China's Defense Budget Getting Fatter on the Big Mac Index

“Show me the money” is the mantra of those analyzing Chinese defense budgets, searching for every defense dollar hidden behind state-owned defense enterprises and construction projects. But perhaps what they should be asking is, “where’s the beef?”. Every traveler knows that money is only as good as what it can buy. What you find on the dollar menu on one side of the border may cost $2.05 on the other. A lack of this purchasing-power-parity perspective is a major flaw in standard comparisons of annual defense spending. Analysis of the U.S. and Chinese defense budgets should not concentrate on dollar-vs-dollar, but rather the meat of what those budgets can buy.

For a quick non-scientific assessment of defense budgets weighted by purchasing-power, we look to the Big Mac Index (BMI, no pun intended). In 1986, the Economist developed the BMI as a humorous way of gauging the accuracy of currency valuations world-wide. What started out as educational humor became a serious academic endeavor. The BMI is so effective that the infamous currency manipulating government of Argentina’s Cristina Fernández de Kirchner has passed laws regulating the sale and marketing of the Big Mac. Although the Economist has produced a “gourmet” version controlling for local factors such as differences in labor costs, it is those local market defects that make the raw BMI appropriate for defense budget analysis – the analysis is not of currency on the exchange floor, but on the shop floor.

According to the Stockholm International Peace Research Institute, China's raw defense budget of $166 billion is a mere 24% of the American defense budget at $682 billion (including so-called OCO funds for the Iraq and Afghanistan wars). In order to gain the purchasing power perspective, we can compare the budgets using the respective countries’ Big Mac Index prices – $2.61 in China and $4.56 in the United States. Weighted with the BMI, China’s defense budget value is 42% of its American rival, the equivalent of $287 billion.

Depending on what source you use, the comparison worsens.

READ ENTIRE ARTICLE HERE: http://www.realcleardefense.com/articles/2013/08/16/chinas_defense_budget_getting_fatter_106778.html

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