Economics textbooks tell us that what really matters is relative prices, not the absolute price of a good or service. A recent trip to China provided a number of interesting examples.
In a shopping mall in Xian my wife and I encountered a food court that was a foodies paradise, with more than 50 varieties of (mostly) Asian cuisine. It wasn’t just Korean food, there were specific varieties such as “North Korean restaurants” (insert joke here.) We chose a delicious seafood meal at a Yunnan restaurant:
A price of 30 yuan is roughly $4.20 in US dollars. The same meal would cost at least $20 in California (especially if you factor in tax and tip), and would not be nearly as tasty. At the same food court, my wife saw this help wanted ad:
The first three lines are monthly salaries for restaurant workers at various skill levels, and the last one is the hourly wage for part-timers. (One yuan is about 14 cents.) Part-timers only earn about $2.50/hour in US dollar terms, but they can buy a nice lunch with about 1 1/2 hours of labor. (The meat dishes were cheaper.)
My wife and I each paid $4.20 for a haircut in Beijing, and it was higher quality than the $20 cut I get in California. You expect haircuts to be roughly equally affordable in each country, as the main cost is labor, and the technology for cutting hair is essentially the same in both places. There’s also a roughly 5-1 difference in ride share prices, although in this case Uber is higher quality that China’s Didi. Even so, the huge price advantage makes Didi far cheaper.
You’d expect China to lag behind the US in areas where there’s a great need for physical or human capital, or where that capital is employed less efficiently. That makes it a bit of a puzzle as to why China is so poor. It’s per capita GDP is $12,500, vs. $80,400 in the US. Even in PPP terms it’s only about $23,300 (according to the IMF). And yet China seems to have lots of capital:
1. It’s subways, intercity rail and airports seem far superior to those in the US. And yet subway rides are only 28 cents, or roughly 56 cents for long rides. A new York City subway costs $2.90, and seems like the Black Hole of Calcutta compared to the clean, safe, and efficient Chinese systems. The roads are also in great shape, and they’ve built a vast expressway system.
2. China has an enormous capital stock in manufacturing, and produces lots of electric cars. I was told a BYD electric car costs about $14,000—it would probably cost twice that in America (if we allowed it to be sold here.)
3. China has built such a large housing stock that many pundits claim that China has too much housing. But in Beijing we saw an ad for a mediocre apartment of 1100 sq. feet that cost $2.2 million in US dollar terms. Given the low Chinese wages, how are those housing prices reflective of too much housing? More likely, the real problem is misallocation—too much housing in second and third tier cities, and not enough in the places where the Chinese most want to live (the biggest cities in the east.)
In America, we measure housing prices in terms of “rental equivalent”. Here China looks better, as the monthly rents are nowhere near as astronomical as the price of buying a property. Perhaps the very high price/rent ratios reflect a lack of good alternative investments for Chinese citizens?
Even after spending a few weeks traveling around China, it remains a bit of a mystery to me. Not everything is cheap, even in the service sector. Places like Starbucks charge US prices. An ice cream cone might be 28 cents, and a few steps down the road it might be $2, even for roughly the same quality. There seems to be a sizable subset of urban Chinese with western style incomes and lifestyles, and a service sector that provides them with expensive goods. But working class Chinese can live very cheaply.
I didn’t see any homeless people in China, which might reflect several factors:
1. Lower income people in China are willing to live in very spartan and tightly packed conditions. There might be 8 migrant workers in bunks in a single room. The poor in China don’t seem to worry as much about the poor people they live with being involved with alcohol, drugs, or crime. That makes high density living easier. A lot of California’s homelessness would go away if minimum wage workers could live together peacefully in college dorm level density. A full time worker at a California McDonalds makes about $40,000. Four of those workers would make $160,000/year.
2. Even so, you would still expect at least some homeless people living on the streets of cities as big as Beijing. Perhaps the government doesn’t allow camping on the sidewalk, and removes the homeless to an out of sight location.
When you travel around Latin America, it feels like you are visiting a bunch of middle income countries. China’s per capita GDP (PPP) is a bit below Mexico, but the country feels much different. You see lots of things that make you wonder, “Why isn’t this a high income country?” If they can build so much fantastic infrastructure so quickly, what’s stopping them from becoming high income? Again, it may partly reflect misallocation of capital, especially from the large state-owned sector.
In almost every hotel we visited, the room service was delivered by robots (which is a really weird thing to see). But you go outside and you see lots of zero marginal product workers aimlessly sweeping dust along in the street gutter. Why? (In Chile, I saw no robots and no ZMP workers.)
China seems like the classic glass half full/half empty situation. Compared to the China of Mao Zedong, the glass is half full. Compared to where China should be based on their talent for building great infrastructure quickly, the glass seems half empty. More economic reforms?
PS. To channel John Lennon, imagine there are no countries. Chinese firms would build fantastic subway systems for places like NYC, very cheaply and very quickly. We could pay for them by supply Chinese firms with all sorts of high tech goodies that we currently embargo. Politics makes the world a poorer place.
READER COMMENTS
Econreader
Nov 10 2023 at 10:39am
Scott,
The sticker shock is probably in things that are in the tradable sphere, since Chinas nominal is much lower than PPP and exchange might be undervalued. China probably has to have low prices on internal services and labor to offset relatively high import prices.
The internal flucutation on prices is interesting though, with respect to you observation on ice cream. Its like the bay area and housing, where people with a stable housing situation have ridiculous consumption, and those without focus on cheap alternatives.
Question since you seem to have decent familarity with China. Why is the savings rate so high? I know some of its cultural, but are there gov policies that incentivize this?
Scott Sumner
Nov 10 2023 at 12:06pm
Keep in mind that imports are not a part of GDP, so they don’t impact estimates of the GDP in PPP terms.
Not sure why saving rates are high, but they are also high in some other East Asian countries (and to a lesser extent in northern Europe.) Some point to a weak safety net–small pensions. Could be partly cultural—I suspect Asian Americans also save more.
Trina Halppe
Nov 12 2023 at 2:22am
Whatchutakinbout Willis?
The tradeable sector is less likely to create sticker shock for the foreign visitor. To focus on relative prices means there isn’t much sticker shock. That is, it takes 1.5 hours for the part-time food court worker in China to earn a food court meal and maybe it takes approximately 1.5 hours for the part-timer to do the same in the U.S..
Lizard Man
Nov 10 2023 at 11:07am
I have read that owning a condo can provide a pathway to obtaining a residence permit for a city, but I don’t know if that is true for the tier I cities. Even so, the price to rent ratio seems extreme in lots of cities in China.
Todd Ramsey
Nov 10 2023 at 11:13am
Do you think the near-zero number of homeless I have observed in large Chinese cities is because they a) enforce vagrancy laws, and b) institutionalize the mentally ill?
Do you think the street sweepers are because of a full-employment emphasis for municipal government budgets? (I do appreciate and am impressed by the cleanliness of those cities, though).
I can’t tell if you are joking about China building the subways. Don’t you think our problem is the huge number of veto points we allow in the permitting process?
Scott Sumner
Nov 10 2023 at 12:11pm
Not sure about the homeless, but that wouldn’t surprise me. They want their cities to look orderly.
Yes, it might be a jobs programs, but I didn’t find China to be all that clean, at least compared to Japan.
Dead serious about NYC having China build them a gleaming brand new subway system—a huge win—win for both countries. Of course politics make it impossible–politics is why the world can’t have nice things. If not for politics, places like Switzerland would be the norm.
Matthias
Nov 10 2023 at 6:04pm
Our train system here in Singapore is partially built by the Chinese: the bidding is open to companies from all over the globe, and Chinese companies win some of the tenders.
Much of the construction labour is supplied by men (women are very rare in construction) from India, Bangladesh and the surrounding countries.
Scott Sumner
Nov 11 2023 at 12:43pm
That’s why Singapore has nice things.
John S
Nov 10 2023 at 2:01pm
How is the air pollution there (compared to California)?
Scott Sumner
Nov 11 2023 at 12:43pm
Air is improving, but still worse than here.
steve
Nov 10 2023 at 2:06pm
Daughter lives in Shanghai and reports prices are a bit higher than you are reporting. When they travel outside of Shanghai they do see the lower prices. Also, she reports that “American food” is almost universally fairly expensive. The thing that maybe surprised her the most was the importance of fresh greens/vegetables and how they are always available and high quality.
Cohen posted some good stuff on building subways and tunnels. A big key to lower prices was having teams that regularly did the work. In the EU those teams travel so the team that builds a subway n Paris goes to Spain. In the US the emphasis is on hiring local and since any given city only builds a large scale project every 10 years or so you get firms with workers who have never worked on a big project. Then throw in the NIMBYs and it gets worse. SO I think Scott is correct that a Chinese team could do it cheaper but the NIMBY factor plus having to appease every political group means you wouldn’t save as much as hoped.
Steve
Scott Sumner
Nov 11 2023 at 12:49pm
“Daughter lives in Shanghai and reports prices are a bit higher than you are reporting”
To be clear, you can pay $100 for a haircut in Beijing, I was giving the price of a budget haircut, which is $20 in California and $4.20 in Beijing. You can spend $200 for a dinner in Beijing.
I doubt Shanghai is much different from Beijing, although I agree it’s more expensive than most Chinese cities.
“I think Scott is correct that a Chinese team could do it cheaper but the NIMBY factor plus having to appease every political group means you wouldn’t save as much as hoped.”
I was suggesting we give them carte blanche. Eliminate laws requiring environmental impact statements, etc.
Jose Pablo
Nov 10 2023 at 6:10pm
imagine there are no countries. (…) Politics makes the world a poorer place.
Wouldn’t be the right conclusion “Countries make the world a poorer place”?
Scott Sumner
Nov 11 2023 at 12:50pm
Countries with the wrong politics.
Jim Glass
Nov 12 2023 at 8:57pm
For most of all human history, up to surprisingly recently, there were no countries. Was the world a richer place?
Matthias
Nov 10 2023 at 6:11pm
Compare: in Germany, thanks to occupational licensing you need to have gone through a few years of government approved vocational training before you are allowed to cut hair. And if you want to run your own hair dressing business, you need another year or so after government approved training. You are only allowed to start the second round of training after a few years of experience on the job.
In addition there are pretty high taxes on labour and mandatory insurances, so that there’s a wide gap between the cost of labour and what the individual hair dresser gets per hour.
Scott Sumner
Nov 11 2023 at 12:51pm
Fair point.
Philo
Nov 11 2023 at 12:02am
“Politics[–domestic as well as international–] makes the world a poorer place [than it could be].” But maybe the world should count its blessings: things could be so much worse!
David S
Nov 11 2023 at 2:42pm
Still somewhat on topic when it comes to relative prices—I once overheard a conversation between two hairdressers who were on their smoke break outside a swanky Newbury Street salon:
Hairdresser #1: “I can’t believe she only tipped $20.”
Hairdresser #2: “I know, it was a $350 service. It should have been at least $50.”
This was around 2003, incidentally. Granted, I should refer to them as “Stylists” not hairdressers.
TGGP
Nov 11 2023 at 11:30pm
Razib Khan’s most recent (gated) interview for Unsupervised Learning is with Carl Zha, a Chinese expat currently living in Bali. They discussed the Chinese real-estate market, where he noted that the high prices reflect the high savings rate and lack of other avenues for investment.
Trina Halppe
Nov 12 2023 at 2:09am
If China reduces the state-owned sector, then in purchasing power terms it’s interesting to imagine the obstacles and as you suggest it’s not obvious. Just wait for some more of the low-skilled old people to die and the average income will rise. Old people dying probably also reduces the average rate of corruption.
There seem to be 2 kinds of high income countries. There’s the U.S.. There’s also the “second” class that is Western Europe, Japan, S. Korea, Taiwan, Canada, Australia, etcetera. U.S. per capita GDP is higher than the second class and if much of it can be attributed to the fact that the U.S. has a larger economy then the fact that such an obstacle doesn’t exist for China would suggest a really interesting outcome. People will of course say that the U.S. has more than a size advantage over the second class but also one in innovation. However, they are probably related. The larger economy means there are more early adopters and innovators and as most of them fail, one emerges to be the apparent “first” mover with the first mover advantage. And the first mover advantage is bigger in the bigger economy.
Lizard Man
Nov 12 2023 at 12:21pm
I think Switzerland and Singapore have higher GDP per capita than the US, suggesting that policy plays a role in explaining why other developed countries are less productive, not just size.
Trina Halppe
Nov 12 2023 at 2:32pm
Maybe some sort of small country exception applies to Switzerland and Singapore,. What if your policy or happenstance led to specialization in industry X but the world’s demand for X is only large enough for a a few small countries to do this. Switzerland used to be a specialist in banking secrecy so maybe it’s an anomaly for a historical reason.
Scott Sumner
Nov 12 2023 at 5:46pm
I think it’s more than a few small countries that are the exception. To Switzerland, add Austria, Benelux, and the Nordic countries as being relatively prosperous, compared to European countries with large populations.
I’m not saying the US size is not a factor, just that the issue seems to be quite complex.
MarkW
Nov 12 2023 at 12:43pm
Chinese firms would build fantastic subway systems for places like NYC, very cheaply and very quickly.
In the US. subway construction and operations are patronage jobs programs for politically connected firms and unions (including lots of high-priced consultants) as much as they are transportation systems. If the cronyism problem could be solved, we wouldn’t need the Chinese to vastly lower the costs.
Scott Sumner
Nov 12 2023 at 5:55pm
Even if those problems were solved, the Chinese could still build them far cheaper.
Warren Platts
Nov 15 2023 at 12:49pm
“Chinese could still build them far cheaper.”
That’s hard to believe if the Chinese firms had to pay American-level wages (which in a place like New York City can be on the order of $50/hour for heavy construction work). That’s the fundamental difference between China’s and USA’s economies: in USA it’s consumer driven, whereas in China it’s investment driven. The latter is why they can always hit their GDP targets: just build infrastructure & borrow the money as needed, but also why their workers are relatively poor for the most part.
Meantime in the United States, we must be wary of statements like “the Chinese can do it cheaper” which is basically code for wages are too high. A consumer driven economy depends on high wages and relatively low income inequality because people with no money in their pockets cannot consume very much & the superrich do not consume all their income.
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