Friday, 25 February 2011

GDP does not equate happiness


Headline: “Rising China tops Japan as world's No. 2”.

Looks like a big deal. Officially, the news came out of Tokyo two weeks ago when the Japanese government reported its economy shrank at a 1.1% annual rate in 4Q'10, a period when China's GDP surged 9.8% from a year earlier.

With those figures, Japan's full year GDP amounted to US$5.47 trillion, about 7% smaller than the US$5.88 trillion China reported in January. Japan's real GDP for the full year expanded by 3.9% (-6.3% in 2009); for China it's expected at 10.3% for 2010 as a whole, up from 9.2% in 2009. Thus China became the world's second largest economy in 2010, ending Japan's 42-year reign in that position.

It is something that is bound to happen considering China's ballooning GDP and much, much larger population - just a matter of arithmetic and time. While China's economy has several times in the past surpassed Japan's based on quarterly data, February 14's reading marks the first time China has done so on a full-year basis, the standard used for global rankings. Indeed, China's recent success over-shadows the fact that Japan's economy expanded for all of 2010.

Growth in the first nine months meant that even with the poor showing in 4Q'10, Japan's real GDP for the entire 2010 expanded at 3.9%.

Japan, China and the US

Still, Japan leads the pack among G-7 nations' growth surpassing Germany (3.6%), the US (2.9%) and Britain (1.4%). Lest it's forgotten, Japan remains dependent on exports. GDP growth could well fall off again if global trade tanks. That happened during the recent global crisis, when Japan's economy shrank 6.3% in 2009, the worst contraction among G-7 countries that year.

Hobbled by continuing weak domestic demand, Japan's economic output is still about 5% smaller in nominal terms than it was in 2008 despite the rebound in 2010. In contrast, the US economy is today 2% larger than it was in 2008. But both Japan and China together remain considerably smaller than the US economy: still worth 23% less (at US$11.35 trillion) than the US '10 GDP of US$14.66 trillion. Surely, the news marks the end of an era.

For two generations since overtaking West Germany in 1967, Japan stood solidly as the world's No. 2 economy. Even now, Japan ranks way ahead of Germany (4th), France (5th) and Britain (6th). The new rankings merely symbolise China's rise and Japan's decline as global growth engines. For the US, as I see it, while Japan was in a way an economic rival, it has been also a geopolitical and military ally. China, however, poses as a challenger on all fronts.

China should keep growing

But China remains in many ways poor. Whereas, Japan is an extremely wealthy nation. In terms of GDP per capita, Japan is No. 1 in Asia and No. 18 globally, between Canada and Germany according to the World Bank. Japan's success after WWII - the economic “miracle” underpinned by annual growth rates averaging 10% in 60s and 5% in the 70s is still looked-up to by much of the world.

China still lags behind Japan in many respects in the face of a reality that their growing interdependence makes them partners as well as rivals. By comparison, China's income per capita (at US$4,400) is only one-tenth of Japan's. World Bank estimates that more than 100 million people - nearly Japan's entire population - live on less than US$2 a day. Size of course matters.

If you look at China's development, its standard of living is much like Thailand, even Indonesia. But if you look at China's mere size, besides being now the world's No. 2 economy, it's also its largest exporter (counting euro-zone members separately); second largest importer; largest surplus nation (with current surplus peaking at 11% of GDP); and largest holder of the world's stock of foreign currency reserves (equivalent to 50% of its GDP). China's economy probably will surpass US in outright size within 20 years. But, quite obviously, the GDP landmark can't reflect the true condition of the Chinese society, which a friend of mine at Bei-ta described as “rich country, poor people.”

Still, China's continuing rapid growth points out the stark contrast with the US and euro-zone economies which are still struggling to maintain growth and revive employment. US share of global output (20%), trade (11%) and even financial assets (30%) is shrinking, as emerging nations continue to flourish.

China's strong performance is in some ways good for the global economy. It reflects rising demand for Chinese goods in the US and elsewhere. China's exports rose 31% in 2010, but its imports rose even faster at 38%. As China overtakes Japan, it also boosts its growth: Japanese exports to China hit a record 13,000 trillion in 2010. Indeed, the rapidly growing Chinese market for a wide range of products (from cars & SUVs to high-tech electronics to Chinese tourists) is galvanising corporate Japan and the rest of Asia. China surpassed US as Japan's largest trading partner in 2009. Masayoshi Son (CEO, Softbank) expects “China's GDP to double Japan's in eight years.”

As of now, many in Japan and Asia view China's growing economic clout as benefitting all of Asia. Indeed, continued growth in China as well as some pick-up in the US is expected to help Japan bounce back in 1H 2011.

Redefining challenges

China's official rise to become Asia's top economy takes the spotlight off Tokyo. While some Japanese elite now looks back to the era of Japan bashing with “nostalgia”, others found a new opportunity to help redefine Japan's image as No. 3. I well recall a recent Asian Wall Street Journal write-up on the book “Do We Have to be No. 1?” by Renho (a ruling-party politician) who suggested that Japanese should take comfort in the notion that Japan need not be a leader in everything (or anything) to be deemed successful.

Her notion of Japan as a centre of creativity and innovation (e.g. hybrid cars, 3-D video games), in contrast to its image 30 years ago as a copycat and later, outperformed the originals with excellent design, manufacturing and craftsmanship. That label is now passed-on to China. It's a matter of quality over quantity: “Japan is still a wealthy nation in many sense of the word.”

China continues to grapple with challenges in achieving rapid, widely-shared and sustainable growth. Meanwhile, the rest of the world must learn to adjust to China's growing impact. In the aftermath of the global crisis, however, it is a rising China that feels time is on its side. Something rather Chinese considering its 6,000 odd years of history.

Like it or not, US & China's economies are indeed deeply enmeshed - not at all a zero-sum game. To many Chinese (most are cool pragmatists), US will retain unchallengeable global power for the next generation, at least - given US capacity to adjust, innovate and restore its dominance. In the meantime, Chinese attitudes have also changed in a world as it sees it today. There are already indications that the young are growing impatient and increasingly ignoring the advice of Deng Xiaoping (architect of modern China) to “hide our capacities; bide our timenever claim leadership.” China still has much to do just to keep pace with the people's aspirations for higher incomes and higher living standards.

More to life than money

I first met Simon Kuznets at Harvard in the summer of '69 (won the Nobel Prize in economics two years later). A small but impressive man with piercing eyes, he educated me with rare insights into development economics. Also taught me there is more to life than money: “The welfare of a nation can scarcely be inferred from a measure of national income.” He should know - he invented national accounts and built them for the US. So he knew their limits. Fourty years on where Kuznets led, others have followed including Presidents Obama (US) and Sarkozy (France) and Cameron (Britain Prime Minister).

Cameron sums it best: “we need to look for alternative measures that would show national progress not just by how our economy is growing, but by how our lives are improving; not just by our standard of living, but by our quality of life.”

In the 60s, Robert Kennedy criticised GDP as measuring everything (including pollution, cigarette advertising, napalm & nuclear warheads) “except that which makes life worthwhile (the arts, wit, wisdom, compassion).”
Similar concerns underpinned the 2008 Commission on the measurement of economic performance and social progress set-up by Sarkozy and led by Nobel laureates Stiglitz and Sen.

It concluded that the level of GDP per capita was far from the best measure of material living standards.
They emphasised greater usage of net national income (i.e. after adjusting for depreciation of capital, including infrastructure); stress more on the household instead of economy-wide measures; showcase distribution of income and consumption; and evaluate non-market activities, including leisure.

The second stage is to combine new measures of wellbeing (health, education, governance, environmental sustainability, and subjective measures of quality of life) into a single summary measure. The challenge remains how to summarise overall well-being using a simple set of indicators that most can understand and use.

Pursuit of happiness

The trouble is people do quite poorly at predicting what makes them happy. They focus too much on initial responses and overlook how fleeting moments of pleasure are, leaving them no happier than before. Granted many studies have shown that wealthier nations tend to be happier than poorer ones; and rich people appear more satisfied than the less affluent. Yet, other studies on the US and South Korea suggest people are no happier than they were 50 years ago despite sharp rises in income per capita.

A recent Canadian study concluded the happiest people reside in the poorest provinces (Nova Scotia), while those in the richest (British Columbia) were among the least happy. Since happiness is what people finally want and wealth is only a means towards this end, Prof. D. Bok (former Harvard President) made it known “the primacy now accorded to economic growth would appear to be a mistake.”

Based on latest research findings, two conclusions have emerged: (i) things that bring enduring satisfaction for individuals are also good for most others (e.g. helping others, close relationships); (ii) experiences that bring lasting happiness do not feature as priority in government (e.g. medical afflictions, such as chronic pain, depression, sleep disorders, give vast relief to sufferers once treated, but such people are often under-served in hospitals).

But are happiness research really reliable enough as inputs for public policy? For sure, people who claim to be happy tend to live longer, are less prune to commit suicide, don't abuse drugs, get promoted more often and enjoy good friends. Their assessment of their own well-being lines-up rather well with the views of friends and family. Researchers found that answers to questions about their well-being seem to correspond fairly well to more objective evidence.

Be that as it may, it's still premature to initiate new bold policies on happiness based on research alone. Nevertheless, they can be useful in assigning priorities or identifying new possibilities for public intervention. At the very least, like Britain and France, governments should collect and publish regular data on trends in the well-being of citizens. Perhaps, public officials may even use these research insights as a basis for informed decisions. Surely, you can't go wrong with prioritising happiness.

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email:

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