Wednesday, September 02, 2009
American Prominance pt.4: False Idols
The breathtaking rise of China is at the center of the current spate of declinism, much as Japan's was in the 1980's. This argument is not about the present or the absolute decline of the United States but about its relative loss vis-a-vis China- the United States is supposedly doomed because China's economy has been growing at three times the rate of the United States and therefore will surpass the United States in terms of output sometime in the next several decades.
This would be a sake bet only if the GDP is measured using purchasing power parity (PPP), which raises China's 2007 nominal GDP from $3.3 trillion to almost $8 trillion because of its extremely depressed price and wage levels. Taking a high-end estimate of Chinese growth- an annual rate of ten percent- China's economy would double every seven years, overtaking the current U.S. GDP as early as 2015 and leaving the United States in the dust seven years later. But whatever the tipping point, this calculation suggests that China will emerge as number one. Alas, global standing is not measured by the low prices of nontradable goods, such as haircuts, bootlegged software, and government services. Think instead about advanced technology, energy, raw materials, and the cost of a higher education in the West. These items are critical for growth and must be procured on the world market. Influence bought abroad, say, through foreign aid, also comes at exchange-rate prices, as does imported high-tech weaponry.
The debate over whether to consider GDP based on PPP or nominal GDP as a measure of economic power is endless. The Australian economist Saul Eslake, who predicts the declassement of the United States on the basis on PPP as early as 2015, offers a typical caveat: "Of course, these projections may prove inaccurate: by and large they extrapolate the growth rates of the recent past, and make no allowance for global economic downturn, or for downturns in any individual economy, and they do not seem to make much allowance for demographic factors."
Life, however, is not linear. China's uninterrupted double-digit growth rates are of a recent vintage, essentially since 2003. In 1989 and 1990, growth in China was four percent. In 1967 and 1968, China's growth actually fell, by 5.1 percent and 2.9 percent, respectively, and in 1976, it fell by 5.8 percent. These last three years are not plucked at random; the first two marked the beginning of the Cultural Revolution, and the last one, its end, and they offer a useful reminder of volatility driven by wrenching domestic upheaval. History sounded a similar warning against straigh-line projections in 1989, the year of the crackdown in Tiananmen Square, when growth plummeted to four percent, compared with 11.3 percent the previous year. Karl Marx asserted that economics drives everything else- such turmoil suggests that politics in mightier still.
Estimates that China's economy will grow by six percent in 2009 are another cautionary tale. China's growth has dropped by half from a historical high of almost 12 percent in 2007, which serves as a warning that is miraculous growth is foreign made- China is a place where the rest of the world essentially rents workers and workspace at deflated prices and distorted exchange rates. The Chinese economy is extremely dependent on exports- they amount to around two-fifths of China's GDP- and hence vulnerable to global economic downturns. In fact, China's exports have plunged by 26 percent this year. Such are the cyclical risks of playing offshore manufacturing heaven to the world. Export-led expansion may pick up in China again if world trade returns to earlier levels. But such a recovery will not solve the underlying problem: the structural deformation export dependency has wrought. Between 1991 and 1995, 100 million yuan in investment in fixed assests yielded 66.2 million yuan in GDP and 400 new jobs, according to Minxin Pei of the Carnegie Endowment. But ten years later, according to Pei's data, the same amount of investment added only 28.6 million yuan to the GDP and 170 new jobs. The law of diminishing returns- the oldest in economics- has begun to bite.
This also has political consequences, which are never factored into linear forecasts based on past performance. Precisely because China is so export dependent, it devotes only 35 percent of GDP to private consumption, compared to 60 percent in many Western countries. Something will have to give, as some 70,000 civil disturbances each year in China suggest, the latest being the turmoil in Xinjiang in July 2009 that killed hundreds. If China does shift resources into social services and support, exports and export-led growth will necessarily fall. Germany is an instructive case: it has about the same export ratio as China, but it also supports a welfare state that east up one-third of its GDP, which has resulted in an average annual growth rate of 1.5 percent over the last decade. The Chinese regime thus faces the predicament of choosing between exports and welfare. Authoritarian modernization a la Deng Xiaoping has managed to suppress this clash, but unless China is not of this world, society's chickens will come home to roost, demanding to be fed or freed.
Even if China manages to avoid the pernicious dynamics of authoritarian modernization- war, revolution, and upheaval- that eventually befell imperial Germany, Japan, and Russia, it will face another challenge in its demographic deterioration. Essentially, China will grown old before becoming rich, as Mark Haas, a professor at Duquesne University, has noted. According to Goldman Sachs, by 2050 the Chines economy will long have overtaken the U.S. economy with a GDP of $45 trillion, compared with the United States' $35 trillion. But by then, the median age in the United States will be the lowest of any of the world's largest powers, except India. The United States' working-age population will have grown by 30 percent, whereas China's will have dropped by three percent. The economic and strategic consequences will be enormous. China's aging population will require a shifting of resources from investment to welfare, thus reducing China's population growth. And as the economic pie shrinks, a growing number of pensioners- 329 million by 2050- will demand a larger slice. This will necessarily cut into the share for People's Liberation Army. If China cannot dodge this double whammy, how can it be expected to unseat the United States as the greatest military power the world has ever seen?
Perhaps its time to play a different round of compound-interest game so beloved by the declinists. Assuming China's economy grows at seven percent- twice the historical rate of the United States- China's GDP will double between 2007 and 2015, from $3.3 trillion $6.6 trillion, and then double again in 2025, to $13.2 trillion. By that time, assuming 3.5 percent annual growth for the United States (the historical average), U.S. GDP will have grown to $28 trillion. Given the myriad challenges China faces, this scenario is more realistic than projections based on China's recent growth rate. China, it seems, still has a way to go before it can dethrone the United States.
This would be a sake bet only if the GDP is measured using purchasing power parity (PPP), which raises China's 2007 nominal GDP from $3.3 trillion to almost $8 trillion because of its extremely depressed price and wage levels. Taking a high-end estimate of Chinese growth- an annual rate of ten percent- China's economy would double every seven years, overtaking the current U.S. GDP as early as 2015 and leaving the United States in the dust seven years later. But whatever the tipping point, this calculation suggests that China will emerge as number one. Alas, global standing is not measured by the low prices of nontradable goods, such as haircuts, bootlegged software, and government services. Think instead about advanced technology, energy, raw materials, and the cost of a higher education in the West. These items are critical for growth and must be procured on the world market. Influence bought abroad, say, through foreign aid, also comes at exchange-rate prices, as does imported high-tech weaponry.
The debate over whether to consider GDP based on PPP or nominal GDP as a measure of economic power is endless. The Australian economist Saul Eslake, who predicts the declassement of the United States on the basis on PPP as early as 2015, offers a typical caveat: "Of course, these projections may prove inaccurate: by and large they extrapolate the growth rates of the recent past, and make no allowance for global economic downturn, or for downturns in any individual economy, and they do not seem to make much allowance for demographic factors."
Life, however, is not linear. China's uninterrupted double-digit growth rates are of a recent vintage, essentially since 2003. In 1989 and 1990, growth in China was four percent. In 1967 and 1968, China's growth actually fell, by 5.1 percent and 2.9 percent, respectively, and in 1976, it fell by 5.8 percent. These last three years are not plucked at random; the first two marked the beginning of the Cultural Revolution, and the last one, its end, and they offer a useful reminder of volatility driven by wrenching domestic upheaval. History sounded a similar warning against straigh-line projections in 1989, the year of the crackdown in Tiananmen Square, when growth plummeted to four percent, compared with 11.3 percent the previous year. Karl Marx asserted that economics drives everything else- such turmoil suggests that politics in mightier still.
Estimates that China's economy will grow by six percent in 2009 are another cautionary tale. China's growth has dropped by half from a historical high of almost 12 percent in 2007, which serves as a warning that is miraculous growth is foreign made- China is a place where the rest of the world essentially rents workers and workspace at deflated prices and distorted exchange rates. The Chinese economy is extremely dependent on exports- they amount to around two-fifths of China's GDP- and hence vulnerable to global economic downturns. In fact, China's exports have plunged by 26 percent this year. Such are the cyclical risks of playing offshore manufacturing heaven to the world. Export-led expansion may pick up in China again if world trade returns to earlier levels. But such a recovery will not solve the underlying problem: the structural deformation export dependency has wrought. Between 1991 and 1995, 100 million yuan in investment in fixed assests yielded 66.2 million yuan in GDP and 400 new jobs, according to Minxin Pei of the Carnegie Endowment. But ten years later, according to Pei's data, the same amount of investment added only 28.6 million yuan to the GDP and 170 new jobs. The law of diminishing returns- the oldest in economics- has begun to bite.
This also has political consequences, which are never factored into linear forecasts based on past performance. Precisely because China is so export dependent, it devotes only 35 percent of GDP to private consumption, compared to 60 percent in many Western countries. Something will have to give, as some 70,000 civil disturbances each year in China suggest, the latest being the turmoil in Xinjiang in July 2009 that killed hundreds. If China does shift resources into social services and support, exports and export-led growth will necessarily fall. Germany is an instructive case: it has about the same export ratio as China, but it also supports a welfare state that east up one-third of its GDP, which has resulted in an average annual growth rate of 1.5 percent over the last decade. The Chinese regime thus faces the predicament of choosing between exports and welfare. Authoritarian modernization a la Deng Xiaoping has managed to suppress this clash, but unless China is not of this world, society's chickens will come home to roost, demanding to be fed or freed.
Even if China manages to avoid the pernicious dynamics of authoritarian modernization- war, revolution, and upheaval- that eventually befell imperial Germany, Japan, and Russia, it will face another challenge in its demographic deterioration. Essentially, China will grown old before becoming rich, as Mark Haas, a professor at Duquesne University, has noted. According to Goldman Sachs, by 2050 the Chines economy will long have overtaken the U.S. economy with a GDP of $45 trillion, compared with the United States' $35 trillion. But by then, the median age in the United States will be the lowest of any of the world's largest powers, except India. The United States' working-age population will have grown by 30 percent, whereas China's will have dropped by three percent. The economic and strategic consequences will be enormous. China's aging population will require a shifting of resources from investment to welfare, thus reducing China's population growth. And as the economic pie shrinks, a growing number of pensioners- 329 million by 2050- will demand a larger slice. This will necessarily cut into the share for People's Liberation Army. If China cannot dodge this double whammy, how can it be expected to unseat the United States as the greatest military power the world has ever seen?
Perhaps its time to play a different round of compound-interest game so beloved by the declinists. Assuming China's economy grows at seven percent- twice the historical rate of the United States- China's GDP will double between 2007 and 2015, from $3.3 trillion $6.6 trillion, and then double again in 2025, to $13.2 trillion. By that time, assuming 3.5 percent annual growth for the United States (the historical average), U.S. GDP will have grown to $28 trillion. Given the myriad challenges China faces, this scenario is more realistic than projections based on China's recent growth rate. China, it seems, still has a way to go before it can dethrone the United States.
