Can China overtake the US?

Mark Thoma cites a story by Bloomberg's John M. Berry explaining why China's Booming Economy Will Never Surpass U.S.  Here is his argument, as excerpted by Mark:

China's economy is growing so fast that estimates of its long-term prowess are bordering on the absurd. After Chinese statisticians recently sharply revised up their estimate of economic output in 2004 ..., some analysts said that in 35 years it would overtake the U.S. economy. No way, no how. ... Even if China's GDP were to grow indefinitely at 11 percent a year -- 9 percent real growth plus 2 percent inflation -- and the U.S. experienced 5.5 percent growth -- 3.5 percent real and 2 percent inflation -- it would take the Chinese 40 years to catch up in terms of nominal GDP. Sustainable nominal GDP growth of 5.5 percent annually is well within the capability of the U.S. Eleven percent growth, about what Chinese authorities expect in 2006, isn't remotely possible in the long run.

I am always dubious about such linear extrapolations. The future may be much like the past, but we cannot be certain it will, and there are many instances of such predictions being wrong. Worse - as one of the commentators on Mark's blog post pointed out - the piece ignores the fact that on a purchasing parity power basis the GDP gaps are already much smaller than Berry suggests. According to the list of countries by GDP (PPP) on Wikipedia, China accounted for either 58% (IMF estimate) or 61% (World Bank estimate) of US GDP in 2004.

Using these World Bank estimates and Berry's real growth numbers of 3.5% and 9%, it would take China just ten years for its GDP to exceed the United States. Using a lower real growth rate for China of just 6% (two-thirds of the current annual pace) it would take China 21 years to become the world's largest economy. Berry should stick to Fed watching; growth arithmetic is not exactly his strong suit.

UPDATE: I only came across it after writing this post, but the Economist publication The World in 2006 makes much the same point in its piece 'The world in 2026: Who will be number one?' I can't find it online, but here is the key quote:

China is a safe bet to be one of the most important developments over the next 20 years. By 2026, will China - assuming it stays in one piece - be the world's biggest economy?

Yes and no. If the countries' economies are measured using market exchange rates ..in 2026 America will remain comfortably the world's number one... It will still account for more than one-quarter of global output, more than twice as much as second-placed China, which will itself have comfortably overtaken Japan.

But when countries are compared using purchasing power parity rates (PPP), which adjust for price differences between countries and reflect the actual buying power of local income, China overtakes America in about 2017.

Also well worth a look is Sun Bin's piece When will China's GDP overtake the US?, which compares China's growth in GDP per capita with those of Korea and Japan:

If we assume another big "if", that China will follow Japan's path afterward, i.e. after 15-20 years, China will be at where Japan was at in 1960 relative to US, there will be another 30 years when China joins the developed country pack (70% of US). So the optimistic scenario is that it will around 2055-2065 then.

...Whichever path it takes, it will at best reach around 80% of US' GDP/cap. ...It is likely that China will then remain at around 75%-80% of the US level of GDP/cap, like what Japan has been at for the past 20 years.

This is assuming the PPP conversion for Korea/Japan historically and for China today are correct. ...This is also assuming no major political or economic disruption in the world (not just China, as world recession or war means disruption to China's trading) from now till around 2060.

That is why "peaceful development" is the correct, and the only sensible strategy for China. This is also why China cares about a peaceful world environment, and why it has taken great pain in settling border disputes with its neighbors, and is willing to give up its 1.5M sq km claim in dispute with Russian and 90k sq km with India.

UPDATE: Angry Bear asks Is China an Economic Threat to the U.S.? There are also two dozen comments on this post, which are worth a quick skim.

The fact that China’s per capita GDP is only 15% of our per capita GDP begs the convergence question. While the U.S. likely will continue to be an innovator in terms of having a more significant commitment to R&D, Barro and Sala-i-Martin note in Technological Diffusion, Convergence, and Growth:

In the long run, the world growth rate is driven by discoveries in the technologically leading economies Followers converge toward the leaders because copying is cheaper than innovation over some range. A tendency for copying costs to increase reduces followers growth rates and thereby generates a pattern of conditional convergence. We discuss how countries are selected to be technological leaders, and we assess welfare implications. Poorly defined intellectual property rights imply that leaders have insufficient incentive to invent and followers have excessive incentive to copy.

China has certainly adopted a policy of copying as opposed to innovating. While the Communist government is not as free market orientated as the folks at AEI would hope, there is little reason to believe that its per capita income will not increase relative to the U.S. even if convergence does not lead to equality of per capita income for the two nations.

Comments

[Arthur Eckart]

There's nothing to suggest China will overtake the U.S. economy anytime soon. China is two economic revolutions behind the U.S. Also, China's 1 billion peasants will be a negative force similar to India. Moreover, if you take away Hong Kong and Shanghai, China would be one of the poorest countries in the world. It's unorthodox to relate purchasing power parity to GDP. I suspect, it's difficult to measure China's GDP (however, the high growth rate only proves China has a small economy). Both the consumption and production functions should be measured, and the effects of international trade (see Mundell-Fleming model). Obviously, China is losing the major trade wars to the U.S. (China exports half of its economy and is forced to invest its trade surpluses overseas to maintain acceptable levels of output and employment) Comparing living standards is more appropriate. Consequently, China simply doesn't have what it takes to be another U.S. and will follow an economic path similar to India. There's nothing in the Chinese economy that would lead anyone to believe it will surpass the U.S. economy.

[Edward Hugh]

"China simply doesn't have what it takes to be another U.S. and will follow an economic path similar to India. There's nothing in the Chinese economy that would lead anyone to believe it will surpass the U.S. economy."

Fascinating. We are having a discussion over at Afoe on French anti-Americanism. One of the explanations is straight 'denial' of the fact that US superiority over France is based on anything real. I now sense we are seeing this attitude set being reproduced in US attitudes to both China and India. Wow!

On Berry, you do well to mention PPPs, the thing I noticed was he makes no allowances for changes in relative currency values, possible deflations even. If you look eg - at the Italian economy over the last 10 years, it's low growth means that it now only has 80% of the relative size it had. Japan - with deflation - has an even more severe problem.

Looking at the 60% World Bank estimate, and the relative growth potential, I think ten years is a good estimate. And I think the overtaking point will also mark a tipping point of some kind. Let's wait and see.

Two last things to note for 2006. Berry mentions the relative demographics, this meme is coming. Secondly, the value added element: China is catching up, the US is moving the frontier forward. It is a staple of growth and productivity theory that it is always easier to catch up (once you start that is) than it is to move things forward. The hard part of course is to get started.

Happy New Year to Everyone!

BTW New Economist, have you changed your mail? I've been trying to reach you.

[Arthur Eckart]

Unlike the French, Americans welcome competition, which is one reason why the U.S. is the only real superpower. You seem to be in denial about the U.S. (much like the French). China and India are catching up. However, the U.S. is also moving forward, of course, at a slower rate, because large economies can't grow fast. Are you still waiting for Japan to overtake the U.S. also?

[Arthur Eckart]

Also, I may add, I cited the Mundell-Fleming model that helps explain Purchasing Power Parity through the mechanisms and implications of changes in currency exchange rates and interest rates in the goods market-money market-foreign exchange market. I partially explain some of these forces in two of my articles: http://searchwarp.com/swa28733.htm and http://searchwarp.com/swa30365.htm Happy Holidays.

[Edward Hugh]

"Are you still waiting for Japan to overtake the U.S. also?"

No, but this is to do with Japan's demography, and the fact they don't like immigrants.

Incidentally,

"and will follow an economic path similar to India"

My guess is that at some, later, stage India will overtake China, so around 2020 things are going to get very interesting.

[pgl]

I'm late to this party but over at Angrybear, I put a lot of faith in what Sun Bin posted. Simply put, the Chinese population will be more than 4 times the U.S. population for a long time to come. But why would anyone believe China's per capita output will remain less than 25% of our per capita output for more than a generation?

[Arthur Eckart]

China has over 1 billion peasants making less than $3 a day, or less than $1,000 a year. The U.S. will produce $12.5 trillion of output (which equals income) in 2005, which is per capita income of over $43,000, based on a population of 290 million. However, the U.S. also gains more from trade than China, because China needs export-led growth, while the U.S. economy can expand with huge negative net exports. China must invest in the U.S. to maintain acceptable levels of output and employment (in China), and to keep the balance of payments balanced (although, it falls short to say the least). China has a long way to catch-up and 1 billion peasants will be a powerful negative force on Chinese living standards for a very long time (much like India).

[Jing]

To be precise, China has 767 million peasants. This figure is based on China with a 1300 million total population and an urban/rural demographic of 41/59 respectively.

p.s. Hong Kong is not counted in PRC economic models, it would throw things way off. Likewise, neither is/will Taiwan.

p.p.s. Can you explain what you meant by China following an economic path similar to India? I am curious to know because I have always been operating under the assumption that the Indian and Chinese paths to economic development were rather divergent.

[Arthur Eckart]

Whether you call them peasants or something else, China still has over 1 billion people earning less than $3 a day. I don't know how it's possible you can be so precise. Have you heard of the saying: "If you can count your millions, then you're not a billionaire." China and India are following similar economic paths. They're both generally moving from the Agricultural Revolution into the Industrial Revolution (while the U.S. is generally moving from the Information Revolution into the Biotech Revolution). Also, China and India have massive poor populations, which will affect living standards in similar ways. I'm sure there are vastly different policies between the two countries. However, the elephant in the room cannot be ignored.

[Jing]

Well my figure is probably far from precise but as I said, I am simply using the rural/urban demographic data (I believe those percentages are from the 2000 PRC census + a few percentages since then) and total population to extrapolate the number of rural inhabitants. As for your comparison between India and China, China may be undergoeing an industrial revolution of sorts, but India appears to trying to bypass it altogether. Manufacturing in India is considerably hampered by labour regulations and is only a fraction of China's. However India's IT services sector contributes to a far more significant percentage of India's economy than China's does.

As for the large numbers of rural poor, you are simply echoeing a tautology that tells me nothing. Massive poor populations are detrimental to national standards of living; duh. What I want to know is how they will neccessarily impact future economic growth.

p.s. Can you elaborate on this Biotech Revolution please, I thought the Post-Industrial Information Revolution so to speak was ongoeing.

[Arthur Eckart]

I find it interesting you easily dismiss living standards as overly simplistic. Yet, you want to know what factors will effect only the production side, while both the production and consumption sides are a simple tautology. There are universal forces in economics. For example, the Law of Comparitive Advantage implies that less skilled labor will work in lower skilled jobs for two countries to benefit from international trade. Most of China's and India's populations will eventually move from the farm, producing food, into the city, manufacturing non-farm products. Currently, less than 3% of the U.S. labor force works in argriculture. Yet, that small workforce produces more than enough food to feed the entire country. Roughly 16% of U.S. labor works in manufacturing. However, for various reasons, the U.S. continues to produce more with less. U.S. firms in the Argricultural and Industrial Revolutions are the most productive. U.S. Information-Age firms went through a massive "Creative-Destruction" process, after 20 years of strong growth, which freed-up vast resources for the Biotech Revolution (if you want to know what biotech firms do, see the largest biotech firms in the world, which are American). Yes, the Agricultural-Industrial-Information-Biotech Revolutions are ongoing, and there will be many new economic revolutions.

[Arthur Eckart]

To answer your question more directly about the poor impacting economic growth, it will have an inefficient impact. However, small economies can grow fast, because of increasing returns to scale. Education, experience, and training typically have a positive effect on output. Also, monetary policy can create a pro-growth environment, i.e. sustainable growth is optimal growth (many don't realize China is in the boom phase of a boom/bust cycle, in part, to maintain "acceptable" levels of employment, which is inefficient). There are many endogenous and exogenous variables that will influence the production function. However, typically, a free market system is the most efficient system (and market failures can be met with appropriate responses). China and India will face large economic barriers that will prevent those countries from overtaking the U.S. anytime soon. In the 1980s, many expected Japan to overtake the U.S. within a few years. However, Japanese living standards are still far lower than American living standards.

[Dhim]

Hey Arthur do you even have a job,
I dont think so,every job is in India or China these days.Stop being so pro US open ur eyes to the world.They are ready to gobble you up.

[Arthur Eckart]

I work around the clock. I don't have time for a job :) The most efficient way to move from one economic revolution into the next is through a quick and massive "Creative-Destruction" process. Shipping obsolete jobs to China and India frees-up resources for emerging industries. Foreign competition (e.g. through cheaper imports or a stronger dollar) has made U.S. firms more efficient. However, where's the proof India and China "are ready to gobble you up?" Are you serious Dhim? I agree with most American economic policies, because they work well. I'd like to see America's competitors adopt more of these policies (but they won't, because it's not easy to change philosophies and values).

[Soumam]

Well quite a debate going on here. Well a few things Arthur, I completely agree that US doesn't have any immediate threat to it's economy in the near future. But who is talking about the near future here. What is interesting here is that the US is actually ignoring the growing economies of a host of new countries. The problem doesn't lie in this itself because at even the best pace these countries wouldn't touch US probably in a 100 years. But have you ever thought that if these very countries start trading with each other in the forseable future without much US involvement; what would happen? Already companies in US are looking for consumers outside the US probably in Asia because it's domestic sector is already saturated in most sectors or will be in the very near future. It has no other way but to look outside of it's own country. Also don't forget the economy of US is fueled by consumerism.
But more importantly there is other things now hapenning more importantly outside the US. Just open your eyes and realise the Global economy is becoming more independent of US. Chinese are exporting most of the clothes that americans wear today. Probably your undergarment is made by some Chinese company and not Jockey. Even the NIKE shoes are being made in Chinese companies. And don't think these are low level jobs. They may seem now but these very companies that are now shifting low level jobs will later move even the high end jobs due to cost advantage.And then the only way you would able to stop that is by passing some bil in your parliament. Because the American sure can't compete on the basis of competency.
And low end jobs you were talking about. When GM is facing bankruptcy and losses in all it's US factories, it's India operations are returning healthy profits and they have a complete manufacturing facility here, no low end jobs.
It's good that you have a job Arthur and I say you hold on to it and start performing or else one fine day you may find a Chinese or an Indian guy sitting at your desk.
Also first your country needs to deal with an identity crisis. It calls itself capitalist society encouraging free trade whereas they have the highest amount of subsidies in various sectors. They are plain scared even by the mention of free trade (for evidence read drafts of WTO rounds).
So Arthur you are right that America faces not threat at all in the near future and this blind belief will help the rest of the world surpass it. Also we do not need to follow your policies. After all which nation will follow screwed policies.
Wish you and America all the best

[Sam "The Indian"]

Some Stats:
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Economics experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the world but major developments have taken place in the world economy since then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian giants- India and China.

The rich countries of Europe have seen the greatest decline in global GDP share by 4.9 percentage points, followed by the US and Japan with a decline of about 1 percentage point each. Within Asia, the rising share of China and India has more than made up the declining global share of Japan since 1990. During the seventies and the eighties, ASEAN countries and during the eighties South Korea, along with China and India, contributed to the rising share of Asia in world GDP.

According to some experts, the share of the US in world GDP is expected to fall (from 21 per cent to 18 per cent) and that of India to rise (from 6 per cent to 11 per cent in 2025), and hence the latter will emerge as the third pole in the global economy after the US and China.

By 2025 the Indian economy is projected to be about 60 per cent the size of the US economy. The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely to be a larger growth driver than the six largest countries in the EU, though its impact will be a little over half that of the US.

India, which is now the fourth largest economy in terms of purchasing power parity, will overtake Japan and become third major economic power within 10 years.
---------------------------------------------------
I haven't penned this article. I am just 'outsourcing' it for you. Next time please be a little studious and come with a few stats. and anyways you might not need all this. While you sit back and relax, we Indians will be taking up your "low" jobs to build our "High" economies. What say?

[Arthur Eckart]

Soumam, why do you believe textile jobs will turn into "high level" jobs to compete with the U.S., and why would the U.S. try to stop foreign cost advantages of those jobs? Also, why do you assume the U.S. is incompetent to compete? The competition of textile jobs will be between poor countries, not with the U.S. Also, American consumers will continue to benefit from globalization, including the Law of Comparative Advantage. The U.S. is the most productive country in the world (U.S. per capita GDP is $43,000 in 2005). Poor countries, e.g. China and India, aren't even close to competing with the U.S. However, China and India are more of a threat to less productive countries, e.g. in Western Europe and Japan, although not much of a threat, and to other poor countries. I agree, many of the best Chinese and Indians attend American universities and then work in the U.S. Less than 3% of the U.S. labor force works in agriculture. Yet, that small workforce produces more than enough food to feed the entire country. About 18% work in manufacturing, where Americans continue to produce more with less (productivity in manufacturing is higher than total productivity). The U.S. leads the world in all four economic revolutions, i.e. Agricultural-Industrial-Information-Biotech. It won't be easy for poor countries to catch-up (it's tough enough for other rich countries to catch-up). The only differences between your country and a superpower are policies, philosophies, and values.

[T Yang]

Japan's economy (Usd$5.1 tri) is 8 times more than china's(Usd$0.65 tri) in Year 1998, a ratio is just like today's USA vs China, however, the ratio has change to 2 times in year 2005, the gap is quickly narrowed only within 8 years, few people now will doubt that china's GDP will final catch up Japan in the near future any more.

It is interesting to make a comparable between USA and China, USA's real GDP is 8 times more than china in year 2003, 7 times more in 2004, 6 times more in 2005, sure 5 times in the coming year 2006...posible 3 times in 2010. (Note: China's GDP Data, USD$1.24 trillion (2003); USD$1.65 trillion (2004); USD$2.3 trillion(2005), USD$2.7 trillion (est.2006);..USD$5.2 trillion (Est.2010)

As a Chinese, I am more optimistic that China will catch up USD around Year 2025. if surprise please remember the economic development of Taiwan, Hongkong and Singapore (most of them are ethnic chinese )whose GDP per capital jumped to USD$20k from nothing within 20 years (1970-1990).

[Mick Russell]

Arthur Eckart, your views are interesting.

Americans not so long go believed that they were WMD in Iraq. Where are they now!!! You got your arse kicked in Vietnam !!! A backward third world country. Your prediction of American staying top dog in the short term my be correct. But look out for India, China, and also the EU. The EU is already the largest economy (if you combine all the nations in the EU).

Happy dreams Eckart, don't worry everything well be fine in the morning.

[Arthur Eckart]

Mick, I don't recall Vietnam invading the U.S. and taking it over? You must live in another universe. All of America's allies believed Iraq had WMDs. That why WMDs was given as the reason to liberate the good people of Iraq from the tyrants. The U.S. and E.U. have roughly the same size economies, although the EU has about 100 million more people. The EU is falling behind the U.S. However, China and India are catching up, although they have a very long way to go. Let me know when you wake up.

[Marvin McConoughey]

Future national economic growth may hinge on energy efficiency and energy resources. In this sense, China and the USA both face immense difficulties. The USA developed its elaborate economy around high energy consumption. It made sense, when we were a petroleum exporting nation. Those days are long past. China is starting out from a lower consumption base and may better adapt to an energy-short world. Thus far, indications are not encouraging, but it now claims to be seeking an actual 20% reduction in energy consumption. Not likely, in my view.

A key problem for China is simply where to sell its goods. The USA, its primary customer, cannot permanently continue to run vast trade deficits without major currency adjustments. Those adjustments will impact China's ability to export here, and may have other international negative consequences not favorable to China.

Who will win? My view is that living standards in the USA will decline in absolute terms and that China will continue to have rising living standards, but will fall far short of the USA.

[Arthur Eckart]

Marvin, the U.S. is energy efficient, while China is energy inefficient. It takes a lot of energy to produce a lot of output. The value of U.S. output per unit of energy is high, in part, because the U.S. economy has become lighter and U.S. economic growth has been sustainable (which is optimal growth).

U.S. consumers will maintain autonomous consumption. I doubt U.S. living standards will fall, although living standards may not rise as fast, since they rose sharply over the past few years.

It's remarkable, the U.S. economy can expand with huge negative net exports.

[Ice]

I am not an economist (as some of you seem to be)....But arent we missing the point here? This is not a pissing contest.....

One you keep saying the proportion of American contribution to World GDP has fallen (and will fall in the coming years). But there is no fall in the absolute numbers. America is growing and will keep doing so. Perhaps at a lower rate.

Second, as regards China and India, the important thing to realise is that these countries have large numbers of people who are poor. Some of them have the talent to do well but are constrained due to the lack of opportunity. They are now emerging out of the dark ages. Getting new jobs and making more money.

Thirdly, what needs to be remembered is that this is not a zero sum game! As living standards in India and China rise, they will prove to be good markets for US products and services. And vice versa.

In the long run, it is better for the world to let propserity touch the poor of India and China. We all will have to make some adjustments as there would be some limited resources. for eg: oil. Rich countries like US etc will have to stop using up more than its fair share. Development of alternate fuel sources / more efficient use of fuel will help ameliorate some of the displacements.

[Arthur Eckart]

Ice, I agree, opportunities for the poor will benefit everyone, and China and India moving towards globalization (e.g. open markets, free trade, and unrestricted capital flows) will generally raise living standards faster. However, the U.S. produces a large proportion of the world's output and that takes a lot of energy. The U.S. uses energy efficiently, and perhaps optimally (given costs of alternative energy sources). So, the U.S. is using less than its "fair share" of energy.

[Chris Braden]

To the misinformed (obviously Irish) gent who posted the
remark that the US got it's "arse" kicked by Vietnam, a third world country. You are so badly misinformed it makes me sick. The US won every single major battle and inflicted
about 10 times the casualties on Vietnam than vice versa. The Vietnam War was politically unpopular in the US and he US withdrew from Vietnam two years before Saigon fell. America doesn't lose wars. America can only beat itself in a war by dumb politicians who run it and don't let the field commanders have the real say. Would you agree that
Iraq in 1990 was militarily more powerful than 1960's Vietnam? Yes, I'm sure most people would. So explain why
Saddam's butt was kicked in 3 days! Vietnam was a joke to
most US servicemen who served there because we were ordered
to fight with one arm tied behind our backs, and still we
managed to kick their asses. But remember one thing--in
the scheme of things--if there is no political will, no
nation, no matter how large or powerful, will win a war, but
we certainly were not defeated. Wake up and smell the coffee. As far as my view on Chinese imports--I do buy some things made in China because I believe in international trade, but the playing field needs to be leveled. I believe in supporting American manufacturers and American jobs, but I also believe we all have to play by the rules,
and China isn't.