Friday, 31 January 2014

China as economic powerhouse

As Chinese NY comes around it is time to comment on an issue that has concerned me for some time: The question of Chinese economic preeminence.

A regular theme in English (US) language media has been that the masses have incorrectly judged that China is now the preeminent economic power. The journalist in such cases often then calmly explains that this is not the case: The US economy is still massively larger than China's.

As a academic within machine learning I am tempted to believe the wisdom of crowds. As a keen observer of international affairs and the related economic statistics, I am sure we should.

The US economy is roughly twice as large than China's when measured on a nominal basis. Measured by PPP the difference is only approximately 80%.  Others have (long ago) mentioned that the calculations involved in the PPP deflator for China are possibly so biased by the fact that they are drawn from the major cities that China may already be the world's largest economy.  But the major point I wish to make is something different: Economic power is not given by an economy's size alone.

What is important in terms of international power is not an economy's size but the ability the regime of that country has to influence others on the basis of its economic might. China's economy may be smaller than the US, but (i) it is much more open to the world, meaning that it is the largest trading partner of many other countries, (ii) it is growing much faster than the US (particularly true in nominal terms as currency appreciation and inflation play their role), and (iii) it is much better fiscal position, permitting it to invest in (and provide loans to) other countries on a major scale.

If economic power is purely by nominal trade volume, China would win. Including some form of horizon weighting for growth only increases its importance. Including the appreciation and inflation make it obscene.

So what is going on? Are reporters simply stupid? Yes and no. There are obvious responses to trying to claim that China is the world's most powerful economy from the above. Most obviously, the US sits in a very privileged position due to its role as the issuer of the principle reserve currency. It also welds disproportional power through its institutional position with the economic system. There is also the red herring of its ability to respond to disasters (yes - it provided much more relief to the Philippines, but so what?).

But more than anything else, the reasons for denying the obvious fact of China's economic preeminience are four-fold:

(i) Economic importance is only one facet of international relations. Many countries are now in the position that their economic trajectory relies more heavily on China than the US (or the EU), but are nonetheless much more beholden to their relations with the US. This can be true because of military or cultural reasons. But the fact that such countries remain principally tied to the US is not because of its economic power.

(ii) Most Americans, Westerners and even many beyond these cultural boundaries do not want to acknowledge China's economic power. Most important in the third group is China itself. Less than two decades ago, a Japanese prime minister noted that Chinese growth was illusionary, located only along its coast. In the past decade, theses that China could only develop until it competed in low wage, low margin industries were legion.

(iii) The emergence of China as a economic powerhouse is no different to the previous claims that Japan or Germany (or France) were inevitably going to surpass the US. Actually this is, in some sense, certainly true. In each of these cases, the economic growth leveled off. Arguments can be made for whether these countries reach US levels of development (per hour it appears so, but per capita it does not). But this misses the point. For Germany or Japan to surpass the US economically required them to triple the per capita GPD of the US. US productivity needed not simply to be equaled but massively surpassed. Both these countries either basically equaled (per hour) or approached (per capita) US productivity. China needs to do neither. It needs simply to develop to a middle income country with productivity well below the US to become to world clearly preeminent economic power. When you listen to rumors of China over investment, remember that it has a capital stock per capita far less than, say, Spain.

(iv) Finally, let us not deny that English language newspapers decry such popular assumptions of Chinese economic development because such articles are conducive to their readership, who want reassurance that the current US dominated system is impervious to change.

It is not.

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