Wednesday, September 7, 2011

The "inevitable superpower"?

Arvind Subramanian bites the bullet and takes his call on the inevitability of China setting the pace in the years ahead, just as America did for the past half-century or so. He questions the persistent conventional wisdom in the US that "if the United States can get its economic house in order,it can head off the Chinese threat". He writes,

"During the 1956 Suez crisis, the United States threatened to withhold financing that the United Kingdom desperately needed unless British forces withdrew from the Suez Canal. Harold Macmillan, who, as the British chancellor of the exchequer, presided over the last, humiliating stages of the crisis, would later recall that it was "the last gasp of a declining power". He added, "perhaps in 200 years the United States would know how we felt". Is that time already fast approaching, with China poised to take over from the United States?"


He defines economic dominance thus,

"Broadly speaking, economic dominance is the ability of a state to use economic means to get other countries to do what it wants or to prevent them from forcing it to do what it does not want. Such means include the size of a country’s economy, its trade, the health of its external and internal finances, its military prowess, its technological dynamism, and the international status that its currency enjoys.

My forthcoming book develops an index of dominance combining just three key factors: a country’s gdp, its trade (measured as the sum of its exports and imports of goods), and the extent to which it is a net creditor to the rest of the world. GDP matters because it determines the overall resources that a country can muster to project power against potential rivals or otherwise have its way. Trade, and especially imports, determines how much leverage a country can get from offering or denying other countries access to its markets. And being a leading financier confers extraordinary influence over other countries that need funds, especially in times of crisis. No other gauge of dominance is as instructive as these three: the others are largely derivative (military strength, for example, depends on the overall health and size of an economy in the long run), marginal (currency dominance), or difficult to measure consistently across countries (fiscal strength)."


He analyzed the world economy, beginning from 1870, based on these factors and finds that by 2030, the "relative US decline will have yielded not a multipolar world but a near-unipolar one dominated by China". In fact, based on his index, he already finds China ahead. It will have close to 20% of world GDP compared to below 15% for the US; and will generate 15% of global trade, twice that of America; and the yuan will be a credible rival to the dollar as the world’s premier reserve currency. His assessment of the gap between China and the US by 2030,

"My projections suggest that the gap between China and the United States in 2030 will be similar to that between the United States and its rivals in the mid-1970s, the heyday of US hegemony, and greater than that between the United Kingdom and its rivals during the halcyon days of the British Empire, in 1870."


He addresses the conventional explanations of how China may find it difficult to focus its energies externally given the need to improve the living standards of its citizens (even if it reaches half the US per capita income), raise resources for projecting its military power, or in the absence of any soft power. In particular, he points to China's already considerable influence among many Latin American and African countries, where the Chinese government has not hesitated to use its massive foreign exchange resources to virtually buy off these countries.

More convincingly, he points to a scenario where the US economic conditions do not improve much, China continues to grow at about 7% a year and satisfactorily maanges its transition to a stable middle income country, yuan becomes an accepted global reserve currency. In such conditions, he argues, the fate of the world economy, including that of the US, will be largely determined in Beijing.

Update 1 (14/9/2011)

The Economist has this review of Arvind Subramanian's book.

1 comment:

gaddeswarup said...

In a 2006 paper "IS WAR NECESSARY FOR ECONOMIC GROWTH?" VERNON W. RUTTAN already said:
"A major objective in this paper is to demonstrate that military and defense related research, development and procurement have been major sources of technology development across a broad spectrum of industries that account for an important share of United States industrial production.

I argue that the United States and the global technological landscape would be vastly different in the absence of the contribution of military and
defense related research, development and procurement. I also argue that as we look to the future the contribution of defense and defense related technology research, development and procurement to United States
industrial production will be smaller than in the last half century.

An implication is that in the future the rate of productivity and income growth in the United States economy will be slower than during the first two post-World War I decades or than during the information technology bubble
that began in the early 1990s."

I wonder what you think of this line of thought. The link to Ruttan's paper:
http://www.csbsju.edu/Documents/Clemens%20Lecture/HistoricallySpeaking-Issues%20merged%201%2016%2007_2_.pdf
and an earlier paper in the same direction:
http://www.cid.harvard.edu/archive/biotech/papers/discussion11_ruttan.pdf