The other side of China's ascent

Much has been made of the acceleration in China's GDP compared to the US economy, but by other economic metrics it's Washington that is rising.

Lowy Interpreter


Is the US in relative economic decline to China? In a recent article in International Security, I say 'no'. In a post on The Interpreter, Mark Thirlwell says 'yes'. Who's right? 

The answer is: we both are, but only by our own definitions of decline. I define decline as a narrowing of the wealth gap between the US and China. Thirlwell defines decline in terms of economic growth rates. Thirlwell and I come to opposing conclusions because the US is growing at a slower rate than China while simultaneously becoming wealthier. 

How can this be? Normally, growth rates dovetail with changes in wealth gaps. But these measures often diverge when comparing a rich country like the US to a poor one like China. 

Since 1991, China's per capita income rose 11 per cent annually while America's rose 3.5 per cent annually. But 11 per cent of $US900 (China's per capita income in 1991) is less than 3.5 per cent of $US24,000, the US per capita income for that year. As a result, the average Chinese citizen is $US17,000 poorer compared with the average American today than he was in 1991. 

The figure below illustrates this phenomenon. The blue line denotes the absolute difference between US per capita income and that of China. The red line shows China's per capita income as a fraction of America's. 


Source:  International Monetary Fund World Economic Outlook Database, September 2011. 

The best way to deal with this situation is simply to report both figures: the US is growing more slowly but becoming richer than China. Yet most analyses of US decline, including Thirlwell's, only report growth rates. 

It's not hard to see how defining decline in terms of growth rates produces nonsensical results. Over the past twenty years, more than half the countries in the world grew faster than the US, including such titans as Bangladesh, Pakistan, Uzbekistan, and Rwanda. Moreover, by Thirlwell's definition, the US has been in decline to China since 1968, during the Cultural Revolution and over a decade before Reform and Opening. 

The problem with growth rates is that they compare countries to their former selves. China's growth rates are high in large part because its starting point was low. For this reason, Harvard political scientists Sheena Chestnut and Alistair Iain Johnston contend, "it strains the concept... to characterise any state with a faster growth rate than the United States as a rising power. This does not fit with a commonsensical notion of rising power." 

One can argue that comparing growth rates helps account for potential diminishing returns of wealth. For example, Georgetown political scientist Erik Voeten recently asserted 'it is much easier for a country with a GDP per capita of $30,000 to bully a country with a GDP per capita of $1,000 than it is for a country with a GDP per capita of $50,000 to bully a country with a GDP per capita of $15,000.'

Perhaps. But one can also imagine the opposite being true. Highly developed countries may get more bang for the buck than less developed countries – that is, every dollar they spend on innovation, military capabilities, international influence, etc. produces greater returns. This idea of increasing returns to wealth fits with the standard conception of economic development as efficiency of production and is supported by studies showing that more developed countries are better able to translate their basic resources, or 'latent power', into actual capabilities (for examples, see here, here, here and here).

Obviously, growth rates should not be ignored. They provide an important data point and allow us to make educated guesses about the future. But neither should they be conflated with total growth nor used to define loaded terms like 'decline' or 'catch-up'.

One last point. China is growing faster but falling behind the US across most indicators. But in terms of GDP, China is growing faster and closing the gap – by most projections, China's GDP will overtake America's sometime in the next decade or two. Most analysts view this impending GDP transition as a looming power transition. And Thirlwell places a great deal of emphasis on GDP in his post.   

To be sure, GDP figures serve a vital function in defining the set of potential major powers – Luxembourg is extremely wealthy in per capita terms, but its small population precludes it from raising an army, let alone entering the ranks of the great powers. But beyond this basic function, GDP figures can mislead more than they illuminate, at least in certain cases. China is one of these cases.

It is often forgotten that China had the largest GDP for the first half of its 'century of humiliation' (1839-1945) when it was torn apart by Western powers and Japan. The UK, on the other hand, ruled a quarter of the globe during the 19th century, but was never, even at its peak, the largest economy in the world. The figures below show GDP and GDP per capita figures for 1870. The data on GDP per capita matches much better with our understanding of which countries were powerful in 1870.

image image

Source:  Maddison, Statistics on World GDP. 

China is obviously not as weak today as it was in 1870. But much of the case for the rise of China and the decline of the US rests on GDP figures, so it's important to recognise that GDP has never been a good proxy for national power or aggregate wealth. GDP is largely a function of population, and people are both assets and a liabilities because they both produce and consume resources. China's 1.3 billion people produce much output, but they also consume most of it immediately, leaving little wealth for national purposes. 

GDP figures help define the potential major powers. But when you're comparing two big contenders like the US and China, GDP per capita becomes a much more important measure because it represents how developed each country's economy is and how much surplus wealth is available for national purposes. By that measure, along with more specific measures of innovative and military capacity, the US is rising relative to China, at least for now.

Originally published by The Lowy Institute publication The Interpreter. Reproduced with permission.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles