It is terribly tempting to regard the global crisis as the event that precipitated the decline of the US and the rise of China. The “rise and decline” school has gotten it spectacularly wrong before, however. During the 1970s, especially following the Vietnam War and during the economically difficult Carter years, the “declinists” – as incredibly as this may sound today – were worried that US economic decline would lose Washington the Cold War against an apparently ascendant Soviet Union. It turned out that it was the Soviet Union that was experiencing stagnation and decline, leading to its eventual economic collapse and political break-up a little more than a decade later.
During the 1980s, when the US was running record-high fiscal and current account deficits, Japan was going to emerge as “number one”. Exactly ten years after Ezra Vogel's 1979 book, Japan crashed financially and has ever since suffered an economic malaise. During the 1990s and early 2000s, the US “re-emerged” again as the most powerful economy with no serious challengers on the horizon, despite attempts to construe a German-led Europe and a recovering Japan as potential challengers. Following the 2008 financial crisis, the “declinists” are once more predicting US decline. This time, it is China that is set to rise and challenge US pre-eminence.
China does indeed look set to overtake the US in terms of economic size. Not only does China appear to have weathered the very crisis that pushed the US economy “off-course” pretty much unscathed. But China has been growing at an average annual rate of 10% since the beginning of economic reform in 1979. On current trends and on the basis of conventional PPP estimates, China will replace the US as the world’s largest economy within the next decade or so. Some well-respected China analysts, like Bert Keidel, even forecast the Chinese economy to be twice the size of the US by 2050.
While growth may slow down somewhat from double-digit levels, the medium-term term growth outlook appears solid. A low degree of urbanization and a low capital stock provide conditions conducive to continued strong growth. When Japan slipped into crisis, it had already reached the “technological frontier”. The Soviet economic model, based on “extensive” rather than “intensive” growth, was not sustainable, while geo-political competition forced Moscow to keep defence expenditure at ruinous levels. By contrast, China is generating both intensive and extensive growth. So if China manages to avoid geo-political competition, which the doctrine of “peaceful rise” seeks to achieve, China is likely to enjoy continued solid growth. This is the “China story” seen through the eyes of the bulls.
The China bears, on the other hand, not only expect Chinese growth rates to decline more substantially. But they also see other potentially dangerous speed bumps on China’s way to economic pre-eminence. To stick with this metaphor, a speed bump can slow one down. But if ones hits it at top speed, it may throw one off-course, or even into the ditch. These “bumps” range from increasing natural resource dependence and rising geo-political competition with 'status quo' powers (Friedberg 2005) over 'trapped (economic) transition' (Pei 2006) and a crisis of political legitimacy and political instability (MacFarquhar 2006) to the sustainability (or lack thereof) of China’s investment-focused and supposedly export-oriented growth model in case Beijing fails to shift the economy towards greater domestic demand-led growth (Goldstein & Lardy 2008).
One does not have to be a China bear to recognise that the downside risks outweigh the upside risks. However, China looks unlikely to be thrown off-course in the way the Soviet and Japanese economies were. Structurally speaking, China’s medium-term growth potential is very significant. The spanner that would need to be thrown into the works would have to be very massive. The Soviet and Japanese examples, nonetheless, suggest the need to re-examine periodically the viability of the current growth model to check whether it is appropriate given China’s stage of development. It also suggests that China may face considerable “known unknowns” and, one must assume, a non-negligible number of “unknown unknowns” (rewatch the Rumsfeld classic), though this can, of course, not be known, than the US. History, in any event, appears to counsel caution (and intellectual modesty), when it comes to extrapolating current trends a decade or more out into the future – if for no other reason that “if economists could get themselves be thought of as humble, competent people with dentists, that would be splendid”.
According to the US bears, the US outlook is dire. Huge fiscal deficits, a rapidly rising debt burden and a structurally lower level of economic growth post-crisis weigh on the US economic outlook. Potential growth has probably declined from 3% to potentially as little as 2%, the US manufacturing base has been severely weakened and the US is the world’s largest debtor. This sounds excessively pessimistic. US government debt is unlikely to exceed a 100% of GDP. Low real interest rates and some fiscal effort would make a structurally higher level of debt manageable. US external debt is also less of a problem than the numbers suggest, for US liabilities are denominated in dollars and the dollar benefits from reserve currency status, which is unlikely to be challenged in the near- to medium-term. This means that the US has significant room for maneouvre until the domestic political consensus on growth-enhancing economic reforms can be found.