China rising

Tiananmen_Square2C_Beijing2C_China_1988_28129
Photo by Wikimedia Commons.

Over the next decade, China will start to match the United States on a variety of economic issues.

The International Monetary Fund’s April 2011 World Outlook stated that China’s Gross Domestic Product would surpass that of the United States by 2016, Yale economics professor Robert Shiller said. Yale economists predict that as China continues to economic expansion, it will become more interdependent with the United States, requiring compromises by both countries on economic and political issues. However, they warned that China is unlikely to maintain its current rate of growth.

For Shiller, the prediction that China’s economy will be the world’s largest by 2016 must be tempered by the knowledge that the population of China is four times that of the United States.

“For an economy with 1.3 billion people, you have to wonder why [the growth has] taken this long,” said Stephen Roach, a senior fellow at Yale University’s Jackson Institute of Global Affairs.

According to Roach, predictions about when China’s GDP will surpass America’s are “a superficial horse race” because GDP should be considered on a per-capita scale, not on a national one. Currently, China’s GDP per capita is approximately one-eighth that of the United States, Roach said.

China’s economic growth has been largely export-dominated. Low-cost labor and extensive production infrastructure allows China to be a cheap, efficient manufacturer, Roach said. Yet China’s reliance on foreign demand has created an unbalanced macroeconomic environment, he added, explaining that a move towards greater internal markets and private consumption is necessary for sustainable growth.

Yet Zhiwu Chen GRD ’90, a professor of finance at Yale School of Management specializing in the Chinese economy, said he is doubtful China’s export-dependent growth model will change without a crisis or serious political reform. Government revenue growth must first be slowed and asset ownership must be put into private hands, Chen said.

Jeffrey Garten, a professor of international trade and finance at SOM, said the next step in economic progress will require a liberalization of China’s autocracy, which is not likely in the near future. Unless there is political reform, China will not be able to move beyond basic reforms, Garten said. He predicted that China’s reliance on exports will face challenges as demand from foreign markets drops in coming years due to cuts in government spending and high unemployment.

“One cannot simply copy and paste the past 30 years of growth to the next 30 years for China,” Chen said. “The next 10 years will not be smooth or crisis-free for China.”

China will face further barriers to growth from environmental degradation and income inequalities, Roach said.

Moreover, China must eventually move from manufacturing to high-value innovation to truly grow its economy, Roach said, pointing out that the Chinese supply chain is “63 percent dominated” by subsidiaries of western multinationals. Roach added however that the current lack of innovation in China is common for countries in this initial stage of economic development.

“Even as China surpasses America in sheer size, it is doubtful it will rival the innovative capacity of the U.S. for many decades to come,” Garten said. “It takes more than money to be creative, adaptive and inventive. It takes an elaborate infrastructure of finance and education, plus a risk-taking culture that takes many generations to build up.”

Shiller, however, said he is optimistic that China is entering a period of innovation. In his view, China has historically been a “great innovator,” though these periods of rapid progress occur only intermittently.

As the Chinese economy grows, China will become more entangled with international politics, Garten said. China will be expected to assume greater responsibilities for international economic order particularly in terms of trade, intellectual property, currencies, allowing foreign investment and providing foreign aid, he said.

Garten said he expects that China’s increased prominence may create tensions with the United States, but he is optimistic about a peaceful path forward.

“There is ample room for cooperation on a broad range of issues — trade, finance, investment, energy, climate change, science and technology, education and cultural exchanges,” Garten said. “But it will be hard work.”

The U.S.-China Forum at Yale concluded this Sunday.

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