China vs. the United States

A prediction by the International Monetary Fund (IMF) that China will overtake the United States, under certain parameters, as the world’s largest economy in five years — much sooner than was expected — is creating great excitement on the internet. But is this prophecy valid?

Judging by some headlines proliferating on the web, it seems an imminent fact. “IMF news bombshell: The era of the U.S. is coming to an end,” screamed the headline of an April 25 column on Marketwatch.com. “The era of the U.S. will come to an end in 2016,” concluded another on Dailymail.co.uk.

Without a doubt, the economy of the U.S. is in serious trouble. The rating agency, the Standard & Poor (S&P), recently warned of the real possibility that the U.S. will lose its AAA credit rating in 2012, if Barack Obama and the Republican party do not reach an agreement to reduce the country’s huge budget deficit. And days later, IMF chief economist, Oliver Blanchard, said the U.S. “still lacks a credible plan” to reduce its deficit.

Subsequently, the IMF forecast, in its Economic Outlook of the World, revealed that, as a parity of purchasing power, China’s economy will grow this year from $11.2 trillion to about $19 trillion in 2016. In comparison, the U.S. economy will grow from $15.2 trillion to $18.8 trillion, for the same year.

Intrigued by this data, I called Nicolas Eyzaguirre, the head of the Western Hemisphere Department in IMF, who, among other things, monitors the U.S. economy.

Do these figures mean that the U.S. will stop being the world’s leading economic power in just five years? I asked him.

“No, the U.S. economy will continue to be larger than that of China for a long time,” Eyzaguirre told me.

But have you people not predicted that China will surpass the U.S. in 2016? I asked him.

“This is a measurement, relying on purchasing power parity, which is not the most relevant concept of international measures,” he said. He explained to me that this measure takes into account the domestic economic activities that cannot be traded globally, such as hairdressing, and, therefore, is not the best comparative measure.

The best way to compare the size of economics is to take into account the market value of goods and services that can be exchanged with the outside world, he added. In terms of market value, the U.S. economy is worth about $16 trillion, while that of China is about $9 trillion, he said.

And how long will it take China to surpass the U.S., under this last parameter?

“Because China grows at eight percent, annually, and the U.S. at three percent annually, China could match the economic power of the U.S. in [a little] over a decade, if things continue as they are,” he answered.

And do you think that China will continue to grow at its current rate?

“The economic profession is relatively accurate in predicting two or three years ahead, unless a crisis occurs that nobody expected,” he said. “But beyond that, these issues are quite speculative.”

My opinion: Although I remain astounded by the developments of China, from my recent trips to that country, I do not think that the Chinese economy will surpass the U.S. in five years, and probably not even in 10.

In the first place, the dollar still has no credible rival in the world’s reserve currency. The day after the S&P threatened to lower the rating of the U.S. economy, the dollar rose, and U.S. Treasury bonds ended on a high note.

Secondly, we are living in the era of the knowledge economy, and although China is producing more engineers and scientists than the U.S., it still lacks a great deal to equal U.S. scientific production. It is no coincidence that in the ranking of the top 500 world universities conducted by Shanghai University in China, eight of the top 10 are U.S. universities, and the other two are British.

And in the third place, we cannot rule out the possibility of a crisis in China. In recent days, we saw an unusual image from that country: a protest by truck drivers. And, although China’s dictatorship may avoid a social explosion, demographers are estimating that nearly 70 percent of China’s population will have moved to cities by 2019, crowding urban areas and putting an end to the construction fever of recent years.

The rise of China is the most important event of our time. But it’s too early to predict that China will overtake the U.S., especially if we are talking about a time frame of just five years.