Return of China in World Economy?

Economix Blog has a super post on how Chinese economy is making a comeback on its share in World GDP.

The chart above shows the percentage of the world’s economy contributed by China during the last two centuries. As you can see, China held a far bigger share of the world’s economy in 1820 than it does today. From the early 19th century until the mid-20th century, China’s share of global output fell steadily, troughing at about 4 percent of world G.D.P. in the 1960s.

The United States, on the other hand, constituted a mere pittance of world output in the early days of the republic, and then grew steadily up until the Great Depression. It shot up during World War II, and then began to decline and eventually flatten out over the subsequent decades.

How to explain these trends?

As the O.E.C.D.’s Jérome Cukier notes, a country’s share of world output was, until about 200 years ago, strongly correlated with a country’s population size. This partially explained why China, with its huge population, took up so much of the world economy for so long.

But then factors like “colonization, innovation and openness to trade and capital flows” helped change things, Mr. Cukier writes, and economic size began to divorce itself from population size. Western countries shot ahead of China in their share of global economy through much of the last century. Until, that is, China began to catch up and eventually outpace its competitors in the development game more recently.

In other words, China’s plentiful and cheap labor is only part of the key to its rapid growth in the last few decades; what appears to have really made the difference, not surprisingly, is its greater economic interaction with the rest of the world.

Fascinating stuff.