China
real Time Report, Wall Street Journal, AUGUST 25,
2011, 8:05 PM HKT
In his new book,
“Eclipse: Living in the Shadow of China’s Economic Dominance,” scheduled to be
published in September, Peterson Institute for International Economics scholar
Arvind Subramanian starts with a nightmare scenario: It’s 2021 and the U.S. president
heads across own to the International Monetary Fund to sign a rescue loan
package negotiated by the IMF’s Chinese managing director. “The handover of
world dominance is complete,” Mr. Subramanian, a former IMF researcher, writes.
China is now the world’s leading economic power.
Parts of “Eclipse”
read like a wonky version of “Rising Sun,” Michael Crichton’s 1992 novel of
Japanese dominance over the U.S. when Tokyo was seen as speeding toward number
one. But Mr. Subramanian is a first-class economist who uses his book to
discuss provocatively U.S.-Chinese relations and the nature of economic power.
He was interviewed in Washington DC by the Wall Street Journal’s Bob Davis.
Below is an edited transcript
Do you
really think the U.S. eventually will have to turn, hat-in-hand to the IMF for
aid?
I wrote it that way
partly to shock and make people pay attention. But there is a real possibility
of the U.S. being in such a dire economic situation that it might have to turn
to the IMF.
How could it
happen? The combination of a credible rising power in China, with which we have
to cooperate and also be wary of. And broad economic weakness in the U.S.,
including slow growth, fiscal weakness, political paralysis and a middle class
with diminishing prospects.
The probability of
U.S. needing an IMF loan isn’t 80% but it’s not 2% or 5% either. It’s a 10% or
20% possibility.
By some
of the measures you use, China already is a larger economy than the U.S. But
haven’t you picked economic statistics that play to China’s advantage? For
example relying on purchasing power parity to measure GDP. (Purchasing power
parity, or PPP, is a statistical device that tries to take account of the
different prices of goods and services in different countries.)
PPP is an important
concept, but it has a small weight in my overall formula of economic power.
I believe that the
resources a country brings to the power table includes resources that are
internationally traded and resources that involve people. If the U.S. were to
fight against China and 100 Chinese soldiers faced 100 US soldiers, would you
say that because the 100 Chinese soldiers earn/20th of what an American soldier
earns that the value of a Chinese soldier is 1/20th the value of American? I
don’t think so. (PPP tries to account for such anomalies.)
You
also say that China will be a far larger economic power than the U.S. by 2020
or certainly 2030, even if China’s growth rate falls significantly or the U.S’s
rises significantly. Why is that?
The way economic
convergence between the U.S. and China is evolving, the fact that China will
catch up is inevitable. At end of 20 years, China will have a GDP per capita of
only 40-50% of the U.S. But China has four times the population of the U.S., so
the Chinese economy will be much larger overall. The arithmetic is undeniable.
China will have an
economic crisis over the next 20 years, no doubt. But it will recover and
return to some decent level of growth.
If China has a big
economic shock, it has the policy space [including the ability to broadly
stimulate the economy] to prevent one or two years of negative growth from
translating into many years of slow growth.
What’s
the significance of China as number one?
Potentially, China
has the ability to exercise its power in slightly unbenign ways. Look at what’s
happening today on exchange rate. [By keeping its currency undervalued] China
is pursuing a beggar–they- neighbor policy and nobody can stop them. That’s
sign of dominance.
The U.S. is totally
powerless to stop China because U.S. companies have so much at stake in China
that China can call the shots. Asia won’t do it because Asian economies are
part of a value-added chain with China. Africa won’t do it because China has
made so much investment there..
Imagine what
happens when the numbers [denoting the size of the economy] diverge even more
between China and the U.S.
Still,
China would be a relatively poor country compared to the U.S. How can a poor
country exercise power internationally?
Very poor countries
can’t dominate. There’s now no way to project power abroad because the problems
at home are so deep. But so-called middle income countries like China may be
different.
There are different
kinds of dominance. There is dominance of the U.S. – a leader that’s democratic
and pursues international values and which inspires followship. Maybe China
won’t have that. But it could exercise a negative form of dominance, either
through its exchange rate policy or by buying up commodities [to corner markets].
WSJ:
What’s the biggest threat to China’s rise to economic dominance?
A political shock
to system. Then all bets are off.
A political
transition [to a more democratic system] hasn’t occurred. It’s a cloud that
hangs over everything. There’s class divide, geographic divide, lack of
political freedom. If they wind up in conflagration, things could go really
bad.
In your
book, you talk about the importance of tethering China to a multilateral
system. Why should China be interested if it’s inevitably number one?
We need to bind
China today to the multilateral system so a kind of habit and incentive builds
up. Then repudiation of the system would be more difficult. We need to do this
before China becomes a hegemon
Everyone has to
come together to do this well. If every country tries to make its own deal with
China, no one will have any leverage.
Think about
exchange rates. If the world came together now and said let’s do a deal on
exchange rates, China would be more likely to participate. It doesn’t want to
be seen as deviant from international system. The opprobrium of the world is
the biggest carrot and stick to use with China.
One of
your main policy recommendations is to start a China round of trade
negotiations. What could that accomplish?
When China joined
World Trade Organization in 2001, people said we tied China to the global
economic system (because of the commitments it made to open its markets and
follow international rules). But through its exchange rate policy, China has
unraveled parts of its commitments. What that signifies is that Chinese leaders
at the time were overreaching in terms of domestic political support.
Evidently, WTO accession wasn’t politically sustainable internally.
Over time, China
will move away from mercantilism. They would then have an incentive to make a
deal. A deal could involve government procurement – other countries opening
their bidding for China—as well as commitments by China involving control of
natural resources and the exchange rate.
http://blogs.wsj.com/chinarealtime/2011/08/25/eight-questions-living-in-chinas-shadow/
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