It seems that China will become the largest economy this year, ahead of previous estimates. This should not be surprising. China was the largest economy in the World at the end of the 19th century and Richard Nixon predicted that it would eventually become the strongest economy again. When international agencies formally announce that China’s economy is now larger than that of the USA there will be all types of reactions.
First of all, the announcement will have a psychological and political impact, particularly within the United States. Being second is not something that pleases the Americans. There will be blame and political recriminations. On the other hand, a proud China will be more assertive. Until fairly recently, China has been silent, even subdued. That will change.
However, the Chinese economy has more weaknesses than it may seem. Its rapid growth was accompanied by increasing social costs: inequalities worsened and the environment has been degraded to almost unsustainable levels. In addition, because of its demographic policy, employers will face a growing shortage of labor. Investments will be less attractive. The emergence of serious social and regional conflicts as a result of inequality and environmental deterioration should not be excluded. Fertile lands are relatively limited; water and energy problems are surging. China gets the raw materials it needs from overseas, particularly from Asian, African and Latin American countries. In some cases it invests in transportation infrastructure in those countries in order to get access to the raw materials. In doing so, China is following the British colonial model and, to that extent, old frictions and conflicts may reappear in the new situation.
The political system in China also presents a big challenge. A powerful capitalist class has emerged. New rich investors are permanently in search of opportunities to profit. They are the children of the Nomenklatura. They are obliged, however, to share their power with the bureaucracy which, on behalf of the Party, still controls the final decisions. They represent a real “tax”. The new rich someday will decide to get rid of intermediaries and act as the truly powerful force they are, just, as the native sons of the colonialists in the Americas did. A crisis of great of proportions will be the result. The truth is that political reforms, sooner or later, are unavoidable. The depth and scope of such a crisis is the great unknown.
Many factors militate in favor of the USA. It has fertile land, limited water problems, and, in the near future, self-sufficiency in energy. It is the country that invents the most and remains at the forefront of technology and science, although it is yielding ground here. The USA is not facing ‘bottlenecks’ in labor supply; its ports are best located to facilitate trade. Geographically, the USA is in an enviable place. The business environment is also good and the crime rate continues to decline although it is higher than that of developed countries and, in some cases, of developing countries.
But there are also factors which work against the U.S. The country’s health care system is the most expensive and least efficient among developed countries. The incarceration rate is the highest in the world. There are more than 300 million guns in civilian hands, many of them semi-automatics; the quality of primary and secondary education has dropped dramatically by comparison with other countries; the infrastructure in in dire need of maintenance and modernization. The tax system is not the best. Because of the power of lobbies, taxes are very complex and full of distortions that favor the upper classes. The quality of public expenditure is not best: defense and security take a generous share while spending on infrastructure is limited. The government collects little and spends more using the wrong priorities in most cases. Measures to protect the environment perhaps improved somewhat recently but not as much as they need to for a country that calls itself the world leader.
But the worst problem in the US is governance, in the broadest sense of the word. The power of the lobbies is almost unlimited and even so, continues to grow fast. Society is increasingly passive and powerless. Money controls the electoral process in the most unimaginable detail. Small states, ultra-conservative the majority of them, have veto power in the political and legislative processes. Presidential power is shrinking. To make matters worse, the American superiority complex prevents the country from drawing advantage from the experience of other countries. There are even incipient movements towards secession in some States, a reminder of America’s 19th century Civil War. . The USA needs to reform its archaic constitutional, legal and political systems. This would be seen as normal in any other country given the passage of time but in the United States it is heresy simply to mention the topic and this prevents the much-needed political dialogue from even starting.
Who will prevail in the current competition between China and the United States? The outcome will depend on which of them will confront the challenges with more imagination and perseverance in the long term. China has proved to be more persevering and resolute in tackling its problems in recent years. But the challenges that China faces now are much more difficult than those facing the USA. The economic and political reforms needed in the USA are not a mystery; they are simply difficult. China, on the other hand, must travel in unexplored territory. The next steps for China are cloaked in mystery. It is a real Chinese puzzle!