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Print Edition> Business
UPDATED: August 23, 2010 NO. 34 AUGUST 26, 2010
Crisis Focus: China—Big But Not Strong

Japan announced on August 16 its second-quarter GDP totaled $1.29 trillion. China, with its $1.34-trillion GDP in the second quarter, overtook Japan as the world's second largest economy in size. But with a population of 1.3 billion, China's per-capita wealth lags far behind that of developed countries. Derek Scissors, Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation, says that China's leap past Japan is not as important as it seems, and GDP is a flawed measure of economic performance and prosperity. Edited excerpts follow:

After months of speculation, it's finally official: The Chinese economy, as measured by GDP, is larger than the Japanese economy. In the second quarter of 2010, the Japanese economy was valued at about $1.29 trillion, and the Chinese economy at $1.34 trillion. The gap will widen next year and for the foreseeable future.

The switch in the second and third spots in the world, behind the United States, is heralded by many as a sign of Chinese ascendance and Japanese stagnation and as proof of the superiority of China's state-led development model. But the swap is certainly not the result of a superior development model and it might not even say much about Chinese ascendance. This is because, while GDP does measure size, it is a flawed measure of economic performance and prosperity.

In simple GDP, China just became larger than Japan. But GDP calculations adjusting for different prices within economies—known as purchasing power parity—indicated China's economy was larger than Japan's as early as 1995. This is old news.

It's true that simple GDP does matter. The increasing size of China's economy means the entire world is now affected by its demand for oil, iron ore and other commodities, as well as its low-cost supply of consumer electronics, clothing and other goods.

But for successful economic development, what matters far more is the wealth of individuals and families. Japanese economic weakness is not shown in its still impressive third place ranking in world GDP, but in its roughly 40th place ranking in measures of personal income. The Japanese economy was once thought better managed and better performing than the United States, but the average citizen of Japan is now poorer than the average citizen of Mississippi. American citizens are noticeably richer than citizens of most other developed countries, such as those in the EU. But Japan, in particular, is moving backward.

In contrast to Japan's 20 years of weakness, there has been stunning growth in Chinese per-capita GDP for 30 years. Yet China is still a developing economy. Chinese per-capita GDP, even adjusted for purchasing power, is about 15 percent that of the United States. Meanwhile, increases in Chinese urban and rural residents' income don't come close to the country's per-capita GDP increase.

Japan is struggling, but this moment of apparent Chinese triumph requires a disclaimer: Fast GDP growth is overrated when individuals and families lag behind.

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