The debate over how Chinese military expenditures should be normalized to dollars

The American defense budget is still over 2.5 times larger than Beijing’s, but China has steadily been closing the gap. Moreover, China faces much lower costs than the United States, which means that the apparently sizeable spending gap between the two countries is significantly overstated. Controlling for purchasing power parity, Chinese defense outlays are actually twice as large as market exchange rates would suggest. In other words, while China spends much less than the United States, its money goes much further due to lower Chinese labor costs and cheaper intermediate goods. The result is that China gets more bang for its buck, both in terms of procurement and sustainment.

That was from a blog post, “How to Think About Chinese Military Power.” The author linked to my post about the use of adjusting Chinese spending using the purchasing power parity (PPP) rather than the usually cited market exchange rate (MER) which is preferred by the Stockholm International Peace Research Institute. Here is some additional discussion on that from the SinoDefenseForum. Many people agree with the theoretical use of the PPP, but one does not:

No offense, but you are an amateur quoting amateurs, including the last guy Lofgren who got a college degree in economics and now thinks he can refute the 22 PhDs who work at SIPRI along with their team of assistant researchers (https://www.sipri.org/about/staff) and who make it their life’s work to make military expenditure estimates… I’ll let the PhDs do the talking.

Here is one person responding to the attack:

Now you’re attacking the person, not the methodology and framework he outlined below… Yes, SIPRI may have 22 PhDs on the payroll. But as they publicly acknowledge, they simply didn’t try to estimate how much cheaper military personnel and equipment is in China. And we know this is much cheaper in China [even after converting for market exchange rates]…

 

CSIS (where a lot of interesting Navy think-tank work goes) only just started a new project to try and collect China’s military costs. That should result in military PPP exchange rates once they finish.

Yes, I’d like to hear a reasoned argument that refutes the PPP in favor the the MER, rather than an attack on my credentials. I don’t have a monopoly on truth. In fact, I could very well be wrong. If that were the case, I’d appreciate being set straight. But the justification by SIPRI’s handsome staff of PhDs for using the MER is not convincing.