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DEVELOPMENT: China Poised to Surpass U.S. Economy by 2035

Jim Lobe

WASHINGTON, Jul 11 2008 (IPS) - China's booming economy is on course not only to surpass that of the United States by 2035, but to double its size by 2050, according to a new study released here this week by an influential former World Bank economist who also headed the China desk at the U.S. Treasury.

The report by Albert Keidel, currently a senior associate at the Carnegie Endowment for International Peace (CEIP), argues that Beijing's torrid annual growth rates, that have averaged around 10 percent over the past three decades, are likely to be sustained over the next two before gradually declining to around three percent – the rate at which the U.S. economy is projected to grow over the same period – by 2070.

By then, however, China's economy, currently estimated at only about one-third that of the U.S., will have built up such momentum that its total annual gross domestic product (GDP) will reach the equivalent of nearly 180 trillion 2005 dollars, dwarfing the 80-trillion-dollar U.S. economy projected for the same year, according to the study, entitled "China's Economic Rise – Fact and Fiction'.

And while important obstacles to that growth – including possible social unrest, corruption, and macro-economic mismanagement – clearly loom on the horizon, Keidel argues that China's leadership appears prepared to overcome them based on the record it has compiled in dealing with related problems, particularly over the past decade.

"They are not likely to stop China's growth," insisted Keidel at a crowded CEIP forum that drew economic specialists from a host of U.S. government agencies, think tanks, and foreign embassies Wednesday. Moreover, he added, the numbers presented in the report should be considered conservative. "This is a slower-growth scenario," he said in answer to scepticism voiced by some attendees and panelists who were asked to comment on the paper.

Of course, the global implications of such an economic powerhouse are enormous, according to Keidel, who stressed that China's financial clout alone "will spill into every conceivable dimension of international relations."

"Leadership of international institutions will gravitate toward China," with the headquarters of some existing U.N. agencies and other multilateral institutions likely to move to Chinese cities. "The United States will have an important secondary influence, like Europe, but it will need to compromise, and its sphere for unilateral action will be increasingly curtailed."

On the military front, the U.S. will continue to enjoy major advantages, including a worldwide network of hundreds of bases, many situated around China's periphery, and enormous accumulated stocks of sophisticated weapons many times larger than Beijing's arsenal. However, the sheer size of the Chinese economy at the mid-century mark "should persuade American policy makers to consider their options wisely."

Much of Keidel's analysis, which comes on the eve of next month's landmark Beijing Olympiad, is based on his conclusion that China's economic dynamism has been based much more on domestic demand and investment than on exports. The conventional view is that China's economy will begin to slow – sooner rather than later – because its external markets will be unwilling or unable to continue buying those exports at the same rate.

While trade has certainly been an important factor in China's development, according to Keidel, it is by no means export-dependent. Indeed, when its major export market, the U.S., has boomed, China's growth has slumped; while when the U.S. has slowed down, China's growth has been strong – a pattern that is precisely the opposite of three other major export powerhouses, Japan, South Korea, and Germany.

China's high growth rates are more likely to be sustained, moreover, because it started at such a low level of development when it first implemented economic reforms in the late 1970s. Compared to Japan and South Korea, China is still at a relatively early stage of economic and political development, according to the study.

And, unlike its two neighbours that protected their key industries at a comparable period in their development, the Chinese economy has been much more open to global competition, ensuring that leading sectors import and use the latest technology, thus enhancing their own competitiveness. "This is not something that Japan or South Korea ever did," Keidel said.

Finally, the economy has developed a "web of incentive systems that rewards people who take risks and work hard," according to Keidel who said this evolution was "under-appreciated". Despite state control, "Chinese corporations today are money-making machines," and the governance of the larger ones is "heavily oriented towards profit making."

He also believes that China's economic managers have become increasingly sophisticated over the last three decades in ways that show that a growing ability to deal with the "cyclical ups and downs (that) are inevitable" in a fast-growing economy.

As for concerns that poverty, growing inequality, air and water pollution could derail long-term growth, the study concludes that China appears to be on a similar trajectory as Japan and South Korea, both of which have addressed these issues, particularly as their countries became more urbanised and income levels increased, spurring greater public concern.

Corruption, particularly within the Communist Party, could also prove an "Achilles' Heel" for China, although Keidel notes that it "has clearly not prevented rapid growth in the past and is unlikely to do so in the future," particularly with increases in per capita income and the growing attention already being paid to the problem in the news media.

As for the Party's rule, it has evolved from a "one-man authoritarian system" to a "corporate technocracy" that has introduced "participatory governing mechanisms" that may lead to a "more broad-based system of elections" – a transition similar to those of South Korea and Taiwan.

While China's GDP will surpass that of the U.S. by 2035, its per capita GDP will likely draw even with the U.S. in about 80 years, according to the study. In 2005, China's per capita GDP was less than 2,000 dollars, compared to 41,000 dollars in the U.S. As measured by purchasing power parity (PPP), which takes account of the relative cost of living – how much a certain basket of goods actually costs – China's per capita income was about 4,100 dollars.

By 2035, according to Keidel's model, per capita GDP in China should reach about one third of U.S. GDP, and roughly one half as measured by PPP.