Wisdom or Sumner?
Wisdom or Sumner? Take your pick. I am referring to this recent post by Tyler Cowen.
In the spirit of petty jealousy and spite learning through constructive dialog, I thought it might be interesting to take a closer look at Matt Yglesias’ claim that much of China’s growth has come from putting low productivity peasants to work in more productive urban jobs. Here is Matt:
Paul Krugman’s 1994 article on “The Myth of Asia’s Miracle” was written before China had gotten rich enough to be generally considered miraculous. But as I’ve passed these ten days in China, I’m increasingly convinced that it’s must-reading for understanding China’s medium-term economic prospects. I won’t try to summarize the piece, but instead will just offer my Krugman-inspired take on what we’re seeing in China.
The basic story is that living standards ultimate derive from productivity, and there are two ways for an undeveloped country like China to obtain productivity growth. One is to simply shift people out of a low-productivity sector (like farming in China) and into a higher productivity sector (in China, factory labor). Another would be to actually raise the in-sector productivity by getting better at farming or manufacturing or what have you. In the specific case of China, it’s crucial to note that the productivity wedge between sweatshops and rice paddies is enormouswhich strongly suggests that a huge amount of what China’s achieved has been achieved through the former method. And with agriculture still employing over 35 percent of the Chinese labor force, there’s a great deal more China can achieve through this path. And it’s not a path I think should be slighted. Growth achieved through this method isn’t mythical””the higher living standards are very real. What is mythical, however, is the sense of the miraculous. For the reasons Krugman lays out, there’s nothing miraculous about this and there are real limits to how far you can go with it.
Last year Ryan Avent did a post where he cited the following statistics:
A recent report by Andrew Cates, an economist at UBS, attempts to estimate TFP growth in emerging economies over the past two decades (see chart). He calculates that China has had by far the fastest annual rate of TFP growth, at around 4%. Probably no other country in history has enjoyed such rapid efficiency gains. India and other Asian emerging economies have also enjoyed faster productivity growth than other developing or developed regions. In contrast, productivity in Brazil and Russia has risen more slowly than in rich economies.
These figures undermine a common claim””that China’s rapid growth has been based solely on overinvestment. Sceptics like to compare China with the Soviet Union, where heavy investment also produced rapid rates of growth for many years before it collapsed. But the big difference is that TFP in the Soviet Union actually fell by an annual average of 1% over 30 years to 1988. In contrast China’s productivity has been lifted by a massive expansion of private enterprise, and a shift of labour out of agricultural work and into more productive jobs in industry. China’s average return on physical capital is now well above the global average, according to Goldman Sachs. A decade ago it was less than half the world average.
I have some problems with Yglesias applying Krugman’s argument to China, and I also have some problems with Krugman’s argument itself.
Let’s not forget that a few decades ago China was a very inefficient economy. I seem to recall that they had factories with 50,000 employees. Agricultural productivity was incredibly low. Much of the Chinese growth comes from the sort of dramatic boosts in productivity that you can get from moving away from communism. Another big part comes from adopting Western techniques and ideas. I realize that Yglesias isn’t saying that those things aren’t happening as well, and indeed it’s possible that he and I don’t really differ at all. But I think his post leaves an impression that it’s mostly a sort of brute force industrialization in China, so I thought it was worth taking another look at the Ryan Avent post. I might add that each time I return to China I see a country that is significantly more sophisticated than the one I left a few years earlier. I don’t just see more, I see better.
I also have a problem with Krugman’s argument. Correct me if I am wrong, but wasn’t Singapore the example that he used for a country that was growing fast by adding factors of production, not improving productivity? There was a bit of truth to that argument, but wasn’t the implication that Singapore’s growth would soon hit a wall? And yet 16 years later isn’t Singapore still growing rapidly? And didn’t it recently become the richest non-oil country (GDP/person, using PPP, population more than 1 million) in all of world history?
I’m not denying that there’s bit of truth to Krugman’s argument. It was a useful corrective to excessive Asian optimism in the 90s. And I’d guess that total factor productivity in Singapore is still well below US levels. But at the same time I can’t understand why people want to suggest East Asian growth is not impressive. Places like South Korea were extremely poor a few decades ago. I don’t mean poor like Brazil or Mexico, I mean poor like Bangladesh or Sub-Saharan Africa. As far as I know almost no economist predicted just how successful the 4 “tiger economies” would become. And when it does happen the attitude seems to be “Eh, anyone could do that. Just throw some labor and capital together.” OK, but then why don’t other countries “do that?”
I just did a post that said it’s absurd to argue that China’s growth is a miracle. Now I seem to be making the opposite argument. The point isn’t that the East Asian growth stories are miracles. But sustained 10% growth certainly is unusual. China is like a balloon that was held far under water, and then the government let go. The real test is where these countries end up. Japan has leveled off at European levels of GDP/person. My hunch is that the other 4 tiger economies will surpass Japan (two already have.) I have no idea where China will end up. I seem to recall Krugman drawing an analogy between East Asian and Soviet growth. Krugman’s story certainly does fit the Soviet growth story. But last time I visited Singapore it didn’t exactly remind me of the Soviet Union. (Hmmm, shall I take Singapore Air or Aeroflot?)
Read the rest of Yglesias’ post. (Indeed all his China posts are worth reading.) He makes some good observations about the way China’s size influences its development. I think it also influences Western perceptions of China. I’ve argued that if China broke up into a bunch of Korea or Vietnam-sized countries (oops, now I’m banned in China again) it would be much less controversial. Nobody cares about the trade surpluses of Korea or Vietnam. Indeed there are very few articles about worker rights or minority rights or environmental problems in Vietnam, which is also a reforming communist country. China is a lightening rod partly because its size makes some people (wrongly) think it is a rich country.
This hydroelectric dam might be the next lightening rod. I once read an excellent book about this part of China; it could be the most jaw-dropping spot on earth. And now China might build a 38 gigawatt dam there (that’s 50% bigger than Three Gorges, or 1/2 of the entire UK power output.) And then there is the Tibetan holy sites angle. And a possible conflict with India. If they go ahead with this project, look for sparks to fly.
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2. June 2010 at 20:30
Points about Krugman’s argument aside, you really need to stop using the Passive Voice In The Form of a Question so much. A whole giant paragraph is just painful to read.
I wouldn’t necessarily say that. There’s a Free Trade Agreement in the offing with Korea that has yet to be fully ratified in Congress, and it’s not just because they have too much on their plate.
I’m hoping that they avoid the trap that Japan seems to have fallen into, where they have a bifurcated economy split between the highly efficient, advanced export sector (which also tends to be in manufacturing), and highly inefficient, regulated agricultural and service sectors. The result has been that they don’t grow economically unless they can sell a ton of exports (unavoidable for smaller economies, but for one of the largest economies and countries in the world?).
2. June 2010 at 21:32
I find the “China boomers” seem suspiciously like the “Japan boomers” of a couple of decades ago. There was even a phase in speculative fiction where Japan-dominated futures were a bit of a theme. Now China-dominated futures are the go (one of my favourite SF authors, L E Modestit Jnr has published one, Haze).
I accept that there has been genuine productivity growth in China and its post 1979-success has been striking. I am also aware of some deep fault-lines. Its politics could still come apart very nastily. So, one of the things I like about your post is your openness about possible outcomes.
What strikes me in these debates in general is how people ignore India. It is much more stable politically with much deeper-rooted institutions: Leninism produces brittle institutions. Just because India does not throw its weight around like China does, and is not a suitable backdrop for various ideological fantasies, it somehow gets treated as some sort of ignorable footnote to “wow, is not China amazing and clearly they are the future, projections?” at least some of which are motivated by a wish to see the US dethroned. (The implicit notion that a China-dominated world would be better just strikes me as bizarre.)
2. June 2010 at 21:33
That should read “are the future”, projections
3. June 2010 at 03:53
A useful citation here is Alwyn Young, “Gold into Base Metals: Productivity Growth in the People’s Republic of China during the Reform Period.” Journal of Political Economy 111 (December 2003): 1220-1261.
Note that Young is the guy who actually taught us about Singapore. Krugman was simply citing him.
Here’s the abstract:
With minimal sleight of hand, it is possible to transform the recent growth experience of the People’s Republic of China from the extraordinary into the mundane. Systematic understatement of inflation by enterprises accounts for 2.5% growth per annum in the non-agricultural economy during the reform period (1978-1998). The usual suspects, i.e. rising participation rates, improvements in educational attainment, and the transfer of labour out of agriculture, account for most of the remainder. The productivity performance of the non-agricultural economy during the reform period is respectable, but not outstanding. To the degree that the reforms have improved efficiency, these gains may lie principally in agriculture.
3. June 2010 at 04:34
Brett. You said;
“Points about Krugman’s argument aside, you really need to stop using the Passive Voice In The Form of a Question so much. A whole giant paragraph is just painful to read.”
But if that was a problem wouldn’t others have complained about my writing style? Seriously, I will try to take that into account in the future. I always welcome constructive criticism.
I was under the impression was that the problem with trade these days is that the Democratic party has become increasingly protectionist, and they now have a big majority in Congress. But you may be partly correct.
I completely agree with your final paragraph about Japan.
Lorenzo, I agree, although in the end I suspect China will find a way around the worst outcomes, and muddle forward. You might recall I have a post entitled “India as Number One” so I agree with you there.
One other thing. During most of my lifetime the US has been the richest country in the world (setting aside small oil-rich countries.) That’s actually a very odd coincidence. What are the chances that the richest developed country would also be the developed country with by far the biggest population? Pretty slim. But it raises the question of what happens when the richest economy is no longer the biggest? In 20 years will the US or China be viewed as number one? Or perhaps each will be, but in different dimensions.
Ian, Anything that seems like a miracle can, in principle, be explained scientifically. And once it is explained scientifically, it will no longer seem miraculous. The real question is whether it seems impressive. Let’s take an example like South Korea. Suppose we had a God-like view of the situation. Then even though Korea was extremely poor in 1962, its subsequent growth would not seem at all miraculous. Perhaps it is due to some special characteristic of the Korean culture which allows them to mobilize their resources in an effective way. Or perhaps something else that I am unaware of. So in that sense I agree with Krugman and Young—once everything is explained then miracles no longer seem miraculous. That’s why I argue that what really matters here is prediction. Does Singapore’s subsequent growth overturn Krugman’s implied prediction? I don’t know, but it’s the question that we should be asking.
3. June 2010 at 04:43
Scott,
Young’s point about China is not to say that their growth is not surprising, it is that their growth is overstated. He’s not scientifically explaining a virgin birth, he’s saying the virgin birth didn’t happen.
3. June 2010 at 05:43
I agree with you on the size of China being the issue. They are just too big to follow what Pettis calls the Asian Development model of surpessing domestic demand to promote exports.
I am in the line of thought that the failure to properly accomodate the economic rise of China is an underlying cause of the Great Financial Crisis. Both Pettis and David Beckworth make somewhat similar arguments about the choice the Fed had faced with an in-flow of cheap supply from abroad. Beckworth argues the fed should have allowed supply lead depcreciation, while Pettis, who see China’s surplus as largely due to financial system repression in China, doesn’t think that’s a viable option in a representative Democracy.
3. June 2010 at 06:10
Scott,
I also don’t quite understand why so many would pooh-pooh strong growth. Regardless of where it comes from it is surely a good thing. But I do agree that down the line, at some point everybody will beworking full time, capital utilization wll be hitting diminishing returns etc. and at that point TFP must grow for further progress.
Singapore: It is my impression that after that Krugman article TFP was put on the economic roadmap. On the other hand I don’t know which data tell you that SG GDP/capita is now world top excluding oil countries. According to the 2008 US BLS report I cited in a previous comment, and that you used in a recent post as well, SG PPP GDP/capita with 36.7k$ p.a. is still somewhat below staple European countries (36-45 k$ excluding Norway), nevermind the US (46.8k$). It does beat Japan handily though now (34.2k$).
Entirely against all intuition, Japan was tied with the US and a host of Europeans in annual average real GDP/capita growth from 2000-2008 (most were around 1.2%; one of the worst was Denmark: 0.9%, sorry Scott!) while Singapore was impressive at 2.5%. Given the still low GDP/hour worked numbers one must assume this was due to longer working hours.
Japan has decreasing working age population and this distorts perception of economic performance since most data are always and ever discussed in the media and blogs as total GDP. In PPP GDP/capita growth Japan has equalled the West over the last decade. Conversely Singapore has very high immigration rates and therefore its p.a. GDP growth rates per capita are quite a bit lower than its total GDP growth rates, though still impressive.
Brett,
“…the trap that Japan seems to have fallen into, where they have a bifurcated economy split between the highly efficient, advanced export sector (which also tends to be in manufacturing), and highly inefficient, regulated agricultural and service sectors….”
This analysis, according to a dear friend who lives there, of all countries, describes Switzerland very well too.
From all I know and very unscientifically, the high growth rates of China could go on for quite a while even if TFP doesn’t move at all. There is simply still so much unused potential. The same holds for India. Which if the two will end up politically more sustainable will be interesting to see, so far India has put the thesis to shame that one can’t have a messy, democratic, and relatively decentralized government and still succeed.
3. June 2010 at 07:29
From all I know and very unscientifically, the high growth rates of China could go on for quite a while even if TFP doesn’t move at all. There is simply still so much unused potential.
That’s what I think, too.
3. June 2010 at 07:57
What makes me focus more on China’s progress than that of other nations is that the prospect of their continued growth seems to have the greatest likelihood of changing the way my world works in the short-term.
When India, with nearly as many people, grows 8% from some low figure – it’s not at all the same as when China grows 8% from an already medium-high figure.
Call it a “global gain” metric. Take the growth in any particular Chinese input or output as a percentage of the aggregate world total. From 2007 to 2008, India’s coal use grew faster than China’s, at 8.4% vs 6.8%. But India’s total increase was only 18.5 MTOE, while China’s was 92.7 – 5 times more.
Now, as it happens, the total global increase was 109.2 MTOE, so all the pluses and minuses in the rest of the world cancel out, and you can cheat and say these two countries are “responsible” for practically all the growth in the world.
But China’s contribution to change overwhelms everything else in the first-order approximation. It’s fair to oversimplify and focus on them.
Fun Fact: China + Hong Kong + Taiwan = 44% of global coal use in 2008, and more than the entire world used in 1967.
3. June 2010 at 08:05
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3. June 2010 at 08:12
Thanks. It’s not that the Passive Voice is bad, per se – but a whole paragraph of multiple sentences in it, all ending in questions, is painful to read.
3. June 2010 at 09:39
@Scott:
“One other thing. During most of my lifetime the US has been the richest country in the world (setting aside small oil-rich countries.) That’s actually a very odd coincidence. What are the chances that the richest developed country would also be the developed country with by far the biggest population? Pretty slim. But it raises the question of what happens when the richest economy is no longer the biggest? In 20 years will the US or China be viewed as number one? Or perhaps each will be, but in different dimensions”
I am pretty sure there is a link due to increasing returns to scale from trade.
3. June 2010 at 10:18
Scott:
“One other thing. During most of my lifetime the US has been the richest country in the world (setting aside small oil-rich countries.) That’s actually a very odd coincidence. What are the chances that the richest developed country would also be the developed country with by far the biggest population? Pretty slim.”
I suspect that isn’t an odd coincidence at all, afterall the US has a large free-trade block amongst our entire population.
3. June 2010 at 11:34
Ian, Obviously their reported growth rate might be slightly off, but in my view it is just as likely to be understated. I travel to China frequently, and the changes are enormous—all over the country. If they cooked the books they’d also have to fake all sorts of micro data like steel output, car production, cellphones, etc. And those micro data seem plausible to me. When I visited in 1994 I read that 2% of Chinese had any kind of telephone. Almost no one had cars. Now there are 600 million cell phones and they produce more cars than we do. The streets were clogged with bicycles, now they are clogged with cars. There are 100 other things I could mention, the rapid growth is really quite obvious.
And the reported level of GDP/person seems if anything too low. Even in PPP terms, the official Chinese governemt figures show them far below Mexico in GDP/person. I don’t see much evidence that they are exaggerating.
OGT, What is “supply lead depreciation” If you mean lower prices due to higher AS, then I partly agree. David and I both support NGDP targeting.
mbk, Check this out;
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita
Wikipedia lists three sources, and all three have Singapore higher than any big country (over a million) excluding oil-rich Norway.
Your other comments are very defensible. I agree that hours worked explains some of the differences. Perhaps I’ve exaggerated Singapore somewhat. I am actually much more impressed with their fiscal, trade, health care and environmental policies than I am with their GDP. Japan is facing a fiscal nightmare. Singapore runs massive budget surpluses. In this blog I’m trying to get people to think that Singapore might have a more sustainable policy regime. My argument is an implied prediction that in 20 years Singapore’s approach will be widely seen as being successful, and others will want to emulate it.
BTW, Singapore has also bounced back from the recession very rapidly, so their 2010 figures will look quite strong.
Matt, I agree, but it would plateau at a disappointing level, even if much higher than today’s incomes.
Indy, Those are very good points.
Brett, Agreed.
Doc Merlin, Here is the problem, below the US there is no link between country size and wealth. We are an outlier. Look at the GDP/person tables at Wikipedia:
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita
Other than the US, most of the richest countries are very small, not medium-sized countries like German, Japan, Britain, France, Italy.
3. June 2010 at 11:37
Brad, See my answer to Doc. I think that of the 8 biggest markets, the US is the only developed country.
3. June 2010 at 11:47
I’m guessing you’ll respond soon to TC’s latest monetary policy post. In the meantime I have one of these dumb econ 101 questions, which is motivated by the comments on MR with the typical conservative sentiment that “inflation screws savers”:
Please tell me if this is correct or not:
1. If actual inflation is equal to expected inflation, shouldn’t savers who invest in bonds theoretically break even since bond yields are a function of expected inflation?
2. If the above is true, why do TIPS indicate inflation expectations any more than regular bonds? It seems to me that the value of TIPS would only occur if inflation is higher than expected, in which case TIPS would say nothing about expected inflation only about the desire for an insurance policy against un-expected inflation.
3. June 2010 at 18:57
Scott,
re: GDP data. I have often been bemused by the wildly different GDP data, PPP or not, that circulate on the net. I found this US BLS report that I am quoting because I wanted coherent, verified cross country comparisons for hourly productivity and this is the most relevant that I could find that has them for the countries I wanted. It sources from OECD and others, Singapore data come from Singstat which is very thorough.
I really wanted to solve the Singapore data mystery so I looked at the discrepancies in 2008 GDP/capita between Worldbank, Worldbank according to Wikipedia, and this BLS paper. (Unfortunately Singstat itself gives data in S$ in current or 2005 prices and not in PPP so I could not directly use the source). Result: France, Japan, US, Korea: all sources highly consistent. Singapore: US BLS gives a 25% lower number for PPP GDP/capita than the rest.
Now I have noticed such discrepancies before w.r.t. oil states: some statistical sources have their GDP/capita significantly lower than others. It has to do with the difference between citizen, resident, and total populations. For some countries, such as the oil countries, and also Singapore, it makes a significant difference (in some Gulf states only 25% of the population are citizens and the rest may or may not be counted as “residents” depending on your legal inclinations – e.g., I was a US “tax resident” for years but never a US “resident”).
Singapore, according to Singstat: 2009 pop 4.9, residents 3.7, citizens 3.2 Mio. So I checked how the GDP/capita data would change if using the different definitions of “population” for calculation. It turns out that Singapore’s GDP/capita total population is ca. 24% lower than its GDP/capita “resident” population (=citizens plus what would be a US Green card holder) population. Which fits nicely the 25% difference in GDP/capita US BLS vs the three Wikipedia sources.
So the likely conclusion to me is that depending on whether you use “total” population or “resident” population Singapore has a PPP GDP/capita that is almost world’s highest, or one that is about the level of Sweden, Denmark or Belgium, which btw is impressive enough. Take yer pick.
The US BLS report cited here is at http://www.bls.gov/fls/flsgdp.pdf . It has 17 countries reported since 1960 and data (reportedly) checked for comparability and thus I trust them more than Wikipedia. Singstat is here: http://www.singstat.gov.sg/stats/keyind.html .
4. June 2010 at 01:13
mbk:
So the likely conclusion to me is that depending on whether you use “total” population or “resident” population Singapore has a PPP GDP/capita that is almost world’s highest, or one that is about the level of Sweden, Denmark or Belgium, which btw is impressive enough.
But GDP includes the earnings of the uncounted people. Leaving them out of the denominator yields a meaningless number.
4. June 2010 at 04:51
Silly mortal, the IMF is the one stop shop for economic data gathering.
http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/index.aspx
For some countries, the data goes back 30 years. Best of all, it is updated bi-annually with the latest projected growth rates for the next few years.
4. June 2010 at 05:24
Urg, yes, I meant “supply lead deflation.” Mentioning China must bring have Freudian effect to bring the word ‘depreciation’ to mind, as in currency.
Of course, that brings the Pettis side of the issue to the fore. The result of China’s increase in productivity should have brought a real appreciation of their currency. If the increase in net supply was in fact actually the result of aggregate demand suppression in China and Asia is it a tenable political position for the Fed to allow unemployment to increase for the Chinese government to subsidize a sectoral shift of their labor resources?
It may be justifiable in some global utiliatrian calculation, but no voters care about that.
4. June 2010 at 05:39
rob, The assumption is that TIPS and regular bonds are close substitutes. So if 5 year bond yields 7%, and 5 year TIPSs have a promised real yield of 2%, you infer than people expect 5% inflation.
mbk, There should be an easy test. Doesn’t the World Bank also provide total GDP data in PPP terms. If so, just divide by the correct population figure.
My hunch is that you are right, by the way, but I’d like to know for sure.
David, I agree.
Jing, Thanks.
OGT, If the Fed is worried about unemployment (and I see no evidence they are) they should boost NGDP in the US. Even Krugman admits (implicitly) that that would offset the problem of the Chinese trade surplus.
4. June 2010 at 05:44
mbk, I used Jing’s IMF link:
http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weorept.aspx?pr.x=29&pr.y=12&sy=2008&ey=2015&scsm=1&ssd=1&sort=country&ds=.&br=1&c=576&s=PPPGDP%2CPPPPC&grp=0&a=
And it looks to me like they are using (roughly) the 4.9 million figure for 2010, so I might be right after all.
4. June 2010 at 08:46
Re: Singapore GDP figures I have now investigated point by point comparing the BLS tables with Worldbank data pulled directly from the databases (not the summaries).
Unfortunately no conclusive evidence for the discrepancy. All I can say is it’s not the population numbers (all sources consistently use total population so the number fit of my previous post was a coincidence). Rather, the discrepancy comes from the PPP conversion factors.
BLS uses 2008 PPP factors but only quotes 2005 factors in the paper. Using Worldbank GDP/capita data and BLS PPP GDP/capita data one can calculate the 2008 PPP conversion factor BLS must have used and the numbers are very close to the Worldbank’s own “PPP conversion factor (GDP) to market exchange rate ratio” estimate. This holds for France, Japan, Korea – but not for Singapore. Singapore’s factor is 0.76 according to World Bank while BLS uses a factor of 1.02.
Now at face value this looks like an error in the BLS paper since their other conversion factors for the 4 countries I am looking at match the Worldbank data well. But the Worldbank PPP conversion rates are also a bit odd. First, the 0.76 figure for Singapore is very low, almost as low as Korea (and here BLS is consistent with Worldbank). France is at 1.33 and Japan at 1.12. Second, Worldbank actually gives two PPP conversion factors, one labelled “GDP to market exchange rate” and one “private consumption”. For most countries these two are similar but for Singapore the private consumption conversion factor is 35% higher.
At this point all I know is that the high Singapore PPP GDP/capita in the Worldbank/Wikipedia etc tables is produced by a rather large PPP adjustment upwards.
4. June 2010 at 11:21
I went back and looked at the nominal GDP numbers for the 2002-2007 period and was a bit surprised that they were as high as they were peaking at about 6.5%. So, for clarity, if we assume that the Fed tightened to bring that back to say 5% as a target, how does your model imply that the lower level would be split between inflation and real growth? My assumption is that in the short term real growth and unemployment would be higher, given sticky wages I assume you are too.
On the Fed, Greenspan’s 2001-2002 performance compared to 2009-2010 would lead me to believe that the Fed does care about unemployment, but that they view QE measures as asymmetrically risky compared to interest rate actions. This is not saying they are right to believe that.
5. June 2010 at 09:37
mbk, Thanks, but I think those are believable. Doesn’t the Big Mac index also show a low cost of living in HK and Singapore? You’ve got a free trade zone with no tariffs, plus a supply of cheap Asian labor to do the dirty work. These keeps retail markups and restaurant costs low. In know that in HK housing is very expensive, and that makes me question the HK figure somewhat. I don’t think HK living standards are as high as the figures suggest, due to their expensive housing. Don’t know much about Singapore housing.
OGT, In the short run it’s mostly reflected in a change in RGDP growth. In the long run it’s 100% inflation.
6. June 2010 at 05:12
Scott,
it is very hard to establish a consistent PPP between a “typical Western country” and SG (and I suppose HK) because there are so many idiosyncrasies. That’s why I keep scratching my head at the numbers. You can “make” SG one of the cheapest or one of the most expensive cities to live in, depending which index you construct. And in published indexes such as Mercer’s etc, you also find SG in vastly different regions depending on method: sometimes close to Tokyo, sometimes much much cheaper. Somehow I assumed PPP was more “scientifically constructed” than those indexes but apparently not.
Example housing. SG is overall expensive but still cheaper than HK. If you are a citizen you can buy a 99 yr lease government housing project flat new (ca. 80% of the population lives in those). Price maybe 200-500k US$ for say 3 BR 1000 sq ft newly built. If you want true (eternal) private property (“landed”, a small fraction of the real estate pool), you may spend around 1.5 Mio. USD on that 1000 sq ft condo, and have a pool and a gym extra. If you want a house that looks like typical US suburbia, 2500 sq ft living area with 6000 sq ft garden, 2 car garage, expect to spend upwards of 2.5 mio. US$, this can double depending on location. Rents, similarly, expect say 1500 US$ for that example government flat or 2000-3000 US$ for a midrange condo. Actually 2k rent for a condo is a bargain these days.
Food: a meal in a government organized food stall (hawker centres, very common everywhere) is as low as 2 US$. OK granted if you want US quantity you’ll have to buy two. But food, eating out, is really cheap if you eat local foods and so are basic services like handy men, car repair etc. But it depends again: a coffee in that government food court is 0.60 US$, the (better) Starbucks next door sets you back 3 US$. And real restaurants are closer to Western prices.
Retail: higher than in the US, rather similar to Europe. It’s the commercial rents: they are high and they trickle down to the retail prices.
Cars: example pulled off the net, one Honda Accord 2.0l MSRP US$ 87000. Gas: prices about like Europe.
So take your pick. Gut feeling wise I’d say as far as consumers are concerned it evens out and the nominal foreign exchange rate is fair, which means that the PP conversion should be close to 1.0 (BLS), not 0.75 (Worldbank, IMF).
6. June 2010 at 12:48
mbk. That sounds right. No, there is nothing at all “scientific’ or objective about PPP. It is just as flawed as inflation estimates, indeed even more flawed. I talk to Chinese students who tell me that China is just as expensive as the US, whereas to me it seems less than half as expensive. I tell them I pay $2 for a haircut in China(in a very nice modern salon), and they tell me they pay $20 in China. These things are really subjective.
Even comparing living standards between Mississipi and NYC is very difficult. I would guess that each has higher living standards than the other, when using their own utility functions. Would the middle class Mississippian trade a 2000 sq foot house for an 1000 sq. foot apartment in NYC plus the fancy cultural amenities? I doubt it, even at double the nominal income.
Again, I am much less interested in where Singapore is now, than where it is going with its super-high saving rate and massive budget surpluses.