primary healthcare and education to its masses, thus creating a large underclass. Many economists like MIT Sloan Prof. Yasheng Huang have pointed this out as India’s Achilles’ heal. Ironically, however sad it may be, this deep inequity and uneven development could actually give India a unique advantage. While a well-developed population peaks only once, India’s backward population is likely to develop in successive waves and continue to peak repeatedly with renewed drive, dynamism and creativity for a very long time.

  62. Gravatar of Never Mind Europe. Worry About India. « The Myth of Capitalism and its asuric Aura Never Mind Europe. Worry About India. « The Myth of Capitalism and its asuric Aura
    9. May 2012 at 09:35

    [...] but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will [...]

  63. Gravatar of circe circe
    11. May 2012 at 18:05

    Justin Martyr: Wonderful attempt at ignoring history, Justin. Have a look at this: http://en.wikipedia.org/wiki/List_of_regions_by_past_GDP_%28PPP%29

    So what precisely was happening in the “Christian” Europe during the Dark Ages when “Hindu” India and “Confucian” China were enjoying golden ages?

    Also, what about this data?

    I think the evidence suggests that strong claims of “cultural” influences on economies might be vastly exaggerated.

  64. Gravatar of Jayanthropohistorian Jayanthropohistorian
    12. May 2012 at 12:11

    This discussion misses one essential factor–the energy of the people of India. Remember that in 1991 India had almost zero foreign direst investment and was almost belly up. In 20 years they have fought back to be a contender for the top place. India’s middle class is not ‘small’. there are an estimated 350 million of them (take into account the tax dodging consumers also). Additionally, what strikes me when I am in India is the restless, driven, passionate energy and intelligence of the young people there. They resent, given their pride in their historical cultural and economic prowess, being called a poor nation. They are driven to succeed. A large student body from a poorer section said to me “wait till we whip your ****”. In spite of the multitude of problems(x10)- caste, corruption, political chaos (democracy in action?) and the pessimism of analysts since 1980, they are now a subject of the discussion “will India be the #1 economy”. You can see this in action in the West–Indians coming with a suitcase and building a million dollar+ enterprise against all odds.

  65. Gravatar of Jayanthropohistorian Jayanthropohistorian
    12. May 2012 at 12:13

    This discussion misses one essential factor–the energy of the people of India. Remember that in 1991 India had almost zero foreign direst investment and was almost belly up. In 20 years they have fought back to be a contender for the top place. India’s middle class is not ‘small’. there are an estimated 350 million of them (take into account the tax dodging consumers also). Additionally, what strikes me when I am in India is the restless, driven, passionate energy and intelligence of the young people there. They resent, given their pride in their historical cultural and economic prowess, being called a poor nation. They are driven to succeed. In spite of the multitude of problems(x10)- caste, corruption, political chaos (democracy in action?) and the pessimism of analysts since 1980, they are now a subject of the discussion “will India be the #1 economy”. You can see this in action in the West–Indians coming with a suitcase and building a million dollar+ enterprise against all odds.

  66. Gravatar of Beijing SHOTS » Never mind Europe. US worries about India. Beijing SHOTS » Never mind Europe. US worries about India.
    13. May 2012 at 23:17

    [...] but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will [...]

  67. Gravatar of Never Mind Europe. Worry About India. | cashotec.com Never Mind Europe. Worry About India. | cashotec.com
    19. May 2012 at 22:27

    [...] but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will [...]

  68. Gravatar of Our Chinese Future | Brown Pundits Our Chinese Future | Brown Pundits
    2. October 2013 at 01:56

    [...] India as #1 [...]

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