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China as #1 – Can the Momentum Be Maintained?

Jean-Pierre Lehmann on China becoming the world's top economy

December 11, 2014

It's official. China has surpassed the US in aggregate GDP. It is the world's number one economy. A dozen years ago it would have seemed implausible. Thirty-five years ago, when radical reforms were launched under Deng Xiaoping, this would have seemed impossible. At one level China being the world's biggest economy is not surprising. It is the world's largest country by population. China is four times more populous than the US and eleven-times more than Japan. In per capita terms, China at 89th place is still quite weak.

China's achievements

Still it would be churlish not to applaud China's achievements. With estimates that some 600 million people have been lifted out of poverty, this is a remarkable benefit to the Chinese people and mankind. This implies higher standards of living and progress in human dignity. China's accomplishments stand in stark contrast to India's mediocre record where some 800 million Indians still live below the poverty line and millions do not have a toilet. While Chinese and Indian GDPs per capita were roughly the same thirty years, China's is now twice India's.

The difficulty in long-term economic forecasting

While these accomplishments are to be applauded, it would be appreciated if the likes of Goldman Sachs, McKinsey and the Economist Intelligence Unit would refrain from making long-term forecasts based on pure extrapolations. While China's share of global GDP currently stands at 14%, the conventional "wisdom" of these institutions is that it will be some 25% by 2040.

The first point that needs to be stressed is
that without any exception that I am aware of all economic forecasts over 30 years+ have proved incorrect. In the mid-1980s these similar institutions predicted that Japan's GDP would surpass the US by 2005. Look where the Japanese economy has been languishing for the last few "lost decades".

History shows that the achievements of the past need not be guarantors of the future. China has done very well getting from being very poor to a middle-income status, but in order to achieve the 2030 target of becoming "a high income economy, with harmonious social, environmental and global relations, driven by creativity and the power of ideas", many challenges have to be overcome.

Two formidable obstacles

Two questions will determine China' outcomes and prospects.

First, to achieve its 2030 target China will need to enact radical reforms across all sectors: education, environment, economy, law, administration, society, and politics. Can these be successfully implemented? Enacting the impressive reforms of thirty years ago occurred in a context where China was on the brink of collapse. There were few alternatives.

Today China is doing quite well. More significantly there will be staunch resistance from vested interests that have profited from the current system and do not want it altered. Given the high level of corruption and cronyism, the last thing these new elites want is accountability or transparency. President Xi Jinping is waging war on these elements, but it is not clear he will succeed.

Second, how will the rest of the world react to China's rise? There are two countries that really matter and with which prospects are by no means obvious. Since Japan and the US are allies, China's relations with one will impact on relations with the second. In a nightmare scenario, should there appear to be a Chinese invasion of the contested Diaoyu/Senkaku islands, the US would be treaty-bound to help Japan.

For 120 years until a decade ago, Japan was the leading power in Asia. It won three wars against China. As Japanese writer Yoichi Funabashi has said, "It is so difficult for Japan to adjust to this new power shift, psychologically and politically. Japan has never believed in 'Japan as number one', but it has believed in 'Japan as number one in Asia' . . . this is a crude awakening for Japan."

Shaky leadership

With "Abenomics" likely to fail and the visceral rejectionist and nationalistic instincts of Prime Minister Shinzô Abe, there are reasons to worry.

Washington seems to have lost its geopolitical bearings since the beginning of this century. With the recklessness of George Bush followed by the aimlessness of Barack Obama, American foreign policy is confused, hence confusing! It is not clear whether Washington wants to contain China or engage China. Evidence indicates the former. This is especially notable in the badly thought-out mega-regional trade initiative, the Trans Pacific Partnership. China is the world's mega-trader. Leaving the mega-trader out of mega-trade deals can hardly be seen as global leadership, but rather global brinkmanship.

This is happening at a time when the institutions of global governance – notably the WTO, the IMF and the World Bank – are suffering from paralysis.

There are so many complexities attached to these two key questions that making any sort of prediction is rash and irresponsible. What needs to be done is to monitor closely how developments take place under the two themes and promote means for enhancing reforms in China and a global geopolitical environment conducive to engaging China in pursuit of its 2030 goals.

Jean-Pierre Lehmann, Emeritus Professor of International Political Economy at IMD and Visiting Professor at Hong Kong University, will be leading a stream in the forthcoming Orchestrating Winning Performance program in June in Lausanne on the theme of "Globalisation with Chinese Characteristics".

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