Shifting Hegemony in the Future

Whether it be in news commentary or in my students' discussions and essays, there is a lot of concern about China's rising economic influence and what it means for the United States' position in the world. Many seem to think that China's economic growth will enable it to replace the US as a global hegemon.

The Boogie Man Du Jour?:

It is tempting to lump concerns about China in with past concerns about the Soviet Union and Japan that didn't pan out. As Paul Krugman pointed out in a 1994 Foreign Affairs article,  "The Myth of Asia's Miracle" (also available here and here),  the rapid economic growth in the Soviet Union and Warsaw pact nations in the 1950s and 60s provoked worries in the west that the Soviet bloc would outgrow them and actually deliver on Kruschev's threat to bury the west. These concerns proved false, in part, because they were based on projecting past performance forward in a linear fashion that did not account for the possibility that growth rates might slow down. In hindsight, the collapse of the communist economies makes the hand wringing of the 1960 look somewhat foolish.

Similar concerns were raised about Japan in the 1980s when, according to Krugman, a projection of their growth rates from the 1960s and 1970s suggested they would surpass the US in per capita income in 1985 and total output in 1998. Yet, neither of those things were close to happening when Krugman wrote in 1994 and, 20 years later, Japanese per capita income still lags about 10% behind that in the US while their GDP is less than half of that of the US. Though Japan hasn't collapsed on anything like the scale of the Soviet Union,, the concerns about "Japan Inc."  that were so prevalent in the 1980s now seem, if not foolish, at least overblown.

So then, is China just another economic boogie man in a growing line of them? A strong argument against this would be that China's large population virtually guarantees that will surpass the US in terms of GDP. After all, with 1.35 billion people, they only need to reach a per capita income of around  $12,300 (equivalent to that of Hungary or Poland) to match the US GDP of $16.6 trillion. If China achieved a per capita GDP equivalent to South Korea's ($22, 590),  their GDP would be about $30.5 trillion. So it seems not only possible, but quite probable that China will actually surpass the US in GDP at some point.

However, this begs the question of what that would mean. With an economy equal in size or larger than the US, China certainly could afford an equal or larger military than the US, which would challenge US military hegemony. But what economic advantage would a larger economy confer on China? Would it become the global economic hegemon? To answer this question, it is important to consider the difference between military and economic hegemony.


Military vs Economic Hegemony:

I think it is important to recognize that there is an important difference between military and economic hegemony. A military hegemon is one that possesses so much military capability that it cannot be defeated by any combination of other powers. An economic hegemon is a nation whose economy is large enough that it alone can influence global markets without the help of other nations. On the face of it, these seem to be very similar conditions, as they both involve comparisons of the size of the hegemon to everyone else in the word.

However, in practice, the relevant size comparisons are quite difference. While it is theoretically possible that a military hegemon might find itself in a war against every other power on earth, it is highly unlikely that this wil occur. In any given war, a military hegemon will probably find itself squaring off against a subset of the world's nations, with a large subset of nations sitting out (and perhaps another subset of allies helping it out). The probable outcome of any war will come down to the relative capabilities of the two sides actually engaged in it.

In contrast, when trying to intervene in global markets, the economic hegemon finds itself in a situation where, in essence, nobody is sitting it out. If the hegemon is trying to tip markets in one direction or another, it will find that it is essentially pitting its economic weight against the weight of everyone else in the market. It must not just need to outweigh those actively opposing it, but also everyone who is participating in the market. Therefore, in practice, it actually faces the theoretical extreme that the military hegemon usually avoids.

The point here is that bilateral comparisons of US and China military capabilities are more relevant to questions of military hegemon than are comparisons of economic size to questions of economic hegemony. In the latter case, the more relevant comparison will be the shares of the global economy that each nation's economy constitutes. Therefore, comparing predicted levels of  US GDP to those of Chinese GDP gives us a very incomplete picture of the amount of influence the two nations might wield in the global economy. Instead, what we need to do is look at is the ratio of each nations future GDP to the future Gross World Product (GWP).

Comparing China and US GDP/GWP:

Statistics on gross world product are not something you come across very often, but the Earth Policy Institute has aggregated data on GDP to produce a dataset of GDP in 2010 PPP dollars from 1950 to 2011 (links to xls file). Comparing these figures to Federal Reserve Economic Data on US Real GDP (admittedly in less comparable 2009 chained dollars), one finds that US GDP as a percentage of GWP has declined from around 30% in 1950 to around 20% in 2010. Though these numbers are imprecise due to the different units of measure, this gives one a sense of the declining size of the US economy vis-a-vis the world. Though the FED doesn't have data on real Chinese GDP, if we look at nominal figures for 2010, China's GDP was about 8% of GWP. Given that China's   GDP is rising faster than most nations in the world, it is obvious that their GDP as a percentage of GWP is rising.

But what of the future? Consider the following hypothetical scenario. Suppose we start off with  GWP, Chinese GDP and US GDP in 2011 at 77, 7 and 16 trillion dollars respectively. Then suppose that GWP increases at an annual rate of 4% (the average of its real growth rate in the Earth Institute's dataset, which will underestimate its nominal growth), that China's GDP grows at 6% a year and that US GDP grows at 2.5% per year (both seemingly conservative rates of growth for China and the US). If we project forward through 2057 (an arbitrarily chosen date), the picture that emerges is captured in the graph below. The hypothetical US GDP/GWP ratio is plotted in blue, while the hypothetical Chinese GDP/GWP ratio is plotted in red (I'll explain the orange line in a minute).

The red and blue lines lay out the scenario that most US commentators dread as China and the US swap positions vis-a-vis the world economy. Of course, in this scenario, China is no more a hegemon in 2057 than the US finds itself today, but the trend puts them on track to eventually claim the position the US held in the 1950s.

However, this scenario is flawed by the fact that it projects trends forward in a linear fashion, thus assuming that growth rates will stay about the same for China, the US and the world. It might make sense that the US and world growth rates will stay at about the same annual levels, since the US and world have been able to post that level of performance for decades. But is it likely that China's growth rate will stay the same level, in particular at one 50% higher than the global growth rate?

An Alternate Scenario:

While China has posted higher growth rates in the past, it is more likely that they will see their grow rates decline over time as they become more developed and diminishing returns begin to set in. Indeed, the World Bank reports annual growth rates for China of 10.4% from 1999-2003, 9.3% from 2004-2008, and 7.8% from 2009-2012, so the pattern of decline is already in evidence. Therefore, an alternate scenario might be that China's annual growth rate slows over time to match that of the global economy as a whole (ableit still higher than the US' rate of growth). The orange line in the graph plots a scenario in which annual growth in Chinese GDP starts at 6% and then decreases by 0.5% every 10 years until it hits 4% in 2052.

If we look at the orange and blue lines (instead of the red and blue ones), we see a very different picture of the future. US GDP will be about 10% of GWP and Chinese GDP will be about 15%. Therefore, though the US will have a smaller share of GWP than China, China will nonetheless be much less of a hegemon than the US is today.

Indeed, the US and China may not be the only ones in the 10-15% of GWP band. If India’s GDP surpasses that of the US, as it is expected to do, India will find itself with probably about a 12-13% share of GWP. Furthermore, the EU will probably have a share about equal to that of the US, especially if it continues to add members. Therefore, China may find itself first among a set of 3 or 4 major economic powers that account for about 40% of GWP (undoubtedly someone will come up with a pithy acronym out of C, I, US, and EU). In such a case, China would not be a hegemon so much as the largest member of an oligarchy in which the US is also a member (albeit a junior one).

Now, of course, the future probably won't look like either scenario. Unexpected shocks (especially an economic collapse and/or lost decade in China) will see to that. However, the rising hegemon scenario described by the red and blue lines, and fretted over by commentators, is probably the least likely one to occur as it is based on a linear project of sustained high growth over the course of several decades.