The USA is still number one and China is so yesterday!!?? Why?

The World Bank made eye catching headlines last week when it stated that China may overtake the USA as the world’s biggest economy as early as this year. Apparently, China is hot on the heels of the USA’s 125 years of global economic dominance; moreover this is occurring faster than anticipated, according to the World Bank’s International Comparisons Program (ICP). Indeed, back in 2005, the number crunchers at the ICP estimated that China’s economy was about 43 percent the size of the USA.  But their latest report, based on 2011 data, reckons China’s economy to be valued at $13.5 trillion, which amounts to 87 percent of the US economy, which is $15.5 trillion.   

                                                                      

Moreover, the dragon was given more puff just one week after the ICP report when it was also reported in the Forbes 2000 list that three of the biggest public companies and five of the top ten world’s largest companies are Chinese: Commercial Bank of China, China Construction Bank and Agricultural Bank of China to name but a few.

At this point it is also worth noting that China already held this top position of the world’s biggest economy during the Qing dynasty (1644-1911), prior the US industrial revolution.

So this time around should we all pack up sticks, sell dollars, buy yen and move east in search of the dragon?

Not really, you see while the claim of rising dominance of China and possible global economic dominance of China by as early as next year may have made headline grabbing news, it might have been also over played.

To understand why this may be so we need to determine what economic data is used to measure and compare economies.

Take, for example, Gross Domestic Product (GDP), which is the monetary value of all the goods and serviced produced within a country’s territory within a specified period (normally a year). GDP figure includes the sum of all private consumption (C) plus the sum of government spending (G), the sum of all business investment (I) and the nation’s net exports (NX), which equates to exports minus imports. So GDP=C+G+I+NX.

But if we use GDP alone to compare the prosperity of a country’s economy with another, it may be misleading because the figure doesn’t factor in the population size of the country.  Take for example, two extremes like India with a $1.758 trillion GDP estimated figure in 2013 and Norway’s GDP of $515.8 billion in the same year. According to GDP figures India is a far bigger economy; nevertheless the Norwegians are far more prosperous than the Indians. In this line of reasoning China’s GDP may have led the world in the 19^th century due to its sheer population numbers, nevertheless China back then was also a relatively isolated backward place and in a desperate state.

So if we measure China’s economy in terms of per capita GDP, then we get another picture. The GDP per capita is calculated by taking the GDP figure divided by the number of people. China’s GDP per capita ranks only 99 in the world, behind that of Peru. Using this figure we can determine that China is still relatively poor.

However, fluctuating exchange rates makes cross border comparisons a dicey business. Purchase Power Parity (PPP) needs to be factored into the equation when making comparisons.   The PPP calculates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power. It can be calculated by dividing the costs of goods x in country 1 (P1) divided by the costs of goods x in country 2 (P2). Thus, S=P1/P2 where (S) represents the exchange rate of country 1 to country 2.  

But even when you play around with all the figures to try and gauge comparisons one has to ask just how accurate are these economic indicators coming out of China. China's National Bureau of Statistics has been accused of fudging the figures by double counting various economic activities, such as factory production, according to numerous economists.

Perhaps we need some other indicator to determine whether China will topple the USA in economic might.  After all it is a country’s ability to innovate, create, develop and market new technologies, products, services more of an indicator of a country’s economic might in the world. To what extent has China’s mammoth growth over the previous decade been down to the innovation and creativity of its people? Being the world’s factory, offering low labor costs and having the technology and creative aspects conducted outside your borders is not a model for world dominance. Moreover, in China’s repressive model of economic capitalism where speaking out against the regime can cost you your freedom, this doesn’t liberate free minds to challenge the status quo, to think outside the box, to innovate, to create. It would be a mistake to underestimate the intelligence of the Chinese; they are an ancient civilization, great strategic thinkers. But under repression minds are shackled and creative thinking is stifled.   

The USA’s ideals of freedom, tolerance, acceptance, rewarding success and even admiring it, are universal ideals that are seductive for talented young minds from Beijing to Bombay to Oslo. Critics may call it spin, an illusion, maybe even a Hollywood plot, nevertheless, if these ideals continue pulling in young talent from across the globe it just may keep the USA in first place. “In God we trust,” is written on all US notes, maybe it’s the people that they trust more in.  

Darren Winters