China Herald: Do GDP growth and standard of living correlate?

Michael Justin Lee

Export has for long been the driving force behind China's GDP growth, but has it also contributed to a higher standard of living? Financial expert Michael Justin Lee challenges one of the common misunderstandings in China's economic development, written for China Focus.

Michael Justin Lee:

Over my years of teaching international finance, there is one idea which has been the single most difficult to get students to appreciate, especially since they hear almost the opposite from other professors. It is not anything mathematical. It is merely an understanding that although exports do indeed benefit a country’s GDP, it does so to the detriment of that country’s standard of living.

Students inevitably comment that GDP growth and standard of living surely must correlate. I need to tell them that this is not necessarily the case. Consider a bakery which produces ten cookies. The bakery can sell them in the neighborhood or “export” them to sell to the next neighborhood. If the bakery exports them (necessarily at a higher price than could be obtained locally or else there’d be no point), the baker will get richer. This will be reflected in the neighborhood’s GDP. But is the neighborhood’s standard of living higher? At least initially, haven’t the neighbors actually been deprived of goods? I admit that in the longer term, the baker’s “export wealth” might get “repatriated” but that won’t necessarily be so or soon.

In this example, it is the neighborhood people (the Chinese population) who have not benefitted from the baker’s wealth (China’s export earnings). The solution is something that the United States knows very, very well. To replace China’s declining exports, China needs to increase domestic consumption. In other words, China needs more of what America has too much of. That’s good ol’ fashioned American-style consumer spending. America may indeed have overdone it, but there’s no question that American spending has provided more than adequate incentive for local and foreign producers to continue to invest here to serve the market. That is precisely the dynamic that China needs much more of now.

Chinese demand for goods is definitely there. And finally, after centuries, even the ability of the people to pay for them is largely there. But much like in Japan in the seventies and eighties, the consumer demand isn’t being met because so much of the country’s factors of production and supply of goods have been dedicated to the export markets. That’s made the country richer, but has deprived the Chinese consumer.

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Michael Justin Lee is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form

China Weekly Hangout

Is education a gold mine or a black hole, and for who? The +China Weekly Hangout discussed on February 7 the future of Chinese students when they start an international study? +Andrew Hupert, formerly working for the NYU Shanghai campus and +Paul Fox, lecturer at the HKU School of Professional and Continuing Education join +Fons Tuinstra, president of the China Speakers Bureau.

The +China Weekly Hangout is having a summer break well into the second half of August.