US, China and a soup fork

The question, long debated, is worth pondering again at a time when two economic giants, the United States and China, are sparring over trade, currency exchange rates and their roles in the global economy.

In the run-up to US mid-term elections on November 2, politicians from both parties, for different reasons, blamed trade with China for American job losses. China responded with irritation and hit back by accusing the US of “out of control” printing of dollars tantamount to an attack on China with imported inflation.

Measured by GDP, the United States tops the list of countries. China overtook Japan in August to become number two. Depending on whose forecasts you believe, China will overtake the United States in 2020, 2035 or 2040 and therefore turn the 21st century into the long-predicted Chinese Century. It’s becoming conventional wisdom that the United States will play a reduced role on the world stage.

Crystal ball gazers might do well to remember that long-range forecasts have often been wrong in the past. At the turn of the 20th century, eminent strategists predicted that Argentina would be a world power within 20 years. In the late 1980s, Japan was seen as the next economic leader, on the strength of supposedly unstoppable progress. Forecasters extrapolated from past GDP growth rates.

They are widely used to compare standards of living in one country with those in another but critics say GDP is too narrow to be a realistic indicator. Joseph Stiglitz, the Nobel-prize winning American economist, has complained that world leaders make a fetish out of it and suffer from GDP-obsession.

John Robbins, a liberal author, says that using GDP as a measure of overall progress makes as much sense as “using a fork to eat soup.”

Why? GDP, developed in the 1930s, measures the total monetary value of all goods and services. It goes up whenever money changes hands, no matter whether that money is borrowed or on what it is spent. The billions it cost to clean up the Gulf of Mexico after this summer’s disastrous oil spill, for example, counted towards America’s GDP.

Viewed solely through its lens, Robbins says, someone treated for a complicated cancer while at the same time paying steep legal fees for a divorce is someone helping make GDP look good.

US, China low on human development index
Where GDP fails is as a measure of living standards, particularly in a country like China which is both a manufacturing powerhouse and a Third World country where more than a third of its vast (1.3 billion) population live on less than $2 a day. GDP per capita is not a particularly reliable indicator either. It measures the average (not the median) which results in distorted figures in countries with great income inequality.

The Nobel-prize winning American economist who designed the gauge in the 1930s, Simon Kuznets, did not mean it to be an indicator of a nation’s overall well-being but that’s how it came to be seen widely. According to Stiglitz, this tends to land politicians in a dilemma. Their goal is to boost GDP but they also face demands from citizens for policies that lower GDP, from better security to anti-pollution measures.

Stiglitz chaired a commission, established by French President Sarkozy in 2008, that looked into different ways of measuring prosperity and produced a 300-page report last year that came up with a range of recommendations to measure both well-being and economic output. (The commission did not suggest dropping GDP). When, if and how widely they will be implemented is open to question.

In the meantime, those dissatisfied with GDP as the principal measure can compare its country rankings with the Human Development Index, a gauge that was adopted in 1990 by the United Nations and is compiled from data on life expectancy, education and GDP per person. On the 2009 index (this year’s will be released early in November) neither the US nor China fare well.

 The US comes in 13th place (having dropped a slot from 2008) and China at 92nd, out of 182. A long way from the top.