Saturday, September 10, 2011

China’s economic might to surpass America’s by 2030

So argues Arvind Subramanian. Here are excerpts from The Economist which reviews Subramanian’s latest book:

[…] Mr Subramanian combines each country’s share of world GDP, trade and foreign investment into an index of economic “dominance”. By 2030 China’s share of global economic power will match America’s in the 1970s and Britain’s a century before. Three forces will dictate China’s rise, Mr Subramanian argues: demography, convergence and “gravity”. Since China has over four times America’s population, it only has to produce a quarter of America’s output per head to exceed America’s total output. Indeed, Mr Subramanian thinks China is already the world’s biggest economy, when due account is taken of the low prices charged for many local Chinese goods and services outside its cities.

More from The Economist:

[…] Big though it is, China’s economy is also somewhat “backward”. That gives it plenty of scope to enjoy catch-up growth, unlike Japan’s economy, which was still far smaller than America’s when it reached the technological frontier.

[…] Buoyed by these two forces, China will account for over 23% of world GDP by 2030, measured at PPP, Mr Subramanian calculates. America will account for less than 12%. China will be equally dominant in trade, accounting for twice America’s share of imports and exports. That projection relies on the “gravity” model of trade, which assumes that commerce between countries depends on their economic weight and the distance between them. China’s trade will outpace America’s both because its own economy will expand faster and also because its neighbours will grow faster than those in America’s backyard.

[…] He is overly sanguine only on the problems posed by China’s ageing population. In the next few years, the ratio of Chinese workers to dependants will stop rising and start falling. He dismisses this demographic turnaround in a footnote, arguing that it will not weigh heavily on China’s growth until after 2030.

Rodrik argues (Rodrik’s cautious views here and also here):

[…] “I see lots of fragility in the Chinese system. Combine the stresses that will arise from the need to alter their economic model with the restiveness beneath the surface (the number of riots that take place in that country every single day is mind boggling) and their inability to effectively deal with political dissent, and I think you have a very explosive situation. It could well be that a balance that you can maintain at 9% growth becomes impossible at 6%.”

[…] “They have little choice but to emphasize domestic demand now. But this will create problems. Domestic consumer will demand, at the margin, more health care, housing, and entertainment — not more steel or electronics or the other stuff on which the export engine depends. The mismatch means lots of factories will have to close and lay workers off.”