In a post this morning (“Sorry, China, the US is still the world’s leading economic power“) Jimmy Pethokoukis reported on a story in today’s Financial Times titled “China poised to pass US as world’s leading economic power this year.” Here’s a key excerpt of the FT story:
The US is on the brink of losing its status as the world’s largest economy, and is likely to slip behind this year, sooner than widely anticipated, according to the world’s leading statistical agencies. The US has been the global leader since overtaking the UK in 1872. Most economists previously thought China would pull ahead in 2019.
Here are some of Jimmy’s comments about the FT story:
Some important context here: on a per person basis, PPP GDP is $51,000 in the US vs. $11,000 in China. Anyway you slice the data, China is still a much poorer nation than America. (More than 30 million Chinese, basically the population of Texas, live in caves.) And at market rates, the US economy is about twice as large as China’s. Also note that within two decades or so, China will have an older population than the United States. The Middle Kingdom has become old before it has become rich. In addition to demographic problems, China is still trying to transition to a sustainable, consumer-driven growth model. So the other team has its problems, too.
Now here is what the FT’s headline, “China poised to pass US as world’s leading economic power this year,” really gets wrong. The US remains the world’s leading economic power due to its technological innovation. Most global innovation surveys put the US at or near the top. For instance, the World Economic Forum ranks the US as the 7th most innovative economy, China the 32nd. Bloomberg puts the US at third, while China did not make the top 30. And which global economy is most critical to expanding the technological frontier, say, Sweden, Bloomberg’s #2 ranked economy with a population of 9.5 million and a $400 billion economy, or the #3 US with its 315 million people and $16 trillion economy. Pound for pound, no nation innovates like America. It’s our deep magic, and a competitive advantage we should be careful not to squander.
MP: The chart above adds some additional context to the FT’s claim that China will overtake the US this year as the world’s leading economic superpower. Displayed above is real GDP per capita in the US (in 2013 dollars), on an annual basis back to 1800, using historical data from Global Financial Data (subscription required). According to the International Monetary Fund, per capita GDP in China last year reached $6,747, which was a level of economic output per capita that was first reached in the US back in 1882, more than 130 years ago. Adjusting for purchasing power in China to make a more accurate comparison between output levels per capita in the US and China, the IMF data show that China’s per capita GDP (PPP) last year was $9,844, which was the level of economic output per person first reached in the US back in 1912, more than a century ago. Even if China’s per capita GDP continues to grow at say 7% for the next three years, it would still only reach the equivalent level of America’s output per capita in 1939. And even if China’s output per person grew at 7% for the next decade, it would still only be at a level the US reached in 1951.
Bottom Line: Yes, it’s true that China has made phenomenal economic gains over the last several decades to become the second largest economy in the world, and it’s true that China will probably surpass the US to become the world’s largest economy this year based on economic output. But adjusted on a per-capita basis, America’s output is still a full century ahead of China, and it could take many decades of economic growth in China before it even comes close to approaching the level of per-capita GDP that the US reached fifty years ago. Before breaking out the champagne and cigars for China’s status as the “world’s leading economic power,” let’s keep it all in perspective!