Reference Material: Behind the increasing GDP in China

Reference Material: Behind the increasing GDP in China

Note: the reference materials on this website are written by non-practitioners and do not necessarily represent the opinions of Falun Gong practitioners.

Translated from Chinese

China has enjoyed a high growth rate with GDP [Gross Domestic Product - a very basic measure of ecominic success] at 8% since the mid 80s. Simply looking at this figure, it truly seems like a miracle. Compatriots have sufficient reason to be excited and proud of such a tremendous achievement. Nowadays, there are people who propose to strive to surpass the United States within the next twenty to thirty years. Let’s first put aside whether the GDP in China may forever continue to grow at such a high growth rate, and the fundamental differences between the low level growth and high level growth. We first need to figure out what GDP actually consists of and what is not included in its measurement; we then will not be pursuing the increase of GDP in name only.

1. GDP does not measure social cost: Simply speaking, GDP is the total market value of all final goods and services produced in a country in a given year, the measurement of which is based upon the value system of the economy system in a country. For a country with a sound market mechanism, this measurement can reflect as far as possible the total market value of the economic activities in a society as a whole. For a country evolving from a planned market toward a free market like China, GDP is not possible to measure the total market value of all economic activities of all dimensions, in which there exist examples like environmental pollution, labour insurance, children workers, medical insurance, social welfare, and health problems, etc.

Take for example a factory with a total market value of production of 100 million RMB in a given year. If the environmental pollution during production is not taken into account, the social cost of the environmental pollution is not included. What is interesting is that the total social effect is zero if the government spends 100 million RMB to clean the pollution assuming that the pollution is cleaned. However, this is not so in GDP; these two economic activities are calculated separately. i.e. they together account for economic activities with a total market value of 200 million RMB. A social economic activity with zero value has turned into an activity with a value of 200 million. This is the defect of GDP when calculating the market value of social production. Is this an important issue in China? In fact, each local government turns a blind eye to environmental issues in order to pursue increasing GDP in China. The cost of sacrificing environmental concerns to pursue economic growth may very likely lead to zero or even negative market values of total economic production, which is something GDP cannot tell you.

2. GDP does not measure negative effect: This is a simple point that construction and deconstruction are not offset against each other when calculating GDP; on the contrary, it is that same as multiplying negative by negative to produce a positive value. It sounds strange, but the fact is that it is just like this. For example when a government spends three million dollars to construct a road, it means the creation of a total market value of three million dollars. Another group of workers come to reconstruct the road for an underground passage several days afterward, in which a total of ten million dollars is spent. The GDP of the ten million dollars is created. Although these two groups of people may generate a total of zero or negative social value or effect, we come out with a positive GDP as these two figures are calculated separately. Isn’t it the same effect as multiplying two negative values to produce a positive value?

Take the real estate in Hai-Nan Province for example. In the mid 90s, the high tide of the real estate boom in Hai-Nan Island attracted a large capital inflow from the Mainland for investment. Construction sites and buildings were everywhere in Haikou. However, when the market slowed during the market depression, a lot of buildings were half finished and the construction work was forced to stop. For the construction company, the market value of what they created was included in the GDP calculation. However, are those buildings valuable to the society? The answer is no; and they are negative to the appearance of the city. Hai-Nan Province decided to blow up these buildings, in which a total of more than 100 buildings were demolished in one go. (How much is the total value given that each building equals 30 million dollars?) At that time, each penny of the costs was included in the GDP. Were it to blow up these buildings again, it might be necessary to re-calculate the GDP. For the society, however, nothing but a pile of rubbish was left after the demolition, all of which were calculated in GDP for a period of 2 years.

There exist many examples of this kind. For example, selling fake medicines may contribute to an increase to GDP; going to see a doctor may also contribute to an increase to GDP. In fact, it means nothing to the daily living of the general public. Melatonin makes 100s of millions of dollars, however, the costs of lthe long-term side-effects have not yet surfaced. If it is found to be significant, then the social effect of these 100s of millions of dollars may be negative. What can we possible tell by simply looking at the value of GDP?

3. GDP does not measure quality: Quality is something not shown in GDP as GDP is calculated in present market value of social activities. What is so important about that? It is extremely important. We need to understand that the wealth of the society is accumulated by quality rather than quantity. It’s of no use to accumulate large quantity. This involves issues of two levels: One is that only quality accumulates social wealth, or the rate of depreciation for social wealth is faster than that of production. This is a simple mathematics question that everyone knows, and I will not go into detail. For example, a desk with good quality and a desk with poor quality are not comparable after five years. The value for the desk of good quality may go up while the value for that of poor quality is to be eliminated through competition. Its’ the same logic for social wealth. A building of good quality values more after a hundred years while a building of poor quality may be useless after thirty years, which also becomes a pile of rubbish to the society. The production activities of poor quality do not accumulate wealth for a society while products of good quality have external exchange value. Examples such as land and environment, etc are all some kind of wealth. If there’s no quality for international standard, exchange of the same value is not possible. What you calculate for a certain product will not be recognized by others.

4. GDP does not measure the effectiveness of resource allocation: Economics is a subject of effectiveness of resource allocation in a society. From an economic perspective, society expenditure itself is not social cost; it is the social cost for investment A when the inputs of investment A causes the disuse of investment B. For example, if the government spends money on the military, or on provision of eating and drinking facilities, such expenditures themselves are not social costs as they encourage the development of the military industry and the restaurant industry. However, if the investment of both these two industries cause an shortage of education expenditure or a failure to fulfill social needs, this is then a social cost of military development and restaurant industry. In addition, GDP does not measure waste. How much China has wasted each year! – on one hand, it makes huge investment in building the largest fiber telecommunication network in the world; on the other hand, it places the restrictions on the usage of internet with strict control over internet coffee and websites? Such wastes make no impact on the growth of GDP.

There are still quite some examples, and I won’t describe in detail one by one. From the above given examples, we can see that simply having a high growth rate of GDP does not necessarily lead to healthy economic activities for a given country, nor produce an overall benefical effect to the society. Particularly in China, it’s very serious in the following areas: environment pollution, disuse of education, waste and selfish greed, redundant construction, plundering production, and inferior quality, etc. When we cheer for the high growth of GDP, we should at the same time clearly understand the contents of GDP, in what stage [of economic growth] it is a measure of a country’s econmoic power, and in what areas it does not reflect the social effect of the economic activities. Only by doing so can we avoid becoming dizzied by a simplified figure and boast that we are ready to surpass the United States after some thirty years. Without an effective social and political structure, we do not have effective social economic management. Chinese merely know to work hard, but they do not know if they are to reach a higher level after they have been at a certain level, a huge improvement is necessary in the quality of the social structure, or it’s in vain at the end no matter how hard they work.

Now we see in China there exist a lot of bad debts in the banks’ financial system. Why? From a broad perspective, financial assets are images of physical assets. The huge debts tell us that the quality and quantity of physical assets mismatch those records of the financial assets. It reflects a very serious problem. We need not feel too happy about the growth of GDP because it doesn’t tell you the story behind the increasing GDP.

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Original Chinese version:
http://www.yuanmingeurope.net/articles/200212/15644.html