Living standards not a numbers game

For all practical purposes, per capita GDP, adjusted for PPP, is a better measure of individual well-being. It makes more sense when we compare living standards of people in different countries.

Before China launched reforms and opening-up, the living standards in the country were only 2 percent of those in the US. Today, the comparable figure is 20-25 percent. Despite China's unprecedented economic catch-up, living standards in the US remain four to five times higher than in China.

So why are PPP figures used to compare economies, even when not warranted? Often, reasons are political rather than economic. Misguided comparisons shift attention away from absolute and relative poverty in emerging economies. The World Bank measures international poverty by $1.25 (7.66 yuan) a day, which is not enough for a single day's meal in China, not to speak of housing and other expenditures.

Yet the current poverty rate for a family of three persons with one child in the US is about $19,800 - or 2.8 times the average (nominal) per capita GDP in China (and more than 13 times the comparable figure in India).

The practice may also be in self-interest. Climate change is typically defined in aggregate terms in the West. In this way, China and other emerging economies are often portrayed as the greatest polluters. And yet, on a per capita basis, people in advanced economies cause 4-5 times more pollution than their Chinese counterparts, not to speak of poorer emerging nations.

China is not yet the world's largest economy, but it will become one by the 2020s. With a population of more than 1.3 billion, that's only to be expected.

However, higher living standards will require higher productivity. In China, that means the completion of industrialization and the shift to a post-industrial economy. The same goes for the urbanization rate, which in China is close to 55 percent, whereas in advanced economies it is 80-90 percent.

China has begun the transition from cost-efficiencies to innovation but the catch-up will take time.

Ultimately, it's higher productivity that makes possible the living standards that really matter to people. That's what the "American dream" is all about. And the Chinese dream is no different.

The author is research director of International Business at India China and America Institute (USA) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).