GDP is inadequate to determine when – and whether – China will overtake the U.S. in economic power.

The world’s economic gravity will substantially shift towards Asia and especially towards the Asian Giants, China and India. China has been tops for the past few years. Over the past few decades of economic reform has transformed China to increasingly market -driven system. It is also true that consumption as a share of GDP will be growing faster than GDP, in the future it will also be more consumer-based growth. To be sure, total is an important aspect of economic power.

The World Bank recently announced that China’s economy will surpass that of the United States this year, measured according to purchasing power parity (PPP), published on October 28, 2014. Exchange rate–converted GDPs can be highly misleading in indicating the relative sizes of economies and levels of material well-being. PPP estimates purchasing power parities (PPPs) for use as currency converters to compare the size and price levels of economies around the world.

Though PPP can serve some purpose in comparing welfare across countries, it is affected significantly by population size. While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated.

Even if China’s overall GDP surpasses that of the US (by whatever measure), the two economies will maintain very different structures. The Harvard economists (Lant Pritchett and Lawrence Summers) suggest that salient characteristics of China–high levels of state control and corruption along with high measures of authoritarian rule–make a discontinuous decline in growth even more likely than general experience would suggest.

Still, this straightforward statistical estimate does not account for the serious problems that China must address in the coming years, such as rising inequality between rural and urban areas and between coastal and inland regions. China has two segregated economies the rural and urban, a useful explanatory fame of China, and understanding the shifting nature of this divide is probably the key to understanding the most important labor market reform issues of the last decades and the decades ahead.

In short China´s rapid growth over the last three decades has been driven by productivity growth rather than by capital investment. The growth contributions made by human capital accumulation and increase in labor participation are positive but modest. China’s lagging economic sophistication is also reflected in its financial markets. The differences between China and the US in terms of economic sophistication extend to technology as well.

Other major challenges include a bloated and inefficient state sector, environmental degradation, massive internal migration, an inadequate social safety net, corruption, and weak rule of law. Will political change occur when per capita nominal GDP, now at roughly $7,000, approaches $10,000, as occurred in neighboring South Korea and Taiwan?

Political factors surely play some, if not great, role in the greater increase in inequality.

The challenge will be to forge a political agreement on a set of ideas that both sides of the aisle can get behind – It is common portray democratic system that China’s government is not yet prepared to respond effectively to increasingly loud demands for political participation – if not democracy – that tend to accompany rising per capita GDP. Despite the rapid growth of the last three decades, China´s productivity China has till plenty of room for productivity growth though further economic and institutional reforms.

As Joseph S. Nye discuss there is in fact a close empirical association between political and economic institutions. Because of these institutional complementarities, the two economies will maintain very different structures and levels of sophistication. GDP alone is inadequate to determine when – and whether – China will overtake the US in economic power.

China´s future growth.

China has an attractive market and is many countries’ largest trading partner – important sources of leverage that China’s leaders are not afraid to wield. China’s growth record in the past 35 years has been remarkable. In the coming decades, China’s GDP growth will slow, as occurs in all economies once they reach a certain level of development – usually the per capita income level, in PPP terms, that China is approaching.

The rise of China as a low-cost manufacturing powerhouse played a key role in the great macroeconomic moderation of the 1990s and early 2000s. More importantly, the end of cheap labor in china does not mean the end of Chinese economic growth. China´s future growth will be how fast China narrows the rural-urban education divide. If China can improve the quality of education and develop institutions that help to foster innovation and entrepreneurship, then going forward, Chinas population may join a place alongside South Korea and Japan, as a formidable force in high value-added manufacturing and innovation.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s