In a February 2015 Povolny Lecture at Lawrence University, I talked on the subject “China Ranks Number One or Does It? Should We Care?” It’s time for an update. In that talk, I raised the following five questions:
- What does China Ranked #1 mean?
- Is being #1 part of the “China Dream?”
- Will China’s economy dominate the 21st century?
- Does economic dominance matter?
- How should the US and the rest of the world respond to China’s rising economic power?
In this posting, I will indicate how I answered these questions in 2015 and my answers today.
The IMF and the World Bank rank economies in terms of gross national income (GNI) in purchasing power parity (PPP) terms. To translate a country’s income in its own currency into a common currency for comparison terms, the World Bank uses PPP, which employs an index based on the prices local residents pay for these goods and services. For a simple example, see The Economist’s annual Big Mac index. PPP calculations are useful for comparing per capita incomes as they reflect the purchasing power of income for a household that faces domestic prices rather than those in the US (or elsewhere) but not aggregate economic power of an economy. The table below illustrates both the 2015 and 2021 numbers for China and the US, based on World Bank calculations.
|GNI ($)||$10.88 Tr.||$18.16 Tr.||$16.79 Tr.||$23.60 Tr.|
|GNI(PPP)||$17.71 Tr.||$18.66 Tr.||$27.06 Tr.||$23.39 Tr.|
In current exchange rate terms, both in 2015 and 2021, the Chinese economy was quite a bit smaller than the US economy. In PPP terms, the size of China’s economy passed the US between 2015 and 2021. In per capita terms, which provide some sense of material well-being, Chinese households were able to purchase only ¼ what US households could purchase in 2021. Thus, even though China’s GNI is larger than the US in PPP terms, since it serves more than four times as many people, its ability to provide material well-being for its population suggests that it still is a middle-income country.
In the 2015 talk, I cited President Xi’s November 2013 address to the 18th Congress of the Chinese Communist Party. His statement remains pertinent today.
“We must make persistent efforts, press ahead with indomitable will, continue to push forward the great cause of socialism with Chinese characteristics, and strive to achieve the Chinese Dream of great rejuvenation of the Chinese nation.”
This statement reflects the observation that some measures ranked China as the world’s largest economy prior to 1800, and it seeks to return to that position.
China’s dominant economic position
My 2015 talk reflected the views of China 2030, a 2012 document jointly published by the World Bank and China’s Development Research Center. That report projected annual GDP growth of 7% for 2016-2020, 5.9% for 2021-2025, and 5.0% for 2026-2030. These results would depend on labor productivity growth greater than GDP growth throughout the entire period. China did sustain its 7% growth rate between 2016 and 2020; however, long term productivity growth of 5% would be quite rare in world history for middle income countries.
As noted in my 2015 talk,
“Most economies stagnate once they reach middle income levels because they are unable to change their institutions away from those that have rewarded the institutional elite to establish legal, financial, and governance institutions AND practices that encourage the creation of value rather than just its redistribution.”
I further described a variety of reasons why China won’t be able to sustain its economic growth rate. In particular, China’s economic policy choice in 2014 was between one that a) “increase(s) the role of markets, rebalance(s) economic forces to increase consumption and reduce(s) dependence on repressed finance, exports, and investment and b) “emphasize(s) maintenance of stability and keeping economic growth steady” (as suggested by the Central Committee Work Conference in December 2013, which was headed by President Xi.)
Tianlei Huang and Nicholas Lardy recently argued that China, under Xi Jinping, has clearly chosen the second path. In particular, they observe that China has chosen to reallocate resources away from private companies and toward state-led enterprises under CCP control. They argue that the latter organizations in China have been decidedly less productive than the former.
“The bias against private firms began in Xi’s first term, when he called in an important speech to the 19th Party Congress in the fall of 2017 for supporting and strengthening state enterprises. State banks responded by boosting the share of loans flowing to state companies, at the expense of private firms.
In the same speech in 2017, Xi called for a further expansion of the role of the Communist Party in the economy, including the installation of Communist Party committees even in private enterprises. Indeed, the central committee in 2018 went further, calling on “the Party to exercise leadership over all areas of endeavor in every part of the country.”
In a March 2023 Foreign Affairs article, Damien Ma and Houze Song argue that:
“To boost consumption sustainably generally requires two things: organizing the economy to optimize it for growth and raising household income and confidence. Chinese President Xi Jinping, having secured his third term, appears much less interested in organizing the economy for growth than his predecessors did. Instead, he is optimizing it for security and resilience. Strikingly, in the Five-Year Plan released in 2021, Xi made the decision to abandon China’s long-standing policy of setting a hard growth target.”
“For China, boosting consumption has been as elusive as health-care reform in the United States: there has long been a consensus on the need for change but little to show for it. The main difference, however, is that China is still far below U.S. levels of GDP per capita, and relying on consumption is Beijing’s best bet to draw level. Whether it likes it or not, China faces a stark choice. It can either choose a pro-consumption path or risk forfeiting its goal of becoming the world’s largest economy over the next decade.”
China appears to have chosen state control and stability over economic growth and broad-based prosperity. This choice limits the potential for China to reach the type of economic dominance suggested by Arvind Subramanian that I cited in my 2015 talk. Furthermore, de-globalization trends, encouraged primarily by the US and to a lesser degree by the EU, reduce the importance of trade and, thus, the potential for economic dominance.
Does Economic Dominance Matter?
In my 2015 talk, I argued that economic dominance mattered in the 19th and 20th centuries, but that US dominance clearly was diminishing. Since 2008, after the Great Recession in the U.S., it’s clear that the US role in the global economy has changed. It’s not yet clear that China (or the EU) will replace the US as economic hegemon or that there will be a dominant economic power for most of the 21st century.
So, yes economic dominance matters, but it’s difficult to obtain and even more difficult to sustain.
How Should the US and the Rest of the World Respond to China’s Rising Economic Power?
As noted in my talk, former US Secretary of the Treasury, Henry Paulson argued that strategic economic dialogue between the US and China was essential to combat the nationalistic, protectionist instincts of both countries. The strategic dialogue he established in 2006 was diminished by the Obama administration and obliterated by the Trump administration. The Biden administration has done little to undo the previous administration’s actions and policies, and, in fact, has placed even more restrictions on economic relations between the two countries. Attempts to decouple the US and the China’s economies (including some of the initiatives under consideration at the newly established Congressional committee on China) will make life more difficult for both countries as well as the rest of the world. In a March 30th Project Syndicate piece, Michael Spence put in bluntly.
“Many people on both sides of what might be called the “mutual distrust equation” know that decoupling is a distinctly suboptimal and perilous course. But in both the US and China, dissenting voices are either ignored or stifled, whether through political pressure or outright repression.”
My answer to this question in 2015 related to the spread of economic power. The less the concentration of economic power, the more important it is to integrate the large economies into a global economic governance structure that can best serve the world’s people and, for that matter, best respond to global forces such as climate change and rising income inequality. A decade ago, the US chose not to distribute more power and responsibility to China in global institutions such as the World Bank, the IMF, and the WTO. In response, China established the BRICS (Brazil, Russia, India, China, and South Africa) bank as well as the Asian Infrastructure Bank. The US has chosen to not support the WTO (by neither helping to fill existent vacancies nor agreeing to abide by its rulings) nor to relinquish its veto power at the IMF.
In my view, the world will be a much worse place if it morphs into an economic cold war with separate economic spheres reminiscent of the time period between World War II and 1989. I concluded my 2015 remarks with the observation that I didn’t foresee China dominating the world economy; however, I did see the possibility of sustained global prosperity if the major economic powers could work together to design, implement, and act consistent with a set of rules and institutions for such a purpose. I am much more pessimistic today. Furthermore, constructive responses to climate change require the world’s largest economies to play strong leadership roles in keeping temperatures from rising precipitously. Recent actions by both China and the US provide little reason for hope.