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).

Autocracy, inflation, revolt, crackdown

A few weeks ago, social scientists Michael J. Lamia and James Raymond Vreeland published the results of an exhaustive statistical study of the factors that lead countries to transition to democracy. One ostensibly surprising conclusion was that rapid GDP growth does not correlate with such transitions:

Regarding transitions to democracy, we find that economic growth has a robust negative effect. This finding, standing in stark contrast to modernization theory, suggests that autocracies with strong economic performance are unlikely to see democracy emerge. Instead, economic contraction causes dictatorships to break down. Also in contrast to modernization theory...the level of GDP per capita does not have a robust relationship with the emergence of democracy (p.2).

We have an interesting finding for economic growth: it makes dictatorships more likely to survive and lowers the chances for democracy to emerge (p. 27).

Is this really so surprising? No one wants to change a winning game. As long as an autocracy delivers the goods, people are likely to tolerate it. However, these researchers also found that

autocracies with strong economic performance are unlikely to see democracy emerge. Instead, economic contraction causes dictatorships to break down.

What happens when rapid economic progress gives way to economic stress? Perhaps that is the danger point for many autocracies.

Such was the case in the runup to the Tiananmen Square crackdown in China in 1989. From 1984-1988, China's average yearly growth rate (not compounded) was 12.1%, according to Chinability. In 1989, growth slowed to 4.1%, shrinking to 3.8% the next year before soaring again to 9.2% in 1991 and never dipping below 7% thereafter. The major economic stress point in the months prior to the student protests, however, was runaway inflation, which led to widespread calls for increased centralized control of the economy after a period of liberalization.

The Chinese people ultimately accepted continued authoritarianism after the Tiananmen crackdown. Prior to the 1989 dip, they had experienced a dozen years of extraordinary growth, and after a two-year slowdown in 1989-90 the country resumed its torrid wealth creation. Some may lament the wealth-freedom tradeoff. But the government has credibility to the extent that it's fostered the commonwealth for a generation.

Iran's current crisis is also occurring at a moment of economic pressure following a period of growth. Since 2000, according to the Congressional Research Service, GDP growth has averaged about 6.4% per year; this year, in the midst of the world financial crisis, it's projected at 3.5%. But again, the chief stressor is inflation: the official CPI was 17.1% in 2007 and 28.0 in '08, the real rate is higher, and the costs runups hit people where they live, in housing and food prices. Unemployment is also high - 12.1% in 2007 -- and Iran suffers the world's biggest brain drain, according to the IMF, as its young population goes abroad in search of opportunity.

Unlike the Chinese in 1989, Iranians today widely consider their country to be mismanaged economically. Ahmadinejad has held interests rates artificially low, fueling inflation. The international sanctions bite, and foreign investment is low.

A Tiananmen-style crackdown could happen at any time in Iran. But the Iranians have less cause to accept their government's heavy hand than the Chinese did. There is no upside to acquiescence -- no promise of prudent economic stewardship, or of stability and increasing foreign engagment.