Home .Globalization winners Will China overtake the US?
Will China overtake the US?
Tuesday, 27 March 2012 09:49

Many Americans fear that China will soon overtake the US.  With a population more than four times that of the US, and a fast-growing economy, it is just a matter of time before the total size of the Chinese economy exceeds the American ecoomy.  In fact, it should occur over the next decade.

But could the level of Chinese economic development, as measured by GDP per capita, labor productivity or technological sophistication, really surpass the US?  After all, in 2010 China's gross national income in purchasing power parity terms was only $7640 whereas that of the US was $47360.

These questions bring us into the realm of the "catch-up effect" or "convergence theory".  In short, poorer developing countries have the potential to catchup to richer advanced countries (or "converge") by growing faster thanks to heavy capital investments, and absorbing their knowledge, technologies and production methods, and copying their policies and institutions.  Their rates of economic growth should progressively slow down as their levels of economic development converge with those of advanced countries.

Developing countries can even leapfrog developed countries by skipping over technologies that have become obsolete, and adopting new technologies.  In the Philippines, it used to take eight years to get a telephone line installed.  Now everybody has at least one mobile phone.

Sounds simple, doesn't it!  But history shows that it is easier said that done.  In recent decades, only a handful of the world's developing countries, mainly in East Asia, have made much progress in catching up to the US.  And many of those have failed to stay the full course in catching up.  They have fallen into a middle income trap because they failed to keep improving their policies.  The path from being a poor country to becoming a middle income country is usually much easier than the next step of graduating to an advanced country.  Increasingly sophisticated governance and capabilities are required.

Japan is an interesting case in point.  25 years ago, many Americans were equally convinced that Japan would also overtake the US.  But they were horribly wrong, as two lost decades after Japan's bubble economy burst, the land of the rising sun finds itself with a GDP per capita about one-quarter less than America.  Europe's post-war recovery was very rapid, but none of Europe's major economies have made it to the same level of GDP per capita as the US.

There are many factors which can facilitate the catchup or convergence process such as better policy and institutional frameworks, openness to trade and investment, and improvements in human capital.

Columbia University's Richard Nelson has much wisdom to share based on his analysis of successful catchup economies.  He argues that it is necessary to develop considerable indigenous strength in science and technology, in particular:

First, successful cases of catchup have involved considerable movement of people, both citizens of the backward country going abroad to learn and then returning, and people from advanced countries coming as advisors or even settling in the developing country.  This was the case for Japan in the late 19th and early 20th centuries.  Korean and Taiwanese electronics industries were largely developed by people who had studied and often worked in the US.  India's business process offshoring has been driven by Indians who similarly studied and worked in the US.

Multinational enterprises have also been very active in the cross-border knowledge and technology transfer process in countries like Singapore.  Many Asian SMEs have increased their technical competence by supplying components to multinational enterprises, and meeting their product standards.

Second, catchup economies have developed education systems that could provide not only a universal primary and secondaru education, but also highly trained scientists, engineers, businessmen, economists and so on.

The third ingredient was active government support through protection of the domestic industry from advanced firms in leading nations. Although such protection resulted in some inefficient home industries, it was also a hallmark of all countries that achieved successful catchup, like Alexander Hamilton's new United States, Frederich List's Germany, and Japan, Korea and Taiwan.

Fourth, intellectual property regimes which do not seriously restrict the ability of companies to copy technologies.  Licensing agreements also proved to be a useful vehicle for technology transfer.

Fifth, even while they are still in the catchup phase, countries need to develop national innovation systems.  It is not always possible to take foreign knowledge and technology "off-the-shelf".  It usually needs to adapted to local conditions.

Quite obviously, all of this is a very tall order requiring a fairly sophisticated system of governance.  It is not hard to understand why countries have enormous difficulty catching up to the US, notwithstanding the latter's creaking infrastructure, deficient education system, and political paralysis in Washington.  The US still has a strong lead thanks to its very open society, world's best post-graduate education system, risk-taking and innovation oriented culture, and military which can develop technologies like the Internet and drones.

What chance does China have to really catchup to the US?

Certainly many of the above ingredients are present in the Chinese model -- cross-border student and worker movement, an improving education system, protection for domestic industry, lack of respect for intellectual property, and a burgeoning national innovation system.

However, China does have at least a few very major challenges.  It is not an open society, something which is certainly not helped by political repression.  Its corrupt communist regime is having increasing difficulty in implementing policy reform and hanging on to power at the same time.  An inevitable transition to a more open and pluralistic political system is the country's ticking time bomb.  And finally, the effects of the one-child policy mean that China will become old, before its becomes rich (in contrast to Japan), which will be a further drag on growth.

In short, it seems unlikely for the foreseeable future that China's level of economic development will overtake the US, which has been the world leader (forgetting a few tiny oil kingdoms and tax havens) since it overtook the UK in the early 20th century.

References:

Wynne, Mark A., "Will China Ever Become as Rich as the US?".  Economic Letter -- Insights from the Federal Reserve Bank of Dallas.  Vol.6, No.6.  June 2011.

http://www.dallasfed.org/pages/research/eclett/2011/el1106.cfm

Nelson, Richard R., "Economic Development as a Catch-up Process: What is Different About the Current Environment".  Talk presented at Tufts University, October 27, 2005, on the occasion of the award of the 2005 Leontief prize.

http://www.ase.tufts.edu/gdae/about_us/leontief/Nelson_remarks.pdf


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