Will China Be the #1 Economy in the World?
China’s emergence as a major player on the world stage has heightened concerns with globalization in the U.S. Predictions that China will overtake the U.S. to become the largest economy in the world are rampant. For example the 2013 OECD China Economic Survey said China “is on course to become the world’s largest economy around 2016.” But what are the facts? Will China overtake the U.S.?
China’s gross national income was $12.2 trillion in 2012 compared to $16.5 trillion for the U.S., according to the World Bank. However, China’s economic growth has been phenomenal, an incredible 9.2% in 2009 and 7.8% in 2012, compared with minus 2.8% in 2009 rising to a barely positive 2.8% in 2012 for the U.S.
Predictions of when – or if – China surpasses the U.S. in total economic size of course depends on whatever projected growth rates for the U.S. and China an analyst picks. As Mark Twain said “it is difficult to make predictions, particularly about the future.” So let’s consider some underlying issues that make predictions of future U.S. and Chinese growth rates difficult.
China has been doing extremely well, of course, but faces enormous problems going forward. First off, China faces huge demographic problems due to extremely low fertility rates, increased life expectancy and improved health care. The population decline in the age group 20-24 over the next decade will be a staggering 50 percent. Brookings scholar Wang Feng writes “the large birth cohorts of the 1960s and 1970s were at their peak productive ages when the recent economic boom began.” His estimate is that the changing demographics will lead to a decline of China’s economic growth rate of 0.5% per year.
Another problem that China will increasingly face is that it gets harder to sustain rapid growth as an economy matures. Economists use the term middle-income trap when referring to a country’s inability to make the leap from middle-income to high-level development. If China can make this transition, it would become the first state since World War II to accomplish this according to a recent NBER study. Other serious problems that China faces include stifling and unsustainable pollution, scarcity of many natural resources and significant political unrest.
However, to date, the Chinese leadership has been adroit at managing the country’s problems and at the recent plenary meeting of top leaders China outlined plans for the future that may well sustain their growth.
Meanwhile, the U.S. has many potential advantages. We have abundant natural resources and in fact are moving to becoming self sufficient in energy. We don’t face the problem of an aging population to the same extent as China and other developed countries due to our high level of immigration and high birth rates. And our free market economy and established institutions promote innovation to a greater extent than any other country.
Our biggest problem is our dysfunctional political environment that is not dealing with our problems, such as continual budget deficits, a badly outdated tax structure, and a faulty educational system. As Thomas Friedman says, China is getting 90% out of a bad system and we’re getting 50% out of a good system. Not surprisingly, a New York Times article reports a survey that found that 75% of Chinese respondents believe their country is on the right track compared to only 36% of Americans that believe we are on the right track.
But who knows? Maybe we’ll wake up tomorrow and our politicians will get their act together.
Given the uncertainties, it isn’t surprising that predictions as to China’s overtaking the U.S. are all over the lot. A 2010 estimate in the Economist anticipated that China would pass the U.S. by 2019, and indeed if you take the 2012 data for size of the U.S. and Chinese economies and growth rates, China’s gross national income would be $21 trillion compared to $19.9 for the U.S. in that year. However, a recently released study by the London based Center for Economics and Business Research puts the date of China’s economic ascendancy as 2028.
The bottom line is that instead of focusing too much on what the future of a China that might surpass America might look like, let’s focus on dealing with our problems today. We may eventually be #2 but we shouldn’t be contributing to our relative decline.
Image Credit: “20121219-OSEC-LSC-0142” courtesy of Flickr user U.S. Department of Agriculture
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