Economics, U.S. Economy

Exaggerating China’s economic power

 

Is America still the planet’s dominant economy? Most Americans don’t think so. A bit more than half, according to Gallup, think China is numero uno. Younger Americans, especially, have their doubts about Team USA. Of those age 18-29, 62 percent think China has taken the lead. And looking ahead, 46 percent of Americans think China will be the world’s leading economic power in 20 years vs. 38 percent picking the home team. But as this great compilation of economic data, via the Heritage Foundation, shows, China still lags the United States in some key categories:

I guess the stat that jumps out at me is per capita GDP. The United States is still either 12 or 6 times as wealthy as China, depending on which measure you use. Now, one is tempted to extrapolate China’s current growth rates into the future. But there is evidence that fast-growing emerging economies hit a wall and slow down dramatically:

Using international data starting in 1957, we construct a sample of cases where fast-growing economies slow down. The evidence suggests that rapidly growing economies slow down significantly, in the sense that the growth rate downshifts by at least 2 percentage points, when their per capita incomes reach around $17,000 US in year-2005 constant international prices, a level that China should achieve by or soon after 2015. Among our more provocative findings is that growth slowdowns are more likely in countries that maintain undervalued real exchange rates. …

Growth slowdowns, in a nutshell, are productivity growth slowdowns. 85 per cent of the slowdown in the rate of growth of output is explained by the slowdown in the rate of TFP growth. The intuition for this is straightforward. Slowdowns coincide with the point in the growth process where it is no longer possible to boost productivity by shifting additional workers from agriculture to industry and where the gains from importing foreign technology diminish. But the sharpness and extent of the fall in TFP growth from unusually high levels of 3-plus per cent to virtually zero is striking.

Will China avoid that trap? As the study indicates, the answer will depend on China’s ability to boost productivity through innovation. And for that to happen, China may have to loosen the reigns on its state capitalist model and be willing to expose its economy to greater foreign competition. Here is Ian Bremmer on China’s state capitalist model:

State capitalism has crucial weaknesses. First, the primary purpose of this system is not to produce wealth but to ensure that wealth creation does not threaten the ruling elite’s political power. Forced to choose between public prosperity and their own security, state capitalists will tighten their grip every time. …

Second, there is “creative destruction”, a process that invests liberal capitalism with a self-regenerating dynamism. As industries die, the workers, resources and ideas that once sustained them are freed to recombine in new forms that then produce new goods and services that meet the evolving wants and needs of consumers. … Those who administer state capitalism fear creative destruction—for the same reason they fear all other forms of destruction that they cannot control. …

Nor is a state-capitalist system well equipped to inspire innovation. To compete globally, Chinese leaders know they must continue to push their economy up the value chain with development of new-generation information, energy, bioscience and bioengineering technologies. Government-directed investment can play an important role, but over the longer term, state officials cannot value assets and allocate resources as efficiently as market forces can. …

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