In Episode 11 of Power and Consequences, we (Gary Gensler and Simon Johnson) talk about the Chinese economy, its mix of remarkable accomplishments, real imbalances, and potential problems. One question—to which we will surely return—is the status of China-United States economic/political competition and what this implies for who will be the world’s “hegemon” (i.e., most influential country) in the years ahead. With President Trump in China to meet President Xi on May 14 and 15, there’s also a shorter term motivation behind this episode: What should we expect from these talks?
The transformation of China since the late 1970s is simply amazing. From being a poor country, left behind by the industrial revolution and then traumatized by invasion, followed with decades of communist misrule, China has become the world’s second largest economy. Extreme poverty has substantially been eradicated, and a large middle class has emerged. All of this has been made possible by a tight focus on exporting manufactured goods – with 17 percent of the world’s population, China now accounts for perhaps 35 percent of world manufacturing output (that statistic is the share of gross production; China’s share of world manufacturing value added is 29 percent in the latest available data).
Weaknesses, though, are also apparent. Wages of less skilled workers have long been held down—i.e., not everyone has participated equally in the decades long boom (and China has become almost as unequal as the US). While China’s current account surplus is not at its record peak as a share of the economy, it is still around 3.5 percent of Gross Domestic Product; this remains a source of friction with trading partners. Further, the Chinese government has a large budget deficit; its “cyclically adjusted primary balance” is minus 7 percent of GDP, and general government gross debt is about 100 percent of GDP. (All of these macro numbers and more are available from the IMF data mapper.) In addition, the Chinese property market is still a mess.
Some additional reading that we would like to recommend:
-Former MIT President Rafael Reif has observed the rise of science and technology in China, and recommends that we take it seriously including by increasing our commitments to invention.
-In Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, Jonathan Gruber and Simon argued that China is taking pages from the playbook that made America prosperous and the #1 technological superpower after 1940. The U.S. should respond by … increasing its commitments to invention, tapping talent all across the United States, and building more American companies based on new ideas.
On the rise and fall of Japan’s share of global manufacturing, “The World’s Top Ten Manufacturing Nations Since 1970” and its headline graphic are quite informative.
Here are some good background notes on issues for the summit:
-from Patricia M. Kim at the Brookings Institution on Five Things to Watch;
-from the Council on Foreign Relations on the US-China Trade Relationship;
-and big picture from the US-China Economics and Security Commission.
One issue, though, may overshadow everything at the summit: the US-Iran conflict and how to reopen (and keep open) the Strait of Hormuz. For more on this issue and why/how China might decide to help, please see “Is A Lasting US-Iran Deal Now Possible? Overcoming Time Inconsistency and Political Debt Overhang”, Policy Insight 150 from the Center for Economic Policy Research, by Simon and Amir Kermani.
And here’s the “Joint Statement Following Discussions With Leaders of the People’s Republic of China,” dated Shanghai, February 27, 1972.
Simon’s science fiction recommendation for this week is The Three-Body Problem, by Liu Cixin. The material about science during the Cultural Revolution is particularly compelling.
