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China to surpass US as largest economy; what does it mean?

May 1, 2014

According to new figures (and an alternate formula to typical GDP comparison) from the World Bank, China is expected to pass the United States as the world’s largest economy sometime later this year.   The World Bank is comparing Purchasing Power Partity (PPP), which is intended to standardize GDP across currencies and make direct comparisons of how economies work internally.  However, GDP is still the better measure of how economies compare in the globalized world because it takes differences in exchange rates into account.

In any case, China is going to pass the US sooner or later, but what that means remains to be seen.  In the two previous cycles of the world system, France’s GDP likely surpassed England’s in the late 18th/early 19th century and Germany surpassed the United Kingdom in the late 19th/early 20th centuries (see Angus Maddison for reconstruction of early GDP levels) , yet both still lost their challenge for hegemony.

The Six Cycles of the Modern Era copyright EnerGeoPolitics, 2010

copyright EnerGeoPolitics, 2010

Even after China becomes the world’s largest economy, it may not hold that position for very long.  China is facing a severe demographic crisis and, like Japan, will face an declining work force supporting an ever growing retiree population.  Indeed, it may fall off the demographic cliff even before the largest waves of retirees hit – last year, the working age population declined for the first time in history, a decline that will continue.  As the Financial Times notes:

Unless the country can keep lifting the labour force participation rate (for example by getting more women into the workforce or persuading older people not to retire), China will struggle to expand its labour force by even 1 per cent per year. To sustain economic growth of more than 7 per cent, productivity would need to grow by 6-7 per cent a year across the entire economy. This would be a tall order in any country. In China, where the labour-intensive services and agriculture sectors make up half the economy, it is well-nigh impossible.

Of course, a decelerating China does not mean the US will regain the top spot . . . India may well pass both nations.  And my analysis continues to be that India will be the next global hegemon, either in the next immediate cycle, or following one more term by the US.

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