Nov 22nd 2014

IMF: China now world’s largest economy

by Jeffrey D. Sachs

 

Jeffrey D. Sachs, University Professor at Columbia University, is Director of the Center for Sustainable Development at Columbia University and President of the UN Sustainable Development Solutions Network.


NEW YORK – The biggest economic news of the year came almost without notice: China has overtaken the United States as the world’s largest economy, according to the scorekeepers at the International Monetary Fund. And, while China’s geopolitical status is rising rapidly, alongside its economic might, the US continues to squander its global leadership, owing to the unchecked greed of its political and economic elites and the self-made trap of perpetual war in the Middle East.

According to the IMF, China’s GDP will be $17.6 trillion in 2014, outstripping US output of $17.4 trillion. Of course, because China’s population is more than four times larger, its per capita GDP, at $12,900, is still less than a quarter of the $54,700 recorded in the US, which highlights America’s much higher living standards.

China’s rise is momentous, but it also signifies a return. After all, China has been the world’s most populous country since it became a unified state more than 2,000 years ago, so it makes sense that it would also be the world’s largest economy. And, indeed, the evidence suggests that China was larger (in terms of purchasing power parity) than any other economy in the world until around 1889, when the US eclipsed it. Now, 125 years later, the rankings have reversed again, following decades of rapid economic development in China.

With rising economic power has come growing geopolitical clout. Chinese leaders are feted around the world. Many European countries are looking to China as the key to stronger domestic growth. African leaders view China as their countries’ new indispensable growth partner, particularly in infrastructure and business development.

Similarly, economic strategists and business leaders in Latin America now look to China at least as much as they look to the US. China and Japan seem to be taking steps toward better relations, after a period of high tensions. Even Russia has recently “tilted” toward China, establishing stronger connections on many fronts, including energy and transport.

Like the US after World War II, China is putting real money on the table – a lot of it – to build strong economic and infrastructure links with countries around the world. This will enable other countries to boost their own growth, while cementing China’s global economic and geopolitical leadership.

The number of Chinese initiatives is staggering. In just the past year, China has launched four major projects that promise to give it a greatly expanded role in global trade and finance. China joined Russia, Brazil, India, and South Africa in establishing the New Development Bank, to be based in Shanghai. A new Asian Infrastructure Investment Bank, to be based in Beijing, will help to fund infrastructure projects (roads, power, and rail, among others) throughout the region. The New Silk Road land belt seeks to connect China with the economies of East Asia, South Asia, Central Asia, and Europe through an expanded grid of rail, highways, power, fiber, and other networks. And the new 21st Century Maritime Silk Road is aimed at boosting ocean-based trade in East Asia and the Indian Ocean.

All told, these various initiatives are likely to leverage hundreds of billions of dollars in investment over the coming decade, speeding growth in the counterpart countries while deepening their production, trade, and financial linkages with China.

There is no guarantee that all of this will succeed or proceed smoothly. China faces huge internal challenges, including high and rising income inequality, massive air and water pollution, the need to move to a low-carbon economy, and the same risks of financial-market instabilities that bedevil the US and Europe. And if China becomes too aggressive toward its neighbors – for example, by demanding rights to offshore oil or territory in disputed waters – it will generate a serious diplomatic backlash. No one should assume smooth sailing for China (or for any other part of the world, for that matter) in the years ahead.

Still, it is striking that just as China is rising economically and geopolitically, the US seems to be doing everything possible to waste its own economic, technological, and geopolitical advantages. The US political system has been captured by the greed of its wealthy elites, whose narrow goals are to cut corporate and personal tax rates, maximize their vast personal fortunes, and curtail constructive US leadership in global economic development. They so scorn US foreign assistance that they have thrown open the doors to China’s new global leadership in development financing.

Even worse, as China flexes its geopolitical muscles, the only foreign policy that the US systematically pursues is unceasing and fruitless war in the Middle East. The US endlessly drains its resources and energy in Syria and Iraq in the same way that it once did in Vietnam. China, meanwhile, has avoided becoming enmeshed in overseas military debacles, emphasizing win-win economic initiatives instead.

China’s economic rise can contribute to global wellbeing if its leaders emphasize investment in infrastructure, clean energy, public health, and other international priorities. Still, the world would be better off if the US also continued to lead constructively, alongside China. The recent announcement by Presidents Barack Obama and Xi Jinping of bilateral agreements on climate change and clean energy show the best of what’s possible. America’s perpetual war-making in the Middle East shows the worst.


Copyright: Project Syndicate, 2014.
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