China - GNP per capita

Report No. 13580-CHA China GNP per Capita December 15, 1994 Country Operations Division China and Mongolia Department East Asia and Pacific Regional Office f>~ J~ Iy - 8 I0 : . 4,'TffL ;,, -,- _ *, I , . . r - f .C '- , -xa, X _ 4 . _ . _ _ _ _ _ _ _ _ ... .. _ _ _ ....... . ... _ __ .... _ . . . . '.4N~ ~ ~ ~~J  CURRENCY EQUIVALENTS Currency Unit: Yuan (Y) $1.00 = Y 8.5 Y 1.00 = $0.1176 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ACRONYMS AND ABBREVIATIONS FDI Foreign Direct Investment GDP Gross Domestic Product GNP Gross National Product GVO Gross Value Output ICP International Comparisons Program 1-0 Input-Output IMF International Monetary Fund iS Internal Settlement LC Local Currency MPS Material Product System OCFEE Opportunity Costs of Foreign Exchange Earnings PPP Purchasing Power Parity SNA System of National Accounts SSB State Statistical Bureau TVE Township and Village Enterprise UN United Nations WDR World Development Report WEO World Economic Outlook  CONTENTS ACKNOWLEDGMAENTS ............................ ii EX.ECUTIV1 SlIN4,l R'Y .......... . A. Historical Background and China's Statistical-System Reforms ................. vii B. Adjustments to China's Domestic GDP Measures ................................. viii C. Exchange-Rate Conversion to US Dollars ............................................ ix D. Evaluating PPP Conversion to US Dollars ............................................x E. Recommendations ....................................................... xi 1. INTRODUCTION-CHINA'S GDP PER CAPITA IN US DOLLARS ............ 1 A. Historical Background ........................................................ 1 B. World Bank Measures of China's GDP per Capita ................................... 4 C. Other Estimates of China's GDP per Capita .......................................... 5 2. CENA'S DOMESTIC STATISTICAL SYSTEM UNDERREPORTS GDP....8 A. Introduction .................................................... 8 B. China's Statistical System is in Transition--Need for Further Reform ............ 9 C. Valuation Shortcomings in China's SSB-Reported GDP per Capita ............. 11 D. Consistency Adjustments to China's GDP Reporting ............................. 12 E. Scope Adjustments for Inadequate GDP Reporting ............. ................... 14 F. Valuation Adjustments--Roughly 18 Percent .................... .................... 21 G. Conclusion and Recommendations ................................................... 25 3. CHICNA'S CO1M%IiERClA.L, EXCHANGE RATE . ... ....... .. .... 26 A. China's Exchange Rates .26 B. Dollar GDP per Capita .30 C. Domestic-currency Costs of Earning Export Dollars. 31 D. Physical-indicator Estimates. 35 E. Conclusion .40 4. THE NEED FOR A GOOD PPP ESTIMATE FOR CHINA ..................... 41 A. Introduction and PPP Background for China ................ ....................... 41 B. Summary of PPP for China: ICP Preparations and non-ICP Estimates ........ 45 C. Apparent Upward Biases in Taylor and Ren-Chen PPP Approximations ....... 48 D. Potential Unintended Bias for China of Standard ICP Procedures ............... 53 E. China's PPP Per-Capita GDP is Probably Below 2,000 Dollars .................. 55  F. Projections From PPP Base Must Be on a Disaggregated Sector Basis ......... 55 G. Recommendations ....................................................... 56 B lBI1,1O G RA4SFrY ..................................................................... 5 7 TABLEs IN TEXT Table 1: 1992 Per-capita GNP by Atlas and UN PPP Methods, Various Countries .. . vi Table 2: Exchange-Rate Valuations of China's GDP per Capita, 1992 . . ix Table 1.1: Published WDR Estimates of China's Per-Capita GDP ........................ 3 Table 1.2: Comparison of China GDP-per-Capita Estimates by Two Methods ..........6 Table 2.1: Consistency Adjustments to China's GDP ............. ........................ 12 Table 2.2: Gross Output Scope Assumptions, 1987 ........................................ 15 Table 2.3: Expenditure Scope Assumptions, 1987 ................. ........................ 18 Table 2.4: Combined Output and Expenditure Assumptions, with GDP Adjustments 20 Table 2.5: Total Reporting Adjustments ..................................................... 21 Table 2.6: Price Adjustment Effect on GDP, by Sector ................................... 24 Table 2.7: Total GDP Adjustments .......................................................... 25 Table 3.1: Various Chinese Exchange Rates, 1978-92 .27 Table 3.2: China's 1992 GDP per Capita by Various Exchange Rates .31 Table 3.3: Chinese GDP per Capita, 1978-92 .32 Table 3.4: 1992 Opportunity Cost of Foreign Exchange Earnings .34 Table 3.5: 1992 Per-capita GDP, Selected Regions .39 Table 4.1: Differences in Ren-Chen Quality-Matching Techniques, 1986 .51 Table 4.2: 1993 Selected Chinese-to-World Price Ratios .52 FIGURES IN TEXT Figure 1.1: China GDP per Capita in the WDR, 1979-91 .................................. 4 Figure 2.1: Chinese Sectoral Rates of Return, 1987 .................. ..................... 22 Figure 2.2: Rates of Return by Sector after Price Reform Adjustments ....... ......... 23 Figure 2.3: Adjusted Relative Prices Implied by Rate-of-Return Adjustments ......... 24 Figure 3.1: Official and Average Commercial Exchange Rates, 1978-1993 .28 Figure 3.2: China Per Capita GDP by Various Measures, 1978-93 .31 Figure 3.3: 1992 Opportunity Cost of Foreign Exchange, Aggregate Sectors . 33 Figure 4.1: Relative Price Skews for Developing and Industrial Countries, 1970 . 43 BoxEs IN TEXT Box 4.1: PPP Decomposition: Relative Prices and Exchange-rate Conversion ........ 44  ACKNOWLEDGMENTS This report was prepared by Albert Keidel and received support from the World Bank Research Committee during early stages of its preparation, which addressed domestic input-output relationships, scope adjustments, and price reform. A mission to China in October/November 1993 provided additional information on China's exchange rate regime and related statistics, and a consultation mission to China in April 1994 received valuable comments enabling important clarifications. The report draws heavily on the findings of an earlier World Bank report, China: Statistical System in Transition (1992), based on a mission to China in November 1990 led by Ramesh Chander (IECSE), who also acted as technical advisor for this report. Many other persons at various preparation stages contributed significant time in making comments and suggestions, not all of which could be fully incorporated in the report. Within the World Bank, thanks are especially due to Sultan Ahmad, Michael Hee, Boris Blazic-Metzner (IECSE), David Dollar (EAlCO), Uri Dadush (IECAP), Vinod Thomas, John Shilling, Jeffrey Hammer, Yan Wang (EAPVP), Shahid Javed Burki, Nicholas Hope, Shahid Yusuf, Eliana Cardoso (EA2DR), David Pearce, Zafer Ecevit, Peter Harrold, Vikram Nehru, Anthony Ody, David Rix, Tamar Manuelyan Atinc, Carlos Elbirt, Hongjoo Hahm, Bert Hofman, Anjali Kumar, Rajiv Lall, Julia Li, Tejaswi Raparla (EA2CO), Albert Nyberg (EA2AG), Ramgopal Agarwala, E.C. Hwa, Dusheng Liu and Susan Su (EA2CH). Missions to China received valuable assistance from the State Statistical Bureau (SSB), the Chinese Academy of Social Sciences (CASS), the State Planning Commission (SPC), the Development Research Centre (DRC), the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), the State Agency for Exchange Control (SAEC), and the Ministry of Finance (MOF). Thanks are especially due to Liu Chengxiang, Dong Lihua, Xhao Hong (SSB), Jiang Xiaojuan (CASS), Lai Guangxian, Jia Fang, Zhu Baoliang, Yin Yanlin, Liu Rixin (SPC), Li Boxi (DRC), Wang Xixian (MOFTEC), Cao Hounian, Zhang Jianguo (SAEC), Yang Yingming and Hong Yue (MOF). Other specialists contributed generously with comments and suggestions. Special thanks are due to Alan Heston, Robert Summers (University of Pennsylvania), Thomas Rawski (University of Pittsburgh), Gary Jefferson (Brandeis University) and Michael Field (Johns Hopkins, SAIS). None of these is responsible for any errors remaining in the report.  I-  EXECUTIVE SUMMARY 1. This report examines estimates of China's GNP and GDP' per capita in dollars. It distinguishes between exchange-rate methods (such as the World Bank's Atlas method) and the Purchasing Power Parity (PPP) method.2 China's statistical system and its economy are in transition, and this report, as an interim step, presents an estimate of the anticipated impact on China's Atlas-method dollar GDP of future revisions in official statistics and further reforms in China's price system. It also evaluates various academic and other unofficial approximations of China's GDP per capita by the PPP method, in order to emphasize the need, as soon as possible, for an official PPP estimate based on reliable data. 2. The report's major conclusions are: o China's GDP per capita in 1992 was 470 dollars by the Atlas exchange-rate method. This 470-dollar estimate is based on unofficial a4justments to local-currency (yuan) national accounts and conversion at an average commercial exchange rate. - An unofficial 34-percent increase in yuan national accounts adjusts for statistical shortcomings (14 percent) and China's nonmarket price system (18 percent). - Conversion to dollars at a commercial weighted average of China's official and "market' exchange rates results in a 10-percent lower estimate compared to conversion at the official exchange rate. Future price reforms and official revisions to China's national accounts should eventually remove the need for unofficial adjustments. * There is no relabk PPP estmate of China's GDP. - A reliable PPP estimate will be available only after China carries out the necessary price and expenditure surveys. - Approximations of PPP estimates for China are in a range from 1,000 dollars to more than 3,000 dollars. China'GNP N?nd GDP wer virtually idetical in the erly 1990s (with Ieu than a 0.07 percent difference officially reported in 1992). Although World Bank and other publications geneally refer to China's GNP, Chinese octor and iput-output statistcs ae all in GDP tms. This report therefore barc its analysi on China's GDP, with the understnding tht, for its purpose, China's GDP and GNP in these yeas ar numericallyble 2 This repoit draws heavily on an earlier World Bank study: China. Statistical Systm in Traulo, World Bank (1992), Report No. 9557-CHA.  -vi - - Some PPP approximations probably overstate China's PPP GDP per capita because they rely on price data from secondary sources with inadequate product-quality matching. 3. PPP methods are conceptually different from exchange-rate (Atlas) methods and provide a much more reliable basis for international comparisons. For developing countries, PPP methods generally result in significantly higher estimates of GDP in dollars compared to exchange-rate estimates, because PPP estimates adjust for relative-price differences in addition to converting to dollars. Table 1 presents comparisons between Atlas and official UN PPP estimates for a wide variety of countries. It shows that for lower-income countries, the difference between estimates by the two methods is larger than for higher-income countries, and it also shows that the difference between estimates by the two methods varies significantly. Since the UN's PPP estimates are the most reliable measures of an economy's per-capita GNP, Table 1 also presents evidence of the unreliability of the Atlas method as a vehicle for making fine comparisons of living- standard differences between countries. TABLE 1: 1992 PER-CATA GNP BY ATLAS AND UN PPP MrMODS, VARIous COUNTRIES Atlas Method UN-IC?a Atlas Method UN-ICP8 Country (US$) (PPP $) Ratio Country (US$) (PPP $) Ratio Ethiopia 110 340 3.1 Poland 1,910 4,880 2.6 Bangladesh 220 1,230 5.6 Turkey 1,980 5,170 2.6 India 310 1,210 3.9 Brazil 2,770 5,250 1.9 Nigeria 320 1,440 4.5 Mexico 3,470 7,490 2.2 Pakistan 420 2,130 5.1 Rep. of Korea 6,790 8,950 1.3 China 470 n/ab n/ab Spain 13,970 13,170 0.9 Egypt 640 3,670 5.7 Hong Kong 15,360 20,050 1.3 Indonesia 670 2,970 4.4 United Kingdom 17,790 16,730 0.9 Philippines 770 2,480 3.2 Italy 20,460 17,730 0.9 Peru 950 3,080 3.2 France 22,260 19,200 0.9 Morocco 1.030 3,270 3.2 Germany 23,030 20,610 0.9 Colombia 1,330 5,760 4.3 United States 23,240 23,120 1.0 Thailand 1,840 5,890 3.2 Japan 28,190 20,160 0.7 a The United Nations International Comparison Progrm (UN-ICP) has it PPP standrds and conducted PPP surveys throughout the world since the 1960s. b China has not participated in any countnywide UN-ICP surveys or reltd PPP exercis, and academic and other PPP esimation efforts for China have reauked in a wide margin of uncertainty, between unrealisay low estimate of $1,000 and unralistically high estimate over $3,000 (see Chapter 4); WDR 1994 published a figure of $1,910 for 1993 based roughly on UN-ICP methodology, but using weak price data without product-quality matching, which may introduce an upward bias. This report concludes tht the figure would probably be under $2,000 (see Chapter 4). Source: Atls Mcthod estimates: World Bank, World Development Report 1994 (WDR 1994), p. 162-163; PPP estmates: United Nations, ICP estimates, various benchmark yeas, with 1992 adjustments by World Bank staff for growth and inflation, reported in WDR 1994, pp. 220-221.  - vii - A. HITRICAL BACKGROUND AND CHNA'S STATICAL-SYSTEM REFORMS 4. An Atlas GDP estimate for China of 470 dollars per capita in the early 1990s implies that even after more than a decade of reforms and rapid real growth, China is still a relatively poor economy and was extremely poor at the outset of reforms in 1978. Such a low GDP-per-apita level in 1978 is still compatible with high real economic growth rates in the 1949-78 prereform period, because China's prereform growth record derived from rapid centrally planned industrial expansion. Beginning in the middle 1950s, per-capita agricultural output in China stagnated for at least 20 years. By nutritional standards, China was no poorer in the 1950s than it was in the 1970s. A World Bank poverty study found that in 1978 one third of the rural population lived below the absolute poverty line.3 5. Two aspects of China's rapid centrally planned industrial expansion before 1978 continue to influence measures of China's dollar GDP in the 1990s--low quality of industrial output and low plan prices for consumer goods and services. Virtually all of China's economic growth-from the first five-year plan (1953-57) to the death of Mao Zedong (1976)-was due to nonagricultural sectors, especially state-owned industry. State- owned enterprises relied on industrial designs and methods transferred from the Soviet Union before the Sino-Soviet split (1960). The low quality of much of China's industrial output led to low dollar prices on world markets and high domestic-currency (yuan) costs of earning export dollars (see Figure 2.3 and Table 2.4 at page 33). As the share of manufactures in China exports increased in the 1980s, China's strong yuan devaluations reflected the new export composition and caused the exchange-rate method to report estimates of GDP per capita in dollars which changed only very slowly. For PPP methods, low product quality would also imply low dollar-yuan price ratios for industrial products. 6. China's pre-1978 centrally planned economy also enforced a price system which favored industry and which institutionalized an urban economy where collectives and state-owned enterprises supplied goods and services to employees either free or at low subsidized prices. In the absence of state-owned enterprise reform, these subsidies and imbalances in the domestic price system persist into the 1990s, especially for housing and other essential services. They account for some of the greatest difficulties in estimating China's GDP per capita and are the reasons for some of this report's largest GDP adjustments. 7. For China's statistical system, historical influences also largely account for current delays in full GDP reporting. China borrowed both its statistical methods and its original economic system from the Soviet Union. The original statistical system was a version of the Material Product System (MPS), which reports only "material" output and excludes most service-sector production. In addition, the system relied on an inflexible administrative planning and monitoring apparatus for reporting and summarizing raw data. 3 World Bank (1992b), China. Strategsfor Reducing Poverty in the 196.  - viii - 8. China's economic system experienced radical turmoil during communization in the Great Leap Forward (1958-60) and the Cultural Revolution (1966-69). During the Cultural Revolution, China's State Statistical Bureau (SSB) essentially disappeared at the national level and only began its recovery in the middle-to-late 1970s. The original MPS system only fully recovered by the middle-to-late 1980s, and the transition to a GDP- reporting system based on sample surveys-the United Nations System of National Accounts (SNA)-has been delayed to the second half of the 1990s at the earliest. The SNA is important for assuring full reporting of all GDP sectors, and its system of final expenditure statistics is necessary for reliable PPP dollar estimates. B. ADwusmEn To CHNA'S DoMEsrIc GDP MEAsuREs 9. Ultimately, only further reforms can improve China's GDP statistics. This report estimates the effect which statistical reforms would have on officially reported GDP. The estimates are based on (1) national accounts in China's 1987 input-output table, (2) the recent report China: Statistical System in Transition, and (3) assumptions about degrees of underreporting and nonmarket pricing in China.4 The analysis concludes that, with fuller accounting and price reform, China's official GDP measure in local currency units (yuan) could be as much as 34 percent greater than currently reported. The 34-percent adjustment combines a 14-percent adjustment for reporting difficulties and an additional (compounded) 18-percent adjustment for nonmarket pricing. 10. The 14-percent adjustment to GDP for reporting difficulties reflects a variety of criteria, which fall into two categories: consistency and scope. Consistency difficulties include the treatment of subsidies, pricing of rural own-consumption, urban in-kind service consumption, and treatment of inventory write-offs. The net effect of consistency adjustments on total GDP is small, however, coming to only 1.6 percent overall. Adjustments for scope difficulties, however, total 11.8 percent of GDP. Upward adjustments for scope include housing consumption (40 percent), grain output (10 percent), rural industrial output (15-20 percent depending on the sector), and rural service-sector consumption (60 percent). 11. The 18-percent adjustment for nonmarket price distortions is based on adjustments to the pattem of rates of return to land and capital for various sectors in China's 1987 input-output table. Low-priced sectors, such as housing and coal, also have low profits-in some cases zero or even negative. Conversely, traditionally high-priced sectors, such as certain manufactures, have relatively high rates of return to capital and land-10 percent, 16 percent and 29 percent for heavy industry, textiles and other consumer manufactures, respectively. The estimated average rate of return for the whole economy is 4 percent. This report assumes smaller rate-of-retum disparities between sectors and uses input-output calculations to compute implied relative price shifts, with textiles as a numeraire because of textiles' importance in China's exports. Resulting price adjustments 4 Aaaumptions have taken into considrtion comments and suggestions at two seminars-one in Washingon and one in Bej:ing-dedicated to reviewing both thee assumptions and their implichations for reported GDP.  vary by sector-for example 180 percent for housing, 43 percent for coal, 39 percent for grain, and -12 percent (negative) for consumer manufactures. Overall, while the national rate of return changed very little as a result of these hypothetical price changes, average prices relative to textiles increased 18.3 percent. 12. A revised estimate of domestic GDP per capita in 1992 places it close to 2,770 yuan, rather than the current official estimate of 2,063 yuan. This report uses the larger adjusted number for estimating China's GDP per capita in dollars (see Table 2 in Section C). C. ExcHANGE-RATE CONVERSION TO US DOLLARS 13. Exchange-rate conversion from yuan to dollars (as opposed to using PPP ratios) is the basis for the World Bank's Atlas method and is sensitive to the exchange rate used. China had two legal exchange rates in the early 1990s, the official rate and the "swap-market' rate. China introduced the swap-market rate in 1986-87 as an alternative, devalued, rate for foreign-funded firms. By the early 1990s, most commercial transactions used the swap-market rate to conduct up to 80 percent of China's foreign trade. 14. Using a "commercial' trade-weighted average of the official and swap- market rates to convert China's GDP per capita to dollars in 1992 results in a 10-percent lower figure than using the official exchange rate (see Table 2), because until 1994 the official rate was generally overvalued relative to the swap-market rate.5 Applying the commercial exchange rate to the adjusted GDP per capita of 2,767 yuan gives a 470-dollar figure, compared to 389 dollars per capita from using official GDP data converted at the official exchange rate. TABLE 2: ExcHANGE-RATE VALUATIONS OF CHINA'S GDP PER CAPITA, 1992 Data Source 1992 GDP per Capitaa SSBb Adjustedc Valuation in 1992 Yuan 2,063 2,767 Atlas-Method Valuation in USS At Official Exchange Rate $389 $522 At Commerciald Exchange Rate $351 $470 a soed on mid-year population of 1,167 million. b Official Data: China State Statisical Bureau. c Adjusted in Chapter 2 for reporting and valuation difficukies with SSB daft; see the text. d Trade-weighted average of official and swap-market rte. Source: Table 3.2. 15. Alternative exchange-rate estimates for China have appeared in academic publications. They rely on physical-indicator comparisons and appear to overstate China's GDP per capita (see Chapter 3, page 35ff). These studies conclude that China has per- 5 In 1994, China unified its two exchange rates by devaluing the official rate to the swap market rate level.  capita 'physical-indicator" attributes similar to those for the Republic of Korea in the late 1960s and Taiwan Province, China in the early 1960s. They update exchange-rate dollar GDP-per-capita figures from those years using US inflation data to obtain exchange-rate estimates of roughly 1,000 dollars in the early 1990s. However, these methods imply strong assumptions regarding product quality, structure of output, and the adequacy of US inflation data for these purposes. Correcting for potential biases inherent in these assumptions could reduce such estimates by half. For similar reasons, estimates based on physical-indicator observations by visitors to China must also be used with caution, if at all. D. EVALUATING PPP CONvERON To US DOLLAus 16. Using exchange rates to convert GDP to dollars has drawbacks for international comparisons, because relative prices in developing countries differ systematically from prices in industrial countries, and because various political and economic forces influencing exchange rates-such as capital movements-generally cause exchange rates to deviate unpredictably from purchasing-power rates for even traded goods. A preferred conversion method is based on a currency's purchasing power (the PPP method). In principle, this method uses standard dollar prices from detailed price surveys to value comparable GDP expenditure components for all participating countries. In China's case, the lack of survey data has led to a range of PPP approximations with differences between estimates. 17. For all developing countries, the PPP method results in a significantly higher dollar GDP-per-capita figure when compared to results of exchange-rate-based conversions. The reason PPP estimates are higher than exchange-rate estimates-for any developing country, not just China--is that they adjust for service-sector prices and other prices which are relatively low in developing countries compared to those in industrial countries. Exchange-rate-based conversion makes no correction for relative price differences. By calculating a separate PPP price ratio for each GDP component, the PPP method bases its adjustments for relative-price differences directly on price survey data for similar goods and services in different countries. 18. One must therefore be careful not to compare a PPP estimate for one country with an exchange-rate-based estimate for another. In a sense, the two methods are like Fahrenheit and Centigrade measures of temperature--without the benefit of a simple formula to link the two.6 The United Nations International Comparisons Program (ICP) has refined the PPP method and applied it to dozens of countries for more than 25 years. China has not yet participated in the ICP. 19. In place of an ICP estimate, various approximations of a PPP estimate for China have appeared in academic publications and elsewhere, including in the World Bank's World DevelopmenLReport. These approximations fall in a wide range for China in the early 1990s, from 1,000 dollars to more than 3,000 dollars, but the methodologies and 6 See Tabl I on page vi.  - xil- data sources for the highest and lowest estimates make them less reliable than other estimates available. 20. Because of quality-matching difficulties, all but the lowest PPP approximations probably overestimate China's PPP GDP per capita. Most approximations are based on price data from secondary sources, which make it difficult to ensure that products in diffe:ent countries are similar, even though the products have the same name. Careful price ma.ching for products of similar quality in different countries ensures comparability, but t, the degree that approximation methods match prices for higher-quality products in the US w