Posted on 03/30/2012 8:53:59 PM PDT by nickcarraway
Michael Pettis has challenged us to a bet.
For those of you who dont know him, Mr Pettis is a finance professor at Peking Universitys Guanghua School of Management and a frequent blogger. He would like to bet that Chinas dollar GDP (calculated at market exchange rates) will NOT surpass Americas in 2018. That is the year that China's economy will overtake America's if you stick with the default assumptions in our most recent* interactive chart, which allows you to plug in your own guesstimates** of future growth and inflation in the two countries, as well as the exchange rate between them.***
When he is not fretting about Chinas economy, Mr Pettis runs his own record label in Beijing (Maybe Mars). If we lose the bet, hed like us to invite one of his indie-rock bands to perform at an Economist conference. If we win, he has to give us a record deal (not really).
Free Exchange is happy to accept the bet, one blog with another. We would also love to see a band like Ourself Beside Me, Birdstriking or The Offset: Spectacles playing at an Economist conference. But were reluctant to commit our hard-working colleagues in the conferences division to the logistical challenges that might entail, so we were hoping we could keep it simple: how about a bottle of scotch (or baijiu) to the winnerand well see what we can do about the band closer to the time?
Wed also like to propose a counter bet. Mr Pettis reckons Chinas average growth in this decade will barely break 3%. He is definitely smarter than your average bear, but that prediction looks aggressively pessimistic to us. Wed like to bet that growth will break 3%. (Lets say we win if it exceeds 3.5% on average in constant yuan over the decade.)
Some footnotes:
*The chart and the accompanying article were published before the full-year 2011 GDP figures were released. Using the official 2011 figures with the same assumptions suggests China will overtake America in 2019 not 2018.
**Our interactive chart is meant to be interactive. Wed be happier if people played around with it and came up with their own projections, rather than making too much fuss about ours. We wanted to keep the chart as simple as possible. As a consequence, it asks for average rates of growth, inflation, and exchange rate appreciationbut you cannot vary the rates over time. Obviously, in reality we would expect both the rate of growth and the rate of real exchange-rate appreciation to slow as China catches up with America. Our sister company, The Economist Intelligence Unit, which uses a more sophisticated model, foresees China overtaking America in 2021.
***People often forget about the importance of inflation and exchange-rate appreciation in these calculations. Chinas real GDP grew by 10.6% a year over the last decade, but its nominal dollar GDP grew by 18%, thanks partly to the appreciation of the yuan against the dollar and partly to faster inflation in China than in America. One of the nice things about the interactive chart is that it helps people appreciate the significance of these two factors. Our default assumptions look perfectly reasonable by today's standards (growth of 7.75% in China, 2.5% in America; yuan appreciation of 3% and inflation--as measured by the GDP deflator--of 4% in China and 1.5% in America). But in combination these assumptions deliver a very striking result.
There is a magazine, which name escapes my recall right now, which is dedicated to useful inventions created by farmers. Yes, you read that correctly - farmers. No doubt a few of those fellows have been to college, but that is besides the point I was trying to make.
A cultural and social environment must be conducive to inventiveness for inventions to occurr regularly. A culture and society where individuality is discouraged to the point of criminal punishment is going to find it difficult to conjure innovation.
Our colleges and universities no longer encourage exchanges of ideas as only “preapproved” ideas are allowed on campuses.
I’m betting against it.
But I do not believe colleges, corporation, etc. are so stifling or oppressive that the average "Joe" in a garage is more inventive than the collective power of Universities and Corporations.
Sure, in the back woods and the nooks and cranny's of America's communities, are people willing try new ideas, tinker with new things, etc. Kind of like that cable TV show, "Sons of Guns" where you have a group of guys in a shop who are quite clever redesigning existing small arms. Or NASCAR shops through out America who design innovative ideas to make a car go quicker, etc. and it's pit crews finding new ways to change tires during the race.
But I hardly think those things compare to the army of engineers and scientists who are involved in developing the F-35 or an army of engineers and scientists who develop brand new vehicles and mass produce it on an automated production line.
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