It
is an interesting coincidence that Clifford D. May wrote an article comparing
the GDP of Argentina with that of Canada in the same week that the highly
regarded Standard Chartered Bank issued its forecast on how the world will fare
economically by the year 2030, scarcely 11 years from now. The analysis is
viewed so seriously around the world, it was reproduced in every respected
publication, be it financial or of general interest.
Clifford
May's article came under the title: “A plaintive cry for Argentina,” published
on January 8, 2019 in The Washington Times. The writer notes that Argentina's
per capita GDP is a third that of Canada, and asks questions relating to the
differences that exist between the cultures of nations; differences that may
affect the level of wealth they produce. What Clifford May should have done, is
ask questions on how the wealth of nations is measured, and how valid that
measurement is. That's because what he sees may not be what is real. So, let's
look at some numbers, and see how seriously they should be taken.
Listing
the 10 largest GDPs in 2030, the Standard Chartered analysis shows that the
American GDP, which will rank third by then, will have risen from the current
level of 20.5 trillion dollars to 31 trillion international dollars. It must be
acknowledged that there is a small difference between the current value of the
dollar and the international dollar of the year 2000. But this deviation should
not make a difference given that it is applied equally throughout the analysis.
And
so, when you do the math for the American economy, you find that it will have
grown at an average rate of 3.83 percent a year. As to China's GDP that will
occupy the highest level by 2030, it will have risen from the current 14.1
trillion dollars to 64.2 trillion, an average annual growth of 14.77 percent.
As to Egypt that is expected to become the 7th largest economy in the world by
the year 2030, it will have grown from the current 253.25 billion dollars to
8.2 trillion dollars. This is an explosive average rate of 37.2 percent
annually.
Whereas
the American growth rate of 3.83 percent looks reasonable, the Chinese looks a
little exaggerated given that it is expected to slow down from the 8 or 10
percent rates it has been scoring over the past few years to the 5 percent rate
it is realistically expected to score over the coming years. And then, you have
the staggering Egyptian acceleration from the 7 or 9 percent rates expected —
at best — for the coming years, to the 37.2
percent foreseen by Standard Chartered. What's going on? Why these wide
discrepancies?
To
begin forming insights that may help us find answers, we do the math in
reverse. We ask: if the Chinese GDP were to grow at an average rate of 6
percent and become 64.2 trillion in 11 years, what is its true value today? We
do the math and find it to be 33.8 trillion dollars. As to the Egyptian
economy, assuming an average 9 percent growth rate in the coming years, for it
to be worth 8.2 trillion in 11 years, its value today would have to be 3.18
trillion dollars. Why not say so?
In
fact, a method known as the Purchasing Power Parity (PPP) already exists which
compares the GDPs of nations according to how much local goods and services the
local currency can buy. This method leads to results which are different from
the one based on the translation of all values into American or international dollars
and doing the comparisons.
For
example, if an Egyptian who earns 50,000 Pounds a year can buy a house for
500,000 Pounds, he is doing as well as an American that earns 50,000 Dollars a
year and buys a comparable house for 500,000 dollars. This would indicate that
one Egyptian pound should be worth one American dollar. But the reality is that
the marketplace where currencies are exchanged, is saying something different.
It says that the Egyptian pound is only worth 7 American cents, even less. Thus,
it is evident that using this figure to evaluate the Egyptian GDP in American
dollars, has falsely devalued that GDP by a factor of 14 or thereabout. This
means that the real value of Egypt's GDP today is not 253.25 billion dollars
but 3.6 trillion dollars. This is close to the 3.18 trillion estimated by the
method used earlier.
Even
then, this is not the figure that's published by the agencies which use a more elaborate
PPP method. It is one that's based—not on a
single item such as a house—but a basket
of goods and services. The latest published figures estimate the Chinese GDP to
be worth about 22 trillion dollars — two thirds
the figure estimated earlier. As to the Egyptian GDP, it is estimated to be
worth about 1.5 trillion dollars — a little
less than half the figure estimated earlier. Who's right? Who's wrong? Who
cares?