Mario Cavolo
Mario Cavolo

Author Mario Cavolo of China: The Big Lie?: The Truth of Trillions in a Culture of Cash explains in the China Economic Review why China and the Chinese are less poor than many expect. China has a cash economy, he argues, where trillions are hidden from the eye.

The China Economic Review:

What is the “big lie”?

The “big lie” is the misunderstanding that China is poor. The degree to which we think that we should follow and believe, and therefore forecast, on official statistics that we typically hear from governments and institutional analysis-type organizations. We hear the information about things like China’s annual per capita income is US$3400 per year, and the Gini coefficient is double what the Gini coefficient of the United States is. Fortunately, a deeper look shows that that simply isn’t the case.

Your book discusses the emergence of this shadow cash culture that you’ve estimated at US$6 to US$10 trillion. Could you explain how and why this culture has developed?

I want to first point out the idea that in fact it hasn’t emerged as something new. And that’s a big part of the misunderstanding. China for the last couple of decades, if you talk to any Chinese person or businesspeople, has very much been a cash culture. And so much of that cash culture is in fact off the books by its very nature. We can talk about the negatives of course. For example, when you have such a large cash culture, it makes all kinds of corruption a lot easier. But the positives are that it is a huge economic force that no one is including when they’re doing their analysis and forecasting and estimates of what GDP is in this society.

So with your estimate of US$6 trillion you’re not looking to put a precise figure on this cash economy –  it’s more that you want people to understand just the enormity of what’s going on, and you’re trying to give a figure  that is in some way acceptable to the public?

That’s right. And we do have some references to work with on that. We have the reference from Professor Wang Xiaoli with the China Reform Foundation, who in 2010 worked with Credit Suisse. Now, Credit Suisse, working with Professor Wang, produced the first official report on China’s shadow economy. The reference on that also would be Dr. Edward Feige from the University of Wisconsin, who’s the world’s most famous researcher on shadow economies, and who talks about how in the United States the shadow economy is US$2 trillion. And we’re not talking about the black economy, or illegal things. The gray economy is the shadow economy of workers who are working off the books, and this money is not being reported to Uncle Sam. So we’ve got US$2 trillion in the US, and that’s relative to GDP of US$16 trillion. In China, let’s just call it US$10 trillion of GDP. And even Credit Suisse at that time estimated the lower range of what I’ve said, which is US$6 trillion, as being the size of China’s shadow economy.

More in the China Economic Review.

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