Tuesday, May 6, 2014

The World Has Nothing to Fear From the US Losing Power

As China looks set to overtake the US as the world’s largest economy, a multipolar world can only be good for democracy
Mark Weisbrot
The news that China will displace the US as the world’s largest economy this year is big news. For economists who follow these measurements, the tectonic shift likely occurred a few years ago. But now the World Bank is making it official, so journalists and others who opine on world affairs will have to take this into account. And if they do so, they will find that this is a very big deal indeed.
What does it mean? First, the technicalities: the comparison is made on a purchasing power parity (PPP) basis, which means that it takes into account the differing prices in the two countries. So, if a dollar is worth 6.3 renminbi today on the foreign exchange market, it may be that 6.3 renminbi can buy a lot more in China than one dollar can buy in the US. The PPP comparison adjusts for that; that is why China’s economy is much bigger than the measure that you have most commonly seen in the media, which simply converts China’s GDP to dollars at the official exchange rate.
The PPP measure is a better comparison for many purposes. For example, take military spending: the money that China needs to build a fighter jet or pay military personnel is a lot less than the equivalent in dollars that the US has to pay for the same goods and services. This means that China has a bigger economy than that of the US, for purposes of military spending. And in a decade, the Chinese economy will most likely be about 60 percent bigger than the US economy.
President Obama has just returned from a trip to Asia where he was criticised for not being tougher with China. However, Americans may want to consider whether “containing” China with a “pivot” to Asia is an affordable proposition.
When the US had an arms race with the Soviet Union, the Soviet economy was maybe one-quarter the size of ours. We have not experienced an arms race with a country whose economy is bigger than ours, and whose economic size advantage is growing rapidly. Are Americans prepared to give up social security or Medicare in order to maintain US military supremacy in Asia? To ask this question is to answer it.
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