- The Washington Times - Friday, May 24, 2002

HONOLULU It's time to overhaul China's calculations of its gross domestic product.

In an otherwise bleak international economy, China is almost alone in achieving high growth, with an official increase in GDP at 7.3 percent in the past year and 8 percent in 2000.

However, many believe that China's official growth numbers are grossly exaggerated. Some suggest China's economy actually has contracted in recent years. Others offer "corrections" to the official numbers, which the Chinese government vigorously defends.

Using energy as a barometer, the East-West Center Energy Project was among the first to question China's growth statistics several years ago. In most developing countries, increased energy consumption is related closely to overall economic growth, with elasticity near or exceeding 1.0. But in the case of China, the post-1978 figures were no more than half that for other Asian economies. Something was clearly wrong.

Since energy consumption was more likely to be measured accurately, it seemed that Chinese growth was being overstated. After the energy project raised the issue, the Paris-based International Energy Agency also noticed this discrepancy and began to further study the relationship between economic growth and energy consumption in China.

China's economic growth, as recorded in official statistics, had been spectacular since the end of the 1970s, when sweeping economic reforms began.

Official real GDP growth averaged 9.4 percent per annum for more than two decades between 1978 and 2001. During the same period, however, official statistics said China's total primary commercial energy consumption grew at an average annual rate of 3.6 percent and actually declined between 1997 and 1999. Thus, during the 1978-2001 period, the GDP elasticity of primary commercial energy consumption in China averaged 0.38 uniquely low when compared with other rapidly growing Asian economies.

Chinese scholars cite four major arguments to explain this low elasticity:

•Productivity change (more efficient energy use).

•Structural change (declining share of energy-intensive industries).

cEnergy price reforms (higher prices leading to lower consumption).

cEnergy conservation, including the importation of more efficient machinery during the past two decades.

All of these arguments are plausible, but the same phenomena have been occurring in other economies without the same dramatic consequences.

The East-West Center's calculations suggested that annual real GDP growth was overstated by at least 2 percent and perhaps as much as 4 percent from 1978 to 2001. The International Energy Agency study, which approached the issue from a different angle, reached similar conclusions.

The low elasticity theoretically could be caused either by incorrect energy consumption data or inaccurate GDP data. The latter is more likely.

The overstatement of GDP growth figures could come from three primary sources:

•Statistical fraud committed by officials or flawed methodologies.

•Underestimation of GDP deflators for certain years, and flaws from using fixed exchange rates for GDP conversion.

•The way that GDP is calculated, which does not distinguish output generated by profitable businesses from that of money-losing operations.

Using purchasing-power-parity for conversion is more reasonable. This method shows that the Chinese economy would be several times bigger and the relative growth from year to year would be more modest.

There is little doubt that real GDP growth is overstated. However, among the mixed signals generated by the economic activities in China in recent years are positive developments. They include the continuous growth of foreign trade and direct foreign investment in China, as well as growth in transportation and the consumption of oil, gas and electricity, at the expense of primary coal use.

Thus, those who suggested that the economy contracted in the late 1990s were overreacting.

Some may argue that it does not matter how much China is growing since any visitor can see the dramatic changes in infrastructure and peoples' livelihoods. However, accurate statistics are key to effective economic planning and help to alert policy-makers to issues that can have significant consequences, such as income disparities.

For China, an overhaul of the official economic data collection and reporting system is urgently needed. A task force should be established with support from the highest government level and with the participation of Chinese as well as international scholars.

More reliable data that reflect the true dynamics of the Chinese economy will benefit China, foreign investors and the international community at large.

Kang Wu, a research fellow at the East-West Center in Honolulu, specializes in China and Asia-Pacific energy and economic studies.

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