Wednesday, April 27, 2011

End of the Age of America? Not quite so fast...

China's GDP is a bit less than half that of the U.S by conventional measures.; its population is about four times as large, and its rate of annual GDP growth about triple.  The IMF is now forecasting that China's GDP will surpass that of the U.S. by 2016.

The IMF gets to that watershed so quickly in large part by adjusting current figures for "purchase power parity" (PPP)-- that is, adjusting for the artificially low exchange value of the yuan.  PPP-adjusted, the IMF pegs China's current GDP at about 74% that of the U.S., as opposed to approximately 40% in 2010 as conventionally measured, according to IMF figures.

Brett Arends, reporting this forecast in Marketwatch, concludes:
This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, “We are witnessing the end of America’s economic hegemony.”
I wonder if that is necessarily so. Certainly not immediately.  At present, the European Union's economy is larger than that of the U.S., but it projects nowhere near the comparable military or soft power.

While China's population is about  four times that of the U.S., its per capita income, by conventional measures, was a bit less than 1/10 as large in 2010, according to the IMF. Call it 1/6, PPP-adjusted.  China spends 2.2% of GDP on its military, compared to 4.7% in the U.S (Stockholm International Peace Research Institute).  It collects 17% of GDP in taxes, compared to 28% for the U.S (Heritage).

China can obviously decide to spend a much higher percentage of  GDP on its military -- and I imagine it's hard to say how PPP would affect calculations of the real value of its spending. Perhaps, too, the large percentage of China's output controlled by state-owned enterprises makes defense spending relatively less costly to the government (or does relative inefficiency in SOEs make it relatively more costly?).   On the other hand, China's spending on its social safety net is also relatively low, and it faces huge infrastructure challenges -- as James Fallows presented it, needing to move something like 300 million people into cities that haven't been built yet.

The U.S. in its turn needs to cut defense spending. But it has the habit of projecting power -- and with rational tax and budget reform, and effective healthcare reform, it would have the means to maintain a large portion of its spending lead for a long time to come.

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