The tail and the dog

PURCHASINGB2B MAGAZINE, JANUARY/FEBRUARY 2011:
When I look at the economic recovery in North America, one word comes to mind: fragile.
Employment has improved a great deal in Canada, no question. But in the US, the “official” unemployment rate still exceeds nine percent.
It’s actually far worse than that. In the past 12 months, about two percent of the working-age population has left the labour force. That is, they’ve given up even looking for work.
If they were still in the game, unemployment would be 11.5 percent, a rate you associate with poor European countries, not the leader of the free world. Things are more different now than they’ve been in my lifetime.
Nothing symbolizes the changes that have occurred more than the recently voiced concern that monetary policy in developing countries like China and India threatens the economic recovery in developed countries like the US and Canada.
China has been raising reserve requirements for its banks, meaning there is less money for them to lend.
India’s Central Bank—the equivalent of our Bank of Canada—raised interest rates six times in 2010 and as I write this their bank rate stands at 6.25 percent. Ours is 1.25 percent. The fear is that the actions that China and India are taking to curb inflationary pressures could stunt our economic growth.
Isn’t this the tail wagging the dog? Official reports suggest that the US economy is about three times the size of the Chinese economy. And even though India has 30 times the number of people we do, our GDPs are about the same.
When you put it all together, this year the combined economies of the US and Canada will still be more than twice the size of India’s and China’s. So how can it be that our prosperity is seemingly much more dependent on what they do, than their prosperity is dependent on what we do?
There just has to be something wrong with this picture…and I think I know what it is. It has everything to do with how GDP is measured. What economists do is tally up the final price of all goods and services produced in a country in a given year.
If, for example, you get a $30 haircut and I get a $10 haircut, your haircut contributes three times to as much to GDP…even though you would think that a haircut is a haircut!
And it’s a flawed way of understanding the world. Let’s look at global motor vehicle production. In 2009 (the last year for complete numbers), production in China and India exceeded North American production by a factor of two to one!
A statistic like that goes a long way to explaining why China and India should be understood as the dog in the global economy and North America increasingly as the tail.
Toronto-based Michael Hlinka provides daily business commentary to CBC Radio One and a column syndicated across the CBC network.