China overtakes the US

It is now the largest economy in the world. Should we worry?

Pritam Singh

Taxis on the street in Hong Kong. The earlier models of development cannot be repeated in the emerging economies such as China and India. Thinkstock

WHAT was earlier anticipated by many observers, including this writer, regarding the rise of China as the largest national economy in the world is official now. The latest International Monetary Fund (IMF) data has confirmed that China with 17.6 trillion dollars Gross Domestic Product (GDP) now has a 16.47% share of the global GDP and the US at the number two position with a 16.28% share. Between them, these two countries now have one-third of the entire world's GDP. India, which overtook Japan as the third largest economy in 2011, is way behind in its share at 6.81 per cent of the world GDP. The ten largest economies in the world now are (in the descending order): China, the US, India, Japan, Germany, Russia, Brazil, France, Indonesia and the UK.

America has been the most dominant national economy in the world for 142 years. It overtook the UK as the largest economy in 1872. It seems that if the 19th century was a British century, the 20th century a US century, the 21st century is likely to be an Asian or, to be more exact, a Chinese century. America's decline has been slowly in the making but the financial crisis since 2007-08 has precipitated that relative decline. The American intervention in Afghanistan and Iraq has further put strain on US resources despite some American corporations winning energy, military and construction projects in these countries.

China's rise has been phenomenal. In 1980, China' share of the global GDP was merely 2% (lower than even India's 2.40%) while America' share was 22.6% which went up to 23.3% (nearly one fourth of the world GDP) in 2000. China's dominance is not confined merely to a top place in the GDP ranking. China is also the largest exporter in the world. It is also the largest importer of many commodities, and it is able to use that economic clout to be a price setter of many products. China holds the world's largest trade and current account surpluses, is the owner of a third of the world's currency reserves and holds the world's largest flow of savings. As the owner of the world's largest dollar reserves, although it owes that position to its exports to the US, it holds the US fate in its hands. China is the biggest trading partner in Africa and has a huge foothold in Latin America, Europe, Middle East and South and South East Asia.

Many observers had found it odd that when the IMF first presented data a few months ago which suggested that China would overtake the US as the largest national economy in the world by the end of 2014, China protested against the IMF estimates. China's protest related to the use of the Purchasing Power Parity (PPP) method used by the IMF to estimate the GDP of all countries rather than using the current exchange rates to measure the GDP. It is true that at current exchange rates, China's GDP is lower than the USA's but due to differences in costs of living in different countries, the PPP method is internationally accepted as a better measure of comparing GDPs of different countries. China has finally accepted the IMF estimates. Any other emerging economy in the world, including India, would have celebrated with great fanfare if that economy had reported to have achieved the number one GDP slot but China seems to be reluctant to accept that status. Chinese reluctance is based on the astute realisation that becoming the world's top GDP economy carries many global governance responsibilities too. The recent criticism of China's disproportionately low commitment to fighting the Ebola virus in Africa has brought into sharp focus the responsibilities that accompany the power that comes with achieving the top economy status.

China's rise to GDP dominance is a reflection of a wider structural change taking place in global capitalism. The advanced capitalist economies have been in crisis since 2007-08. Although most recently there have been signs of recovery in the US and the UK mainly reflected through the decline in unemployment, the new jobs that are being created are low wage, generally with very low job security and most often part time in nature. In contrast with that the leading emerging economies have shown reasonable rates of growth. No doubt, per capita income in the advanced economies still remains significantly higher than that in the emerging economies.

The central question that arises is: can the emerging economies reach the levels of per capita income and standards of living that the Western capitalist economies have enjoyed for several decades? The answer to this question is: no. The reason is that when the advanced capitalist economies grew largely after the Second World War, their growth was not constrained by ecological risks. It is the historical misfortune of the emerging economies that their growth will result in a threat of ecological barbarism due to climate change and global warming.

One example should suffice to illustrate the risks involved. A car is considered the most visible and known product that symbolises Western standards of living. If we take the motor vehicle use as a proxy for car use, the most recent data available from the World Bank shows that the US has 786 cars per a thousand population while China has 198 and India has 41. If China (and India) were to have the US level of car use or even half of the US level, it would create such a high level of demand for steel, rubber and oil that our planet earth would not be able to sustain that level of demand. Environmental science teaches us that all produced products eventually become waste which are then absorbed by the environment (land, water and air) and the scale of waste that would be generated by the US level of car use in China and India would be so horrendous that our land, water and air would be polluted to an extent that they would threaten life on earth.

China's rise to GDP prominence highlights that capitalism so far has been confined to relatively low-population countries (except the US) and its extension to high-population countries such as China, India and Indonesia, to name just the top three, has such high environmental risks that new environmentally sustainable paths of development need to be worked out not only for these emerging economies but also the so-called developed economies. The earlier models of development cannot be repeated in the emerging economies.

The writer is a Professor of Economics at Oxford Brookes University, Oxford, UK