by Mark Scheinbaum
AR Financial Correspondent
Angel Fire, N.M.
May 20, 2011
HELPFUL HINTS FOR THE END OF THE WORLD
DUMMERSTON, Vt. -- If the International Monetary Fund is to be believed, China is poised to surpass the United States as the world's largest economy by 2016.
Using a formula that measures economies in terms of real goods and services called purchasing power parity, or PPP, the most recent version of the IMF's World Economic Outlook forecast shows China's economy will grow from $11.2 trillion this year to $19 trillion by 2016.
The United States, by comparison, will increase from $15.2 trillion to $18.8 trillion over the same period.
That would make China and the United States roughly equal in economic power, accounting for about 18 percent each of the world's total economic output.
When you consider that just a decade ago the U.S. economy was three times the size of China's, these figures are amazing.
But is this, as some pundits have been saying, the end of more than a century of American economic dominance? Or are we about to begin an age where our nation has to adjust to the status of being in a group of equals?
It's still too soon to say, and the IMF forecast does not take into account economic wild cards such as peak oil, climate change and rising political unrest around the world. But the IMF forecast does illustrate the result of choices made by U.S. companies to trade jobs for profit.
Our nation exported its manufacturing jobs to China. Corporations made more money. Consumers got lower-priced products. But the American workers who once made those products are out of work and unlikely to ever get a job with the pay and benefits that their old jobs had.
Compare that to the choices China made. Even taking into account the amount of centralized state planning in the Chinese economy, you could argue that China's decision to promote high technology, to hire locals for managerial and technical jobs, and to not allow foreign investments to compete with selected domestic industries was a good idea.
Unlike other countries that saw a rapid expansion in trade and foreign investment, the communist Chinese government heavily managed this expansion and made sure it fit with its development goals. The government controls most of the financial system, sets the exchange rate for its currency and owns 44 percent of its major industrial firms. That's a big reason why the Chinese economy has been the fastest growing economy for the past three decades.
Then there are the other set of choices that our nation's leaders have made regarding international policy. Since the end of World War II, this nation embarked on the course of empire. If you are a supporter of the idea that the United States should be the sole superpower, you would likely see China's ascension to the role of co-superpower as a threat to the world.
But when you consider the cost of being the sole superpower -- a trillion-dollar-per-year budget for national security, dozens upon dozens of military outposts ringing the globe, and five decades of military actions against countries big and small, from the Korean War to the bombs being dropped on Libya -- you can see that maybe our nation and economy may benefit from the ongoing shift to a multi-polar world.
Unlike the United States, China doesn't make policy demands or use force to threaten other nations. It is more subtle. They treat economic power as more important than military power or dreams of empire. That's why China's focus is on securing raw materials for manufacturing and making trade deals to sell the finished products.
While China seems to be on its way to surpassing the United States economically, it may not necessarily happen in five years, or even 10 years.
First of all, despite Standard & Poor's threat to downgrade the credit rating of the United States, the dollar remains the world's reserve currency. No other currency is even close in status.
China's currency, the renminbi, is artificially and deeply undervalued on foreign exchange markets. Why? Because the Chinese government is buying up dollars.
Inflation is also a concern. For example, as is the case in nearly every other country in the world, food and energy prices have been rising sharply over the past couple of years. While food consumes about 12 percent of a median American family's budget, it takes up 30-40 percent in China.
And China is now the world's largest user of energy -- not a good position to be in when fossil-fuel supplies are tight and prices are high. This has led to strikes and protests for higher wages in recent months.
The traditional remedies for fighting inflation, such as raising interest rates to slow economic growth, are not an option for China. Sustained and rapid economic growth has been the main way the Communist Party has kept a lid on social unrest and dissent. Without it, the government risks losing legitimacy and seeing a Cairo-style uprising.
While China now has nearly 600,000 millionaires, it remains one of the poorest nations in the world, with a very sharp economic divide between its rural and urban populations. According to the World Bank, there are 270 million Chinese who live on less than $2 a day, and another 210 million who live on less than $1.25 a day.
As for the overall average standard of living of its citizens, the IMF ranks China 93rd in the world, which puts it behind violently unstable nations such as Libya and Bahrain, and on a par with revolutionary nations such as Egypt. An increase of poor, hungry and jobless citizens in China increases the chances of social upheaval.
Certainly, as the world's largest exporter and the world's largest creditor, China's growing economic strength must be reckoned with. But its mix of state capitalism with authoritarian dictatorship may no longer be able to sustain the kind of growth that has kept China politically stable for the past two decades.
It might be more reasonable to expect that the Chinese government will be too busy dealing with a restive population and the fallout from the end of two decades of hyper-growth to indulge in imperial dreams.
Chief of AR Correspondents Randolph T. Holhut has been a journalist in New England for more than 30 years and in 3007 was selected as Vermont's Best Editorial Writer by the Vermont Press Assn. He is a graduate of the John F. Kennedy School of Government at Harvard University. Reach him at email@example.com.