China's slam dunk
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China has not just overtaken the US economy, but will soon leave it far behind, writes HUGH WHITE
For longer than anyone now living can remember, the United States has been by far the world's richest country. This simple fact has profoundly shaped the world in which we all live, and Australia's world especially.
It has been the foundation of the United States' position as the world's leading strategic power and Australia's security guarantor. We find it almost impossible to imagine that this will not always be so.
Some time last year, China overtook the US to become the largest economy in the world, which is startling enough. But the most startling thing is what will happen over the next few years.
Recently, PricewaterhouseCoopers released The World in 2050 - its latest estimate of the shifting global distribution of economic power. PwC predicts that by 2030 – only 15 years from now – China's gross domestic product will be $36 trillion, and the US GDP will be $25 trillion. In other words, China's economy has not just overtaken the US economy, but will soon leave it far behind.
This remarkable projection is based on detailed and rather conservative calculations.
It takes full account of China's declining population and slowing economic growth. PwC estimates China's GDP will grow by only an average of 3.4 per cent a year in real terms over the next few decades, little more than half the current rate and one third of the average of the past three decades.
On the other hand, PwC's take on the US economy is quite optimistic. It certainly does not assume the US is in decline. On the contrary, it calculates its economy will grow by an average of 2.4 per cent a year over the next few decades, which is rather better than its recent performance. This bullish number, and PwC's correspondingly bearish projection about China, suggests its estimates are more likely to understate than overstate how fast China will pull ahead of the US over the next few years.
If one uses the alternative market exchange rate methodology, which does not filter these effects out, China's lead over the US builds up more slowly but, as PwC notes, PPP provides a more accurate long-term comparison.
Of course, these are still just estimates, and could prove quite wrong. Perhaps China will undergo a political revolution or a massive economic meltdown; perhaps the US will experience a transformational technology-driven renaissance. But realistically, the most likely outcome is that these estimates will prove broadly correct and China will indeed become the world's largest economy within 15 years, and remain far ahead for decades after that.
If that happens, we will be living in a very different world because, ultimately, wealth is power. As US leaders often say, their country's immense power has always been founded on its vast economy. Now, as China's wealth overtakes that of the US, its power relative to the US will increase too, perhaps not quite so fast but certainly fast enough to upset the assumptions on which Australia's world view had been built for decades.
US leaders are now in denial about how fast things seem to have turned around. Neither President Barack Obama nor any other senior political figure has ever acknowledged how quickly the United States' economic edge is disappearing. They know China is growing, but Obama still reassures Americans that their country has never been stronger relative to others than it is today.
This is simply and starkly untrue. Perhaps he knows this, and simply lacks the political courage to acknowledge the truth to the American people. Or perhaps, like others, he chooses to believe the US remains stronger than China because its GDP per capita is still far ahead of China's. But if he thought about it for a minute, he'd know that GDP per capita is no measure of national power: if it was, Australia would be more powerful than China, and Luxembourg would rule the world.
The United States' collective self-delusion about the shifting realities of power constitutes a very serious failure of the US political system, which carries immense dangers for the nation itself. Until the US acknowledges what is happening to its place in the world, it will be impossible to work out how to respond effectively.
And it remains vitally important not just for Americans, but for Australians and many others around the world, that the US does respond effectively. For as far ahead as we can see, the US will remain, along with China and India, one of the world's three richest and strongest countries. Its influence on global and regional affairs will remain immense, and can be hugely beneficial, if its power is used wisely.
But that can only happen if the scope and limits of that power are fully understood.
Likewise, Australia needs to think very carefully about how different our world is going to be when the US is not the dominant power in Asia, but only one of the top three.
Like their US counterparts, Australian political leaders are in denial about the economic trends that are transforming our strategic and political environment. Few of our political leaders have acknowledged the new realities or begun to explore what they mean for our place in the world. This means our political system is failing us, too.
Hugh White is professor of strategic studies at the Strategic and Defence Studies Centre at ANU College of Asia and the Pacific.
This article was originally published by Fairfax media.