World Policy Journal
Volume XXIII, No 1, Spring 2006

 

Two Myths of Globalization
By A. Edward Gottesman

 

Economic commentary on the subject of globalization has often focused on two widely accepted, but mainly misunderstood, mantras. The first is that China is the "next economic superpower" and will be the largest economy in the world in 10, 20, or 30 years (depending on the source). The second is that the current account deficit the United States has run for a number of years (about a third of which has recently been in trade with China) is "unsustainable" and will result in some global economic cataclysm. The nightmare scenarios painted by such well-known economists as Fred Bergsten and Martin Feldstein foresee a dramatic fall in the value of the U.S. dollar, an unacceptable rise in the value of other Western currencies, and a worldwide recession.

Popular journalists like sound bites, so they seize on the first mantra to justify headlines like one that appeared in the December 6, 2004, issue of BusinessWeek: "Does It Matter If China Catches Up to the U.S.?" The article goes on to compare the growth of the Chinese economy between 1980 and 2004 with the growth of the U.S. economy between 1820 and 1950.

Anyone with a pocket calculator and a little patience can analyze the Chinese superpower mantra. U.S. gross domestic product (GDP) is currently about $12.6 trillion. There is little dispute about that number, because it is counted in U.S. dollars, the base currency in which most world economic statistics are expressed. It is hard, however, for the average person to grasp the real meaning of the billions and trillions in which these statistics are calculated. As the journalist Nico Colchester pointed out in an article published in 1996 just after his untimely death, the world economy could be thought of as the sum of 26 Italys. Eight of those Italys were in North America, eight in Europe, and five in Japan. That totals 21. All of East Asia, including China and the Asian "tigers," were equal to only two Italys. That picture has not changed much.

For our purposes, it is more useful to say that the U.S. economy today is approximately seven Chinas. According to the most widely accepted statistics, China's GDP is about $1.7 trillion, which means that China at present is not much larger than one Italy. Chinese sources agree with these estimates, as noted by Zheng Bijian, the chair of China Reform Forum, in a recent article in Foreign Affairs.

These figures are stated at market exchange rates (MER). Many economists prefer "purchasing power parity" (PPP) calculations, based on comparisons of the cost of goods and services in each country. In general, these calculations show that Chinese GDP is greater than the MER statistics indicate. There is, however, a danger in this approach. Again, Colchester put it succinctly: "If critics insist on purchasing power parities (theoretical exchange rates that equalise the price of the same things in different countries), remind them that to compare Russian like with American like was CIA folly."

Let's stick with the numbers that count: what you can buy with money. If U.S. GDP increases at the "trend growth rate" of about 3 percent a year, it will be about two and a half times today's level in 30 years, or more than $30.5 trillion (in 2005 dollars). If China's GDP grows at an average 8 percent annual rate for the next 30 years, it will reach $17.1 trillion, or a third more than U.S. GDP today. China's economy in 2035, far from being the world's largest, will be a little over half the size of the U.S. economy.

Endnotes

* A. Edward Gottesman is an American lawyer who has lived and practiced in London since 1962. He is a former president of the American Chamber of Commerce (U.K.), and a member of the President's Council on International Activities at Yale University.