Joseph S. Nye writes:<\/p>\n
The World Bank recently announced that China\u2019s economy will surpass that of the United States this year, measured according to purchasing power parity (PPP). But this is far from a holistic depiction of China\u2019s global economic standing.<\/p>\n
Though PPP can serve some purpose in comparing welfare across countries, it is affected significantly by population size. India, the world\u2019s tenth largest economy measured according to the market exchange rate of the US dollar and the Indian rupee, is the third largest in PPP terms. Moreover, power resources, such as the cost of imported oil or an advanced fighter aircraft engine, are better judged according to the exchange rates of the currencies that must be used to pay for them.<\/p>\n
But, even if China\u2019s overall GDP surpasses that of the US (by whatever measure), the two economies will maintain very different structures and levels of sophistication. And China\u2019s per capita income \u2013 a more accurate measure of economic sophistication \u2013 amounts to only 20% of America\u2019s, and will take decades, at least, to catch up (if it ever does).<\/p>\n
Moreover, as Chinese officials and researchers have acknowledged, though China surpassed Germany in 2009 as the world\u2019s largest exporter by volume, it has yet to develop into a truly \u201cstrong\u201d trading country, owing to lackluster trade in services and low value-added production.<\/p>\n
China\u2019s lagging economic sophistication is also reflected in its financial markets, which are only one-eighth the size of America\u2019s, with foreigners permitted to own only a tiny portion of Chinese debt. Though China has tried to increase its financial clout by encouraging the international use of its currency, renminbi-denominated trade still represents just 9% of the global total, compared to the dollar\u2019s 81% share.<\/p>\n
Not even China\u2019s massive foreign-currency reserves \u2013 the world\u2019s largest, at nearly $4 trillion \u2013 will be adequate to boost its financial leverage, unless the authorities create a deep and open bond market with liberalized interest rates and an easily convertible currency. These reserves do not give China much direct bargaining power over the US, either, given that interdependent relationships depend on asymmetries.<\/p>\n
China holds dollars that it receives from its exports to America, while the US, by keeping its market open to Chinese products, helps to generate growth, employment, and stability in China. Yes, China could bring the US economy to its knees by dumping its dollars, but not without taking a serious hit itself.<\/p>\n
The differences between China and the US in terms of economic sophistication extend to technology as well. Despite some important achievements, China relies on copying foreign inventions more than domestic innovation for its technological progress.<\/p>\n
In the coming decades, China\u2019s GDP growth will slow, as occurs in all economies once they reach a certain level of development \u2013 usually the per capita income level, in PPP terms, that China is approaching. After all, China cannot rely on imported technologies and cheap labor to support growth forever. The Harvard economists Lant Pritchett and Lawrence Summers have concluded that regression to the mean would place Chinese growth at 3.9% for the next two decades.<\/p>\n
But this straightforward statistical estimate does not account for the serious problems that China must address in the coming years, such as rising inequality between rural and urban areas and between coastal and inland regions. Other major challenges include a bloated and inefficient state sector, environmental degradation, massive internal migration, an inadequate social safety net, corruption, and weak rule of law.<\/p>\n
Moreover, China will face increasingly adverse demographic conditions. After enforcing a one-child policy for more than three decades, China\u2019s labor force is set to peak in 2016, with elderly dependents outnumbering children by 2030. This has raised concerns that the population will grow old before it grows rich.<\/p>\n
China\u2019s authoritarian political system has demonstrated an impressive ability to meet specific targets, from the construction of high-speed railways to the creation of entire new cities. What China\u2019s government is not yet prepared to do is respond effectively to increasingly loud demands for political participation \u2013 if not democracy \u2013 that tend to accompany rising per capita GDP. Will political change occur when per capita nominal GDP, now at roughly $7,000, approaches $10,000, as occurred in neighboring South Korea and Taiwan?<\/p>\n
It remains to be seen whether China can develop a formula to manage an expanding urban middle class, regional inequality, and, in many places, restive ethnic minorities. Its lagging economic sophistication may complicate matters further. In any case, it means that aggregate GDP, however it is measured, is inadequate to determine when \u2013 and whether \u2013 China will overtake the US in economic power.<\/p>\n
Joseph S. Nye writes: The World Bank recently announced that China\u2019s economy will surpass that of the United States this year, measured according to purchasing power parity (PPP). But this is far from a holistic depiction of China\u2019s global economic … Continue reading ![\"China's](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2014\/11\/Chinas-Economic-Power-300x279.jpg\")
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