The World Bank’s International Comparison Program recently released its report on countries’ purchasing power parities. Besides claiming that the size of mainland China’s economy might have overtaken that of the U.S. for the first time to become the world’s biggest, it said that Taiwan’s 2011 per capita gross domestic product, of US$39,059 in PPP terms, was higher than those of Japan and South Korea, at US$34,262 and US$29,035, respectively.
For financial professionals this is not news, but the layman was left scratching his head, wondering if the figures could be accurate, given that he did not share in this feeling of wealth. The correct attitude to take is to interpret these numbers objectively, rather than being negative or taking delight in the good news based on one’s political orientation.
In fact, Taiwan’s PPP per capita GDP also overtook that of such advanced countries as France, Italy and the U.K. many years ago. Moreover, Taiwan’s PPP lead over South Korea is something that has existed since the end of World War II, and nothing to celebrate.
The reason for Taiwan’s high PPP is that the figure is calculated based on a country’s nominal production value compared against domestic prices. PPP, which is calculated in U.S. dollars, can be used to evaluate domestic purchasing power, independent of differing price levels between countries and exchange rate considerations which distort nominal GDP. This is where price stability, on which Taiwan focuses so heavily, shows its long-term worth, allowing the nation’s adjusted purchasing power to leap ahead of many advanced countries.
However, various facets of this international comparison should be noted. It does not take into account the number of hours worked and wear and tear on the environment, a perspective from which Taiwan fares poorly. Taiwan’s high output comes at the cost of ranking near the top globally in annual hours worked per person, thus making its labor productivity below that of other advanced countries.
As a result, Taiwan’s people enjoy much less leisure time than in most advanced nations, which naturally impacts their life satisfaction. The country’s standards of environmental protection are also not as high as in these nations, which also impacts environmental quality. The PPP statistics have no way of incorporating these factors.
The ICP’s international comparisons are based on per capita averages, as though all production was distributed equally, but, in fact, wealth is distributed rather unequally. Given Taiwan’s higher PPP than Japan and South Korea, it could be argued that the measure overestimates purchasing power for most people.
As such, most experts would compare national income distributions, using Gini coefficients or comparisons of those in the top and bottom 10 percent, for example. It makes sense to make a direct comparison of PPPs only when two countries’ income distributions are similar. Although Taiwan’s income distribution has become more uneven in the past two decades, the trend has slowed down in the past few years. This remains a cause for concern, but it is not bad by international standards. Thus the PPP data still has reference value for Taiwan when making international comparisons.
The value of PPPs is also limited to comparisons of domestic spending. Taiwan people’s purchasing power within Taiwan is higher than South Koreans’ purchasing power within South Korea. If ROC citizens and South Koreans take their money and spend it abroad, the situation is completely different, because this is determined by nominal incomes and exchange rates, and Taiwan’s nominal per capita income is not high. Of course, the ideal situation is to earn a high income abroad and then spend it at home.
Despite the latest World Bank report, the nation should continue to pursue economic development to achieve the income level of the most advanced countries. At the same time, attention should be paid to income distribution, health, reasonable leisure time and maintenance of the natural environment. Otherwise higher per capita growth will not be reflected in public happiness. (SDH)
(This commentary first appeared in the Economic Daily News May 7, 2014.)
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