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

[tom]

suck on these apples

DEVELOPMENT:
China Poised to Surpass U.S. Economy by 2035
Jim Lobe

WASHINGTON, 11 Jul (IPS) - China's booming economy is on course not only to surpass that of the United States by 2035, and but to double its size by 2050, according to a new study released here this week by an influential former World Bank economist who also headed the China desk at the U.S. Treasury.

The report by Albert Keidel, currently a senior associate at the Carnegie Endowment for International Peace (CEIP), argues that Beijing's torrid annual growth rates, that have averaged around 10 percent over the past three decades, are likely to be sustained over the next two before gradually declining to around three percent -- the rate at which the U.S. economy is projected to grow over the same period -- by 2070.

By then, however, China's economy, currently estimated at only about one-third that of the U.S., will have built up such momentum that its total annual gross domestic product (GDP) will reach the equivalent of nearly 180 trillion 2005 dollars, dwarfing the 80-trillion-dollar U.S. economy projected for the same year, according to the study, entitled 'China's Economic Rise - Fact and Fiction'.

And while important obstacles to that growth -- including possible social unrest, corruption, and macro-economic mismanagement -- clearly loom on the horizon, Keidel argues that China's leadership appears prepared to overcome them based on the record it has compiled in dealing with related problems, particularly over the past decade.

'They are not likely to stop China's growth,' insisted Keidel at a crowded CEIP forum that drew economic specialists from a host of U.S. government agencies, think tanks, and foreign embassies Wednesday. Moreover, he added, the numbers presented in the report should be considered conservative. 'This is a slower-growth scenario,' he said in answer to scepticism voiced by some attendees and panelists who were asked to comment on the paper.

Of course, the global implications of such an economic powerhouse are enormous, according to Keidel, who stressed that China's financial clout alone 'will spill into every conceivable dimension of international relations.'

'Leadership of international institutions will gravitate toward China,' with the headquarters of some existing U.N. agencies and other multilateral institutions likely to move to Chinese cities. 'The United States will have an important secondary influence, like Europe, but it will need to compromise, and its sphere for unilateral action will be increasingly curtailed.'

On the military front, the U.S. will continue to enjoy major advantages, including a worldwide network of hundreds of bases, many situated around China's periphery, and enormous accumulated stocks of sophisticated weapons many times larger than Beijing's arsenal. However, the sheer size of the Chinese economy at the mid-century mark 'should persuade American policy makers to consider their options wisely.'

Much of Keidel's analysis, which comes on the eve of next month's landmark Beijing Olympiad, is based on his conclusion that China's economic dynamism has been based much more on domestic demand and investment than on exports. The conventional view is that China's economy will begin to slow -- sooner rather than later -- because its external markets will be unwilling or unable to continue buying those exports at the same rate.

While trade has certainly been an important factor in China's development, according to Keidel, it is by no means export-dependent. Indeed, when its major export market, the U.S., has boomed, China's growth has slumped; while when the U.S. has slowed down, China's growth has been strong -- a pattern that is precisely the opposite of three other major export powerhouses, Japan, South Korea, and Germany.

China's high growth rates are more likely to be sustained, moreover, because it started at such a low level of development when it first implemented economic reforms in the late 1970s. Compared to Japan and South Korea, China is still at a relatively early stage of economic and political development, according to the study.

And, unlike its two neighbours that protected their key industries at a comparable period in their development, the Chinese economy has been much more open to global competition, ensuring that leading sectors import and use the latest technology, thus enhancing their own competitiveness. 'This is not something that Japan or South Korea ever did,' Keidel said.

Finally, the economy has developed a 'web of incentive systems that rewards people who take risks and work hard,' according to Keidel who said this evolution was 'under-appreciated'. Despite state control, 'Chinese corporations today are money-making machines,' and the governance of the larger ones is 'heavily oriented towards profit making.'

He also believes that China's economic managers have become increasingly sophisticated over the last three decades in ways that show that a growing ability to deal with the 'cyclical ups and downs (that) are inevitable' in a fast-growing economy.

As for concerns that poverty, growing inequality, air and water pollution could derail long-term growth, the study concludes that China appears to be on a similar trajectory as Japan and South Korea, both of which have addressed these issues, particularly as their countries became more urbanised and income levels increased, spurring greater public concern.

Corruption, particularly within the Communist Party, could also prove an 'Achilles' Heel' for China, although Keidel notes that it 'has clearly not prevented rapid growth in the past and is unlikely to do so in the future,' particularly with increases in per capita income and the growing attention already being paid to the problem in the news media.

As for the Party's rule, it has evolved from a 'one-man authoritarian system' to a 'corporate technocracy' that has introduced 'participatory governing mechanisms' that may lead to a 'more broad-based system of elections' -- a transition similar to those of South Korea and Taiwan.

While China's GDP will surpass that of the U.S. by 2035, its per capita GDP will likely draw even with the U.S. in about 80 years, according to the study. In 2005, China's per capita GDP was less than 2,000 dollars, compared to 41,000 dollars in the U.S. As measured by purchasing power parity (PPP), which takes account of the relative cost of living -- how much a certain basket of goods actually costs -- China's per capita income was about 4,100 dollars.

By 2035, according to Keidel's model, per capita GDP in China should reach about one third of U.S. GDP, and roughly one half as measured by PPP.

[Arthur Eckart]

Tom, I've already proven my statements on this site about a year ago using orthodox economics, mathematics, and real data. To repeat, since you're taking up so much space with your value judgments:

Your assumptions on the U.S. military, education, and China are false. India has a realistic chance of surpassing China within 10 or 20 years. Perhaps, China can overtake the U.S. someday. However, it needs to improve its economic policies. Also, the U.S. is a nation of immigrants, which has typically attracted the best, the brightest, and the ambitious. Moreover, history, since at least Vietnam, shows U.S. military power has been most effective. The second link gives you an idea of U.S. military objectives. Furthermore, even with wars in Iraq, Afghanistan, and the War on Terror, along with Homeland Security, the U.S. budget deficit fell to $160 billion in 2006 (or roughly 1% of GDP), and U.S. military expenditures as a proportion of GDP are near recent historical lows.

Even Sheila Jackson Lee, a Congresswoman, who voted against Operation Iraqi Freedom stated: "The U.S. achieved extraordinary military success in Iraq, toppling the regime of Saddam Hussein in only 21 days, assuring the world that Iraq does not possess weapons of mass destruction, assisting the Iraqis in holding free elections, and setting the nation on a path toward democracy."

http://www.jacksonlee.house.gov/list/hearing/tx18_jackson-lee/reporttohousecommitteeiraq.shtml

http://fpc.state.gov/documents/organization/101771.pdf

[D sherman]

Why don't people simply realize one thing about China. They are simply manufacturing, There isn't any intellectual property coming from China. If we don't buy there is no China economy. The United States can always find cheap labor for our consumption.

[Larry Koss]

What's missing from this conversation for me is a growing discussion among forward-thinking economists that our present model of spec-marketed growth economics is not sustainable - be it locally, nationally or globally.

Indeed, given what we witness via climate change, peak oil, global economic fragility, global hunger, poverty, poverty-related disease, environmental and cultural degradation, world conflict etc, it appears: (a) our entire global malaise sits on the doorstep of how we've practiced commerce and (b) that neither the Earth or humanity have sufficient resources or resiliency to continue this path unabated.

Einstein puts it pretty straight - "We shall require a substantially new manner of thinking if mankind is to survive!” and "We cannot hope to solve a problem using the same kind of thinking that produced it."

When I look at China, India, Japan, the European Union, U.S. et al, I see attempts to foster exponential growth leading to geometrically increasing complexity with little commitment beyond lip service to true sustainability in whole terms - i.e., to bring or organizing and expression in life on all quarters into "absolute honesty, balance and whole wellbeing." Despite all the very noble attempts being made to reduce the "symptoms" (e.g., carbon emission) of a "context gone awry", I do not believe we are yet speaking to the "belly" of the issue. To wit - even after multi-billion dollar bailouts and stimulus packages, we still witness unconscionable excess and dishonesty at executive levels throughout the corporate and political world that led to it in the first place.

I'm reminded of a quote by Will Durant, "A great nation is not conquered from without until it has destroyed itself from within!" Too, of a comment made in the 1/12/2009 issue of Newsweek ... “Only a transformation of capitalism can save the United States and perhaps the world. If we can’t escape the materialistic trap that the most recent brand of capitalism seems to have set for us, I’m very afraid for the world my children will inherit!” – Frank Kline, Lake Forest Park, WA

I find it interesting that David Rockerfeller and his cabal go on record with their commitment to create a "one world government." Recognizing how utterly complex and crazy-making it is to run a single country without bringing it to the verge of collapse (noting the fall of many former empires, the former Soviet Union as the latest) - I would like to see more discussion beyond speculation on who will overtake the other, on what we can do to bring ourselves - ALL of us - to absolute honesty, balance and whole well being. Alas, the minute I hear my mind say, "That's not realistic!", I hear next, "It's 'inevitable' if humanity is to survive on Earth!"

In closing, when I look at the underpinnings of our entire global malaise, it seems to sit upon the doorstep of how we've practiced commerce. I've noted, too, that this entire malaise represents acts of violence against humanity and/or Nature. Next, a Bureau of Justice Statistic reveals that "85-95% of all violence is caused by men, and of the 5-15% caused by women, most have been abused directly or indirectly by men."

This seems consistent with the reality that we are a patriarchal world run-riot - i.e., all our systems from commerce to education, government/politics, military and even theology are principally directed, controlled and furthered by men. This of course speaks to the Bureau of Justice claim of women being "indirectly" abused by men via. It's occurred via the systems we've created that have suppressed beyond comprehension their innate preciousness, equality and value to the world from the very creations of our theologies to the workplace and political process.

Looking beneath the choice to violate in the first place, one finds a "disconnect" from one's own sense of self and our own preciousness - for were that intact, we literally couldn't hurt a fly.

This suggest that our grossly out-of-balance patriarchal world sits squarely upon a massive, systemic sense of insecurity on the part of who we are as men - an insecurity which has compelled us thus to seek evermore money, power and fame in an insatiable effort to "be somebody." Yet alas, given the "leaky bucket" we've had on board, there will NEVER be enough, right?

Core issue? I believe we men have an answered question, the failure to answer of which will keep us on this treadmill forever. And I believe this question represents the "gap" we feel from women, from ourselves and from the source of Life Itself.

I believe we have yet to ask individually and as a gender why are we here other than to be a sperm-donor? Women innately know why they are here - i.e., they're here to create and nurture life. They can be doctors or lawyers, yet fundamentally their psyche and physiology clearly signals "mothering and nurturing."

For us men, however, since all life needs to create, once we've done the sperm thing, what are we left with? Seems the principal "babies" we set out to create and nurture are our images viz a vie our money, power and fame. These are of course mere illusions, yet we insert ourselves in them SO deeply that when competition threatens the image, some literally KILL to defend it - which explains some go berserk killing themselves and/or others, why one corporation seeks to bury another or why one theology will genocide another.

I believe as men we are being presented with an opportunity now to "wake up" beyond individual and organizational ego to a larger truth of who we are - one that will NOT be found in any bank account, estate or accolades, rather in the heart and soul of each one of us as individuals within the organizations we represent. I believe, too, somewhere deep inside we know this to be true. We simply find the notion of softening and partnering at a much broader level scary enough to imagine it to be life-threatening. Indeed, deep inside beyond our images, it appears we scared to death of women and the softening and surrender that is innate to them. Could it be that we've been fighting the woolly mammoth for too long?

I leave with a metaphor ... "What does it take for a man to surrender to have his wife and kids (LIFE) be the most important thing in his life?" Seems generally one or more of three things. Some need a health problem (some even a few heart bypasses). Others, for their wife to say, "You think all that show of yours is more important than we are? We're out of here!" Some need to lose their money, power and privilege enough to ask, "What is REALLY important in life?" And some, of course, need all three.

I hope we can come together as a gender to learn than in the surrender to what is more noble and heartfelt - ESPECIALLY in what we do daily in the marketplace - we finally find ourselves, happiness and what we've sought via our theologies.

Blessings upon your day!

[JET]

The glorious days of the Roman Empire had gone...the British Empire too had gone...so what makes you think that the US will last forever? Everything comes and goes, that is natural. Even if China will to become number one in the world, it too will be gone in due time. So why worry?