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Sep 9th 2011, 15:14 by The Economist online
By 2030 China's economy could loom as
large as America's in the 1970s
A NEW book, discussed in this
week's Economics focus, by Arvind Subramanian of the Peterson
Institute for International Economics argues that China’s economic might will
overshadow America’s sooner than people think. Mr Subramanian combines each
country’s share of world GDP, trade and foreign investment into an index of
economic “dominance”. By 2030 China’s share of global economic power will match
America’s in the 1970s and Britain’s a century before. Three forces will
dictate China’s rise, Mr Subramanian argues: demography, convergence and “gravity”.
Since China has over four times America’s population, it only has to produce a
quarter of America’s output per head to exceed America’s total output. Indeed,
Mr Subramanian thinks China is already the world’s biggest economy, when due
account is taken of the low prices charged for many local Chinese goods and
services outside its cities. China will be equally dominant in trade,
accounting for twice America’s share of imports and exports. That projection
relies on the “gravity” model of trade, which assumes that commerce between
countries depends on their economic weight and the distance between them.
Economics focus
The celestial economy
By 2030 China’s
economy could loom as large as Britain’s in the 1870s or America’s in the 1970s
Sep 10th 2011 | from the print edition
Economic Dominance: Top Three
countries by economic dominance
%
share of global economic power (weighted by world GDG, trade and net
capitals)
|
|||
1870
|
1973
|
2010
|
2030
|
UK:
16,4
|
USA:
18,6
|
USA:
13,3
|
China:
18,0
|
Germany:
9,3
|
Japan:
8,0
|
China:
12,3
|
USA:
10,1
|
France:
8,3
|
Germany:
8,0
|
Japan:
6,9
|
India:
6,3
|
Source: Arvind Subramanian, Eclipse: Living in the
Shadow of China’s Economic Dominance, Peterson Institute for International
Economics
|
IT IS perhaps a measure of America’s
resilience as an economic power that its demise is so often foretold. In 1956
the Russians politely informed Westerners that “history is on our side. We will
bury you.” In the 1980s history seemed to side instead with Japan. Now it
appears to be taking China’s part
These prophesies are “self-denying”,
according to Larry Summers, a former economic adviser to President Barack
Obama. They fail to come to pass partly because America buys into them, then
rouses itself to defy them. “As long as we’re worried about the future, the
future will be better,” he said, shortly before leaving the White House. His
speech is quoted in “Eclipse”, a new book by Arvind Subramanian of the Peterson
Institute for International Economics. Mr Subramanian argues that China’s
economic might will overshadow America’s sooner than people think. He denies
that his prophecy is self-denying. Even if America heeds its warning, there is
precious little it can do about it.
Three forces will dictate China’s rise,
Mr Subramanian argues: demography, convergence and “gravity”. Since China has
over four times America’s population, it only has to produce a quarter of
America’s output per head to exceed America’s total output. Indeed, Mr
Subramanian thinks China is already the world’s biggest economy, when due account
is taken of the low prices charged for many local Chinese goods and services
outside its cities. Big though it is, China’s economy is also somewhat
“backward”. That gives it plenty of scope to enjoy catch-up growth, unlike
Japan’s economy, which was still far smaller than America’s when it reached the
technological frontier.
Buoyed by these two forces, China will
account for over 23% of world GDP by 2030, measured at PPP, Mr Subramanian
calculates. America will account for less than 12%. China will be equally
dominant in trade, accounting for twice America’s share of imports and exports.
That projection relies on the “gravity” model of trade, which assumes that
commerce between countries depends on their economic weight and the distance
between them. China’s trade will outpace America’s both because its own economy
will expand faster and also because its neighbours will grow faster than those
in America’s backyard.
Mr Subramanian combines each country’s
share of world GDP, trade and foreign investment into an index of economic
“dominance”. By 2030 China’s share of global economic power will match
America’s in the 1970s and Britain’s a century before (see chart). Those
prudent American strategists preparing their countrymen for a “multipolar”
world are wrong. The global economy will remain unipolar, dominated by a “G1”,
Mr Subramanian argues. It’s just that the one will be China not America.
Mr Subramanian’s conclusion is
controversial. The assumptions, however, are conservative. He does not rule out
a “major financial crisis”. He projects that China’s per-person income will
grow by 5.5% a year over the next two decades, 3.3 percentage points slower
than it grew over the past two decades or so. You might almost say that Mr
Subramanian is a “China bear”. He lists several countries (Japan, Hong Kong,
Germany, Spain, Taiwan, Greece, South Korea) that reached a comparable stage of
development—a living standard equivalent to 25% of America’s at the time—and
then grew faster than 5.5% per head over the subsequent 20 years. He could find
only one, Nicolae Ceausescu’s Romania, which reached that threshold and then
suffered a worse slowdown than the one he envisages for China.
He is overly sanguine only on the
problems posed by China’s ageing population. In the next few years, the ratio
of Chinese workers to dependants will stop rising and start falling. He
dismisses this demographic turnaround in a footnote, arguing that it will not
weigh heavily on China’s growth until after 2030.
Both China and America could surprise
people, of course. If China’s political regime implodes, “all bets will be
off”, Mr Subramanian admits. Indonesia’s economy, by way of comparison, took
over four years to right itself after the financial crisis that ended President
Suharto’s 32-year reign. But even that upheaval only interrupted Indonesia’s
progress without halting it. America might also rediscover the vim of the 1990s
boom, growing by 2.7% per head, rather than the 1.7% Mr Subramanian otherwise
assumes. But even that stirring comeback would not stop it falling behind a
Chinese economy growing at twice that pace. So Americans are wrong to think
their “pre-eminence is America’s to lose”.
Bratty or benign?
If China does usurp America, what kind
of hegemon will it be? Some argue that it will be a “premature” superpower.
Because it will be big before it is rich, it will dwell on its domestic needs
to the neglect of its global duties. If so, the world may resemble the headless
global economy of the inter-war years, when Britain was unable, and America
unwilling, to lead. But Mr Subramanian prefers to describe China as a
precocious superpower. It will not be among the richest economies, but it will
not be poor either. Its standard of living will be about half America’s in
2030, and a little higher than the European Union’s today.
With luck China will combine its
precocity in economic development with a plodding conservatism in economic
diplomacy. It should remain committed to preserving an open world economy.
Indeed, its commitment may run deeper than America’s, because its ratio of
trade to GDP is far higher.
China’s dominance will also have limits,
as Mr Subramanian points out. Unlike America in the 1940s, it will not inherit
a blank institutional slate, wiped clean by war. The economic order will not
yield easily to bold new designs, and China is unlikely to offer any. Why use
its dominant position to undermine the very system that helped secure that
position in the first place? In a white paper published this week, China’s
State Council insisted that “China does not seek regional hegemony or a sphere
of influence.” Whether it is precocious or premature, China is still a
tentative superpower. As long as it remains worried about the future, its
rivals need not worry too much.
from the print edition | Finance and
economics
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