Southern Powerhouse, Leading in GDP Rankings? - Huxiu.com#
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This article introduces the significance and calculation methods of international GDP rankings, as well as recent changes. The article points out the importance of international GDP rankings in the post-World War II international order and introduces the differences between nominal GDP and real GDP, as well as the calculation methods of purchasing power parity and exchange rate. The article also analyzes the changes in GDP rankings between India and Germany and Japan, and evaluates the economic development of India and Germany.
• 💰 International GDP rankings are part of the post-World War II international order, affecting finance, trade, and international obligations.
• 🌍 India's nominal GDP has surpassed that of the UK, becoming the world's fifth-largest economy, demonstrating India's strong economic growth momentum.
• 📈 Germany is expected to surpass Japan and become the world's third-largest economy, reflecting Germany's economic recovery and development potential.
In recent times, there has been a constant stream of news related to GDP, such as "Indonesia sets a goal to be among the top 5 global economies by 2045 and become a developed country," "Germany's GDP surpasses Japan," "India will become the world's third-largest economy," and so on. People have become accustomed to these headlines.
Comparing GDP internationally has become a common practice. In addition to the promotion by economists, there is also a very pragmatic factor behind this practice, which is the need for a basis for the allocation of international organization fees and international aid tasks.
Take an example (Image: United Nations Headquarters)
I. GDP Rankings, a Mysterious Game in the Eternal Era
From this perspective, international GDP rankings are part of the post-World War II international order in which people live. With the expansion of this order itself, the small rankings will truly affect various aspects of a country, such as finance, trade, and international obligations, through various international coordination mechanisms.
Involving real money, the compilation of rankings has developed three major principles: consistent indicator concepts and definitions; representation in the same currency unit; measurement using the same price level.
Under the guidance of this thinking, the first step is to widely recognize the difference between nominal GDP and real GDP in order to suppress the interference of price fluctuations on GDP data. Otherwise, there would be a ridiculous situation of explosive GDP growth in countries experiencing hyperinflation.
Next is the parallel calculation methods of purchasing power parity (PPP) and exchange rate in international comparisons.
The exchange rate method only requires converting data into the base currency, the US dollar, but it is significantly affected during periods of sharp exchange rate fluctuations.
The PPP method artificially constructs a currency conversion factor based on the logic that the purchasing power of different countries' currencies is different. In places with high prices, life may not be as comfortable as it seems. China's GDP has already surpassed that of the United States, calculated using this method.
Comparison of GDP using PPP and exchange rate methods
However, as an artificially created factor that is periodically updated, the PPP conversion factor itself has significant flaws: the representativeness of selected goods cannot be guaranteed, price parity data for service goods can be easily distorted, and it is difficult to compare types of government services such as defense services.
Therefore, the reliability of PPP data is relatively poor when comparing economies with significant differences and in long-term comparisons. It is a special product of the previous era of globalization. In that era, there was still ample room for various manipulations and word games.
In addition to the errors caused by statistical techniques, the tendencies of the major international GDP ranking publishing institutions are not always the same. The United Nations Statistics Division, the International Monetary Fund, and the World Bank are the three major mainstream publishing institutions.
The purpose of the United Nations Statistics Division is to promote the development of the global statistical system and is an institution that promotes standardization. The IMF's main task is to supervise the stability of the global monetary system, maintain international financial order, and promote international trade. The main goal of the World Bank is to promote the long-term economic development of developing countries and reduce poverty.
The three major rankings are important tools for these three institutions to achieve their objectives, and it is not uncommon for there to be differences in their data.
In this increasingly complex system after World War II, people have seen many interesting changes in the rankings in the post-pandemic era.
II. Loss and Soaring, Observing the World in a Chaotic Era
- India's Breakthrough
On September 2, 2022, Bloomberg announced based on IMF statistics that India's nominal GDP surpassed that of its former colonial ruler, the UK, since the fourth quarter of 2021, making it the world's fifth-largest economy.
The IMF ranking is relatively strict for developing countries among the three major rankings. Compared to the PPP method, which has more room for adjustment and is highly accepted in India, the international recognition of nominal GDP data under the exchange rate method is much higher.
Therefore, this change in ranking has not only attracted global attention but also sparked strong national pride in India, providing timely evidence for Prime Minister Modi's Independence Day vision of "building India into a developed country in the next 25 years."
First of all, it must be acknowledged that India's economic growth since 2020 has been very impressive. Especially in the context of fixed asset investment and exports being impacted in major economies in the Asia-Pacific region, and the global shift towards economic stimulus policies, India's economic surge cannot simply be attributed to Modi's reform measures. Its achievements in the export sector are remarkable:
In 2022, India's merchandise exports reached $460 billion, breaking free from the long-term stagnation of the 2010s; service exports reached $310 billion, approaching the volume of China, the world's largest exporter.
India's large-scale infrastructure construction, which has not yet begun, and the consumption potential contained in its rapidly growing young population, have not been fully unleashed.
Therefore, the view that India's economic future is bright and has great potential is indeed supported by a realistic foundation. However, India's current path of economic development is not a mainstream one, especially for a large country with a high proportion of young population, it is a rather risky path.
Contrary to common perception, India is not an agrarian country but a service-based economy, with the service sector contributing more than half of its GDP. In areas such as digital marketing, web development, SaaS products, and service outsourcing targeting the international market, India has attracted young educated populations at different levels, contributing to its miracles in the field of service exports.
However, the development of India's industry has not made much progress, with the industrial value-added accounting for only 25% of GDP in 2022, which is comparable to the level in 1978.
With its huge and highly youthful population, India will face two dangerous red lines in the future: the first is the threshold at which the cost of labor in mainstream industrial sectors is completely suppressed by the production costs of dark factories; the second is the threshold at which the cost of deploying and maintaining artificial intelligence in general development and service sectors completely crushes labor costs.
The former will delay or even disrupt the process of industrial relocation, while the latter will seriously worsen the living environment of India's educated population. The intersection of these two lines is a battleground.
India is aware of the risks hidden in its economic structure: the Modi government has launched two phases of the "Make in India" initiative. The key development areas of "Make in India 2.0" include advanced chemical batteries, electromechanical products, automobiles, pharmaceuticals, telecommunications networks, textile products and technologies, food manufacturing, solar technology, white goods, and specialty steel. The space between the two red lines is shrinking, and how India will accumulate sufficient production capacity in the above industrial categories before the intersection of the red lines may bring astonishing or alarming news.
- The German-Japanese Chess Game
In 2023, according to the economic forecast data released by the IMF, Germany is expected to surpass Japan in nominal GDP, and there will be a swap in the third and fourth positions in the world GDP rankings. The nominal GDP data for the first half of 2023 released by the German Federal Statistical Office and the Japanese Cabinet Office support this prediction.
Apart from the mysterious connection between virtue and fortune, this change also serves as an interesting example to help people understand the comparison of GDP between countries.
First, the rapid narrowing of the GDP gap between Germany and Japan cannot ignore the instability of the yen exchange rate and the contribution of German inflation.
In the so-called "lost decades" of Japan, the yen gradually became a safe-haven currency with good liquidity and extremely low interest rate volatility. The ultra-loose monetary policy left by Prime Minister Abe gave Japan hope of escaping deflation. Therefore, this policy was not adjusted when facing the strong US dollar in 2022.
It can be almost said that, measured in US dollars, Japan's GDP declined by 16% in 2022; but measured in yen, Japan's GDP remained almost unchanged.
On the other hand, Germany has experienced the highest level of inflation since the European currency crisis in 1992 after the pandemic and the Russia-Ukraine conflict. The difference between its real GDP and nominal GDP is no less than 6%.
Therefore, this exchange of positions between Germany and Japan, from the perspective of the actual life experience of the people in both countries, is a country that finally sees a glimmer of recovery being surpassed by a country that is bleeding internally due to a conflict thousands of miles away.
Setting aside these controversial aspects, this overtaking is likely to actually happen within the next three to five years.
Unlike Japan's long-term stagnation, Germany's industrial capacity, market, and its connection to the economic hinterland of East and West Europe through internal rivers have enabled Germany to maintain an annual real GDP growth rate of around 2% even after the Russia-Ukraine conflict. The adverse effects of energy supply on the economy will gradually be mitigated within two to three years as energy channels are adjusted.
However, Japan will be trapped in long-term insufficient domestic demand and dependence on exports, which is already defined by its population structure. Moreover, the existence of Japan's government debt pressure provides absolute motivation to continue maintaining loose monetary policy. Therefore, it is almost impossible for the yen to return to the exchange rate before the major depreciation.
In this chaotic era, the fundamental difference between Germany and Japan, namely the difference in sovereignty integrity, must also be taken into account. After all, when the world needs countries to make sacrifices, it is always those countries with weaker control over their own destiny that pay a higher price.
As for how this price is reflected in the international GDP rankings, it may be enough to reiterate one of the IMF's objectives: maintaining international financial order.
III. People Can Have a Fresh Perspective
In the past decade, people have experienced too much firsthand. Whether they want to witness history or not, everyone has witnessed it.
Hot conflicts are the most intense manifestation of changes in the international order. Before the fierce fire, the old order has quietly cracked. As one of the products of the old order, the international GDP rankings will further decline in effectiveness, even from a mathematical perspective, as they become more frequent. People have to consider more.
For example: industrial electricity consumption indicating industrial capacity, the ability of consumer markets behind employment rates, trade balance ability shown by railway and port freight volume, and the reflection of investment conditions by medium and long-term credit.
Even one day, attention may need to be paid to the number of young male populations and the production and reserve of food.
These grand backgrounds of the era will affect our real lives at a speed beyond expectations!
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