June 11, 2007
Will China really overtake America?
I got lots of correspondence about my column last week – in which I suggested that the era of American global dominance is coming to a close. Some of it was rank abuse – accusing me of everything from “penis envy” to loathing of the United States.
But there was also a much more reasoned line of argument. This was essentially that I had been much too credulous about Goldman Sachs’s projection that the Chinese economy will be larger than that of the US by 2027. I got lots of e-mails making this point. Here is one (the author prefers to remain anonymous):
“You should go back and read the pieces in the 80’s on Japan overtaking US, before that there was a Brazilian miracle, and the 50s the Soviets were going to take over the world because THEY have figured out how to get things done."
Linear earnings projections did wonders for the internet stock valuations in the 1990s (you just had to extrapolate the same growth rate 10 years into the future), and it seems like political scientists are guilty of the same sin. All of a sudden structural issues in the Chinese society do not matter, (of course 15 years ago the orthodox view was that sustainable long-term economic growth was impossible without democracy and this was why China simply could not grow without an extensive political reform).
Chinese growth has been driven by additions of labour and capital. This is a one time event, and while it is a very lengthy event (worked for 20+ years in the USSR) you do run out of growth eventually. The US growth story has persisted for so long because it is a free and creative society and over the long term it can keep increasing its productivity.
China will absorb the remaining surplus labour in the next 2-3 years. There is no evidence that western capital actually earns a significant excess return in China and China massively subsidizes its domestic cost of capital. Chinese banks are arguably in a worse shape than the Japanese banks were in the 80s. The Chinese one child policy will make European demographic problems pale in comparison over the next 20-30 years. The country is facing massive environmental issues, it is no longer self sufficient in terms of food. Just think what paying global food prices will do to political stability in China… the list goes on and on….
Will China be a lot stronger and more powerful in 30 years - sure. Will China be the LARGEST economy in the world? No one really knows…
My bet is that when the Chinese economy comes to a screeching halt a couple of years from now the financial press will be writing thoughtful pieces explaining how everyone has gotten the growth story wrong and significant structural growth impediments that would limit Chinese growth for the next 20 years (of course that would be wrong too)”
So what is my response to this?
First – most of these points are powerful ones. Clearly there are big questions about Chinese political stability, about the fragility of the banking system, about the environment and so on. When I was in Beijing earlier this year, the Chinese authorities seemed to be genuinely fearful of social unrest, if they were unable to keep the economy growing at double-digit rates. Even they seemed far from confident that future growth and stability is guaranteed for generations to come
So why am I still inclined to think that the Chinese economy will indeed be larger than that of the US within 20 years?
The first and possibly weakest reason is that I’ve heard predictions of an imminent Chinese crack-up for the last 15 years and – so far – nothing has happened. I worked as a foreign correspondent and editor in Asia from 1992-97, when memories of Tiananmen were still fresh. All the fears about China that are being expressed today - about democracy, the banking system, the state-owned enterprises, unrest in the countryside, protectionism in the west – were being expressed then, but with even more force. However China has kept growing. Of course, its possible that all these predictions of doom will be vindicated eventually. We will all be dead eventually, as well. But in the meantime, China’s economic momentum is absolutely formidable.
The second and most important point is that this is a number’s game. The reason that China will eventually be the world’s largest economy is that its population is roughly four times that of the United States. Predictions that Japan would over-take the US, popular in the late 1980s, were always implausible. The difference in population size would have meant that the average Japanese would have had to become more than twice as rich as the average American for Japan to surpass America – and that was never going to happen.
By contrast, if you want to argue that China will never overtake the US, you would have to believe that China cannot achieve a GDP-per-capita of just 25% of American levels. And yet there are several examples of Asian “tiger economies” that have already got to that level and well past it – Japan, Taiwan, South Korea, Singapore (the latter, admittedly a micro-state) - some of them managing tricky transitions from authoritarianism to democracy, without stopping growth.
My colleague Martin Wolf points out that if China were to achieve the GDP-per-capita levels of Portugal – the poorest country in western Europe – its overall GDP will be larger than that of the US and the European Union combined.
So you don’t have to dismiss all the arguments about Chinese politics, the environment, social unrest and so on – to believe that the Chinese economy will eventually over-take America. You merely have to note that industrialisation and rapid economic growth are very powerful processes once they get rolling. They can survive a great deal of social unrest – and even the occasional war – and keep powering on.
for you
Posted by: matthew de morgan | June 11th, 2007 at 6:27 pm | Report this commentChina will definetely be at least World’s economy number 2 or 1. The risks chinese economy are facing (social unrest, environment etc) may never really threaten chinese economy, but to surpass US it needs more than avoid risks.
Chinese population is bigger than that of USA, but if US becomes more open to immigration, both skilled and unskilled, then not only population of USA will increase significantly, but also productivity will grow much faster than it is doing now. It is pretty clear that China will be growing fast. Let’s assume China avoids all the bad risks, its hard to tell how US will develop. Perhaps US will become much more open to immigration than it is now, for example when politicians will be threatened by China, they will try to attract more immigrants reduce their disadvantage in that area. The only advantage China has over US is its huge population. Economic policy makers realise that, and the only way to counter it is to get more workers in the United States.
If USA liberalises its economy just like London did with its financial markets, there might be another Big Bang. Just like London benefited from immigrants and free reforms, the whole of USA may be. Then US can grow at 4% annually without generating inflation.
Even republicans may at some point be happy to accept immigrants to help pay off the budget deficit when baby boomers stop working. US needs skilled and unskilled immigrants (it needs unskilled ones so there are low paid workers which don’t require lots of skill - it makes little sense for a cleaner to receive as much as PhD mathematician working in NASA or Bank of America).
May be more states will join USA, like Canada for example because with low population Canada’s economy will be small and it will have less say in World’s affairs.
Even if China avoids all of its risks, its not clear how fast US will grow in the coming years. May be it will become less open country, both to immigrants, talented people, good ideas etc. Then China no doubt will overtake US. But what if US become more open??
The real answer is no one knows for sure. I am not saying US will remain the largest, I want to say that it depends on how US will develop as an economy.
Open US - answer is no. Closed US - answer is yes sure. The biggest obstacle for the US is its politicians like Tom Tancredo and Duncan Hunter who want to close USA.
Posted by: John | June 11th, 2007 at 6:44 pm | Report this commentActually the US population is 22.8% of China´s (not including nether Taiwan nor Hong Kong, another 30 million people). At least the integration of the Anglo Canadian provinces as US states would mean American population reaching 25% of China´s population.
Even if the US population growth has been 1% and China´s population 0.7%, nobody knows how much will both populations grow in the future. Even if the US population growth was twice the Chinese the combined population of USA (including anglo-canadian states) would be just 30% of China´s.
Obviously China´s GDP growth will be lower over the years…but so America´s. The US GDP growth over the last two decades has been on average over 3%, but perhaps in a next decade it is just 2% or lower.
In terms of PPP (Purchasing Power Parity) China will overtake the US in 10 years, but at market prices it will take much longer, 30 years.
Anyway, the level of development of the Chinese economy by then will be still much lower than Europe´s and America´s.
Personally, i think in 15 years the economic center of the World will not be neither in Washington nor in Beijin but in Berlin.
Posted by: Enrique | June 11th, 2007 at 8:09 pm | Report this commentIf some economy grew by say X% it doesn’t mean it will grow by X% percent in the future or more than that. There might be major reform in the USA, no one knows.
Posted by: John | June 11th, 2007 at 8:23 pm | Report this commentUS potentially can grow at 4% without inflation or more if it becomes more open to immigrants who can increase both population work force and productivity.
European Union on the other hand can use the current mess with immigration in the USA by opening up itself, then EU can become most influental economy.
There are plenty of downside risks, there will inevitably be hiccups along the away, but, yes, there is every chance that population size will ensure that China eventually becomes the world’s largest economy - notwithstanding estimates that 28% of its people will be aged over 60 by 2040.
A more complex - and arguably more important - question is what kind of society and politics will emerge in China at the same time?
Posted by: Mike | June 12th, 2007 at 12:38 am | Report this commentOn an absolute level right, China should eventually overtake US, and possibly India will overtake that as well. But why should people be concerned? On a relative basis, people in China or India are still a lot poor than US or other developed countries.
Posted by: Rex | June 12th, 2007 at 4:29 am | Report this commentIf the United States were to further open its doors to immigration, it could certainly be a match for China’s population. Immigration, if managed wisely, has one great advantage over natural population growth: it makes it possible to select immigrants best suited for the economy of the future. The value of unskilled labour will only continue to decline, relative to other economic inputs. I believe we are on the cusp of a robotics revolution. The most powerful, wealthiest, nations of the future will be those with the most talented and educated population. The fact that the U.S. is not too crowded could work in its favour if only it could turn its policies around and make itself a desirable place to move to for highly skilled foreigners, in the way London is today.
Posted by: Guesser | June 12th, 2007 at 1:54 pm | Report this commentI absolutely agree with you Guesser. If politicians in the USA will try to ’solve the problem of immigration’, then not only China, but EU and India might overtake USA in 30 years. Their strategy for not letting immigrants in is self-defeating.
Posted by: Chen | June 12th, 2007 at 2:52 pm | Report this commentBut if USA adopts UK and Canada like immigration policies, no one will be a match for that. The current immigration bill is a first test for the USA.
Have you read Newt Gingrich’s article in the FT?? US might be lucky and get someonelike Reagan or Sarkozy who can revive the country, whether it be Giuliani or Obama.
To answer the question ‘Will China overtake US’ one should try to answer ‘What will happen with immigration in the USA’. USA currently accepts more immigrants than any other country, but if it wants to remain the largest economy it is far not enough.
Dear Mr.Rachman, what do you think about US stance on immigration and its prospects??
“The Economist” writes on occasion about a consolidation of Canada, the USA, Mexico, and central America into a new governmental and trade body. This body would be able to compete with the China of 2027 that is predicted head for head. Sorry Americans, it would not be called the USA but perhaps the United States of North America or the like. The sooner it happens the better!
Posted by: j.p.mccue | June 12th, 2007 at 4:49 pm | Report this commentGuesser/Chen:
Do you seriously think the US ought to use immigration to match China in the body count stakes???
Let’s say for the sake of argument that China has 1.5bn people - and the US 400M. So you’re suggestion an extra 1bn people would need to immigrate to the US… This is utter non-sense. As the UK is discovering, another 2m of immigrants (out of 60m so about 3%) in a short period of time does bring its own problems to sort out. Am I the only one thinking that the transport infrastructures, housing and health are under a lot of pressure? And that is the case even with the massive amount of cash the gov’t has dished out.
That is not to say I don’t regard immigration as both ethically just and a massive economic advantage for the receiving country. But I dont quite understand this fascination with the numbers game. It reminds me of school arguments between kids - my dad’s got the bigger car!
Seriously - it doesn’t matter one bit whether (or rather when) China (and India) overtakes the US in absolute figures. Yes economic efficiency is important but an awful lot of other things are also incredibly important and contribute to the quality of life of a country inhabitants. We ought to adopt a more mature approch to these things - similar to what small countries have done. Think Luxembourg, Norway, Sweden, Switzerland, Australia etc… they know they won’t be the World’s Big Dog in terms of absolute GDP so they care more on providing the best standard of living to their citizens. As far as I’m concerned, I’d rather live in that kind of country rather than in China, India or the US…
As for the US - I’m always amazed at how skilfull business lobbies and government are at denying American workers of basic things such as health insurance and holidays. And Americans seem not to care!!! I might sound like a socialist, but I’m not at all - I’m a proper liberal. However, the figures are incredible for a “rich” country: 1 in 4 US workers does NOT have paid holidays and US workers have on average 15 days paid holidays (9 if excluding bank holidays).
Of course, many companies offer more - but lots don’t and as usual the higher salaries workers are much more likely to get more paid holidays than low-paid jobs. (they might not take their holidays, but their firms are usually more generous)
If the US stays the world’s economy’s Number 1 - it will only be by making its workers work harder.
I believe it’s natural for the people of a country to enjoy the fruits of industrialisation, development and growth. In the US, the overwelming majority of growth went to a few % of the population. (I dont remember the exact stat - would be grateful if anyone had it)
I just don’t believe that is sustainable over the long term. (and this situation applies to several countries)
Not even the democrats are suggesting more paid holidays for US workers!!! (maybe that’s because that would damage their fundraising… but it surely sounds like a vote winner with the ever harder working US people)
(for those claiming it’d hurt US competitivity etc.. - Yes it would, afterall there’s no free lunch - so extra holidays would of course cost something. But most Europeans have 4-5 weeks paid holidays a year and overall Europe’s economies do work wonderfully well.)
Posted by: a | June 12th, 2007 at 4:59 pm | Report this commentThe economies of Central America and Mexico are much weaker than that of the US. A new trade body would only be possible after more North American nations caught up with the United States.
Posted by: Scott | June 12th, 2007 at 5:06 pm | Report this commentNo one saying that immigration will help America to match its population with China. But opennes to immigration will bring skilled, talented and hard-working people to the USA, which will increase its competitiveness and productivity. Today, China’s and India’s GDP combined area quarter of US GDP, though its population combined is 10 times that of America. AMerica’s economy is in better shape because of high productivity of workers. Because China’s productivity is rising fast, it may catch up with USA. But more immigration can also increase the productivity growth of the USA, in which case it will be harder to catch up. Immigration will help to bring talented and hard working people. London is taking over form New York as worlds financial capital these days - because people from all over the World are allowed to work there.
European economies are in a bad shape compared to USA, they have high unemployment in general and very high unemployment amongst young people.
In the USA people don’t go to holidays because they enjoy their work - its called workaholic. USA is a free country, if someone wants to go to holidays and take a break, he/she can do it freely. If you want to take a break and go for a holiday - great, but there might be someone willing to do your work. Why I should keep him away from work??
France was the one of being proud by introducing 35 hour work week. Now its backing off.
Posted by: Chen | June 12th, 2007 at 6:51 pm | Report this commentZhongguo has 5000 years of history behind it. Lao Tzu has a ton of sayings along the lines of what’s this yang type stuff manifesting itself in thorough disregard of the yin? China shows the worst excesses of such Taoist imbalance, the repression of Tibetans and other minorities, the desertification of the North that spreads into the city of Peking, the truly massive and rarely checked pollution, the large scale corruption on all levels and sectors; the dislocation of global inflationary pressure; and the aging of the population due to the one child per family rule. When will the tao be restored? Perhaps china is expected to bypass the US in terms of GDP but at this rate and at this cost the gain might not be permanent. Much of the world economy is banking on that it will be, and has no concept of the risks involved.
The USA is the country of initative, the dream, freedom, fast forward, of quick judgement and quick retrospective. How is China going to define itself in those terms? 1.2 billion people in China cannot move to that tune without spinning the planet fundamentally out of chemical balance, and yet they and many in the west are told to believe they will. Why persist in proposing a future where every Chinese family must have a tv, a car, a couple of mobile phones, a fridge and a few ipods when (short of a miracle in the researching of fusion energy) the planet simply doesn’t have the raw materials to make it happen?
Posted by: Felix Drost, Amsterdam | June 12th, 2007 at 7:51 pm | Report this commentI agree with John about China. As its economy escalated so fast, the real problem actually has turned to what kind of country and society it will become. Formidable? may be. Understandable, may not. In China, there’s a saying, all the visibles are insignificant while invisibles are the really significant issues, from which, we can see how strange and opaque its political dynamism can be as well as how unstable it will be once the only real overwhelming force beyond all underlying groups- PLA proves only a paper tiger. Well, worry is worry, the fact is the various ethnical, ideological and regional forces are reasserting themselves, although it’s sth. like zombies which are called to recover from their over 50 year’s tombs, it’s kind of good for proplr to realize themselves.
Posted by: alan | June 13th, 2007 at 6:43 am | Report this commentChina has a large -potential- for growth, but that does not mean it can realize that potential. They have to mobilize that 1 billion people. And they are running into trouble. You can talk all you want about productivity and investment and ignore the rampant corruption. You -cannot- ignore the fact that they are having structural problems with their water supply.
You can have brass cojones the size of Texas but if you don’t have water absolutely nothing will come of your ambitions. 1/6 the world’s population, 1/8 of the world water supply and they are polluting it like there’s no tomorrow [there probably isn’t one anyway].
The country simply cannot provide in its needs if it does not have a sufficient water supply. I hear the Yellow River doesn’t reach the sea all the time anymore… that’s all you need to know. I can see where most Chinese would want some Western life style, but they’re not getting it unless they make drastic changes. They can be smug and sneer at the tree huggers and the clean air hippies, but the sand of the Gobi dessert reaches Beijing and they have nice mouth guards to stop -some- of the pollution. Way to live in your own filth, China!
The Americans are fantastically hard workers and I simply cannot understand why they don’t take the vacation that is their due. You need down time. Nobody dies wishing they had spent more time at the office. The lobbyists are brilliant in making the workers decide against their own best interests but the truth of that is that they ruin a lot of people’s lives with that policy.
When was it decided that the best way to spend your life was to start working as soon as you opened your eyes and stop when you can’t keep them open anymore? It’s enough for someone to call a request for some extra holidays ‘a socialist’ initiative for it to be stopped dead in its tracks.
The reality is that we’re working too hard. Humanity has to learn how to relax and spend some wholesome time alone, in a quiet place. Not too much electronics screaming for attention.
Whether China becomes the greatest economy or not is not something I worry about. The enjoyment I get from this one life, this one shot at existence, is far more important to me. And I hope you have a great time too.
Posted by: Frances | June 13th, 2007 at 11:36 am | Report this commentChina might very well have the world’s largest economy in the coming years. But that’s strictly based on the fact that it has the world’s largest population and, therefore, more consumers than the United States.
But will China ever invent or produce something that world wants to consume or buy? At this point, that doesn’t appear to be part of their economic system.
Posted by: Doug Page | June 13th, 2007 at 1:14 pm | Report this commentLook I am a US citizen, as are my children, of course; thus, I have little interest in seeing Chia dominate the world economy. Nevertheless, this is inevitable.
Yes, I know the usual sophistry: commentators said the same thing about Japan in the 1980s. But China is not an overpopulated island. Much of the US’s economic prowess is based on services and speculation. I mean how many hedge funds can a country produce?
The remaining areas in which the still US holds a comparative advantage are eroding. It’s just a matter of time,a nd as the US catches its breath, if India manages even half the required structural reforms to make it a truly competitive economy, the US will have much to reckon with.
Unfortunately, the US will not be able to export hot air, a commodity which it produces in great supply,a s demonstrated by its “chief diplomat” and the “decider.”
Posted by: PAL | June 13th, 2007 at 4:41 pm | Report this comment