Will China Ever Become as Rich as the U.S.?

Mark Wynne of Dallas Fed has a nice crystal ball gazing paper by the same title.

He analyses which countries have managed to reach per capita income levels of US and whether China can make it:

Twenty years ago, a visitor to Beijing would have been struck by the bicycle’s popularity as a form of mass transportation. Today, auto congestion and pollution on the increasingly clogged roads of China’s capital city are pervasive features. In a little more than three decades, China has transformed itself from a largely closed agrarian society to an urban exporting nation commonly viewed as the workshop of the world.

At current growth rates, China will be the world’s largest economy sometime in the next decade. But will it ever be the richest? Though providing a definitive answer is difficult—at least in terms of standard of living—examining how China and other developing economies grow offers insight into how, with maturity, these nations may approach the technological leadership and, by extension, the standard of living of the U.S.

He adjusts the per capita GDP to make things measurable:

Gross domestic product (GDP), a measure of everything produced within a country’s borders, is the most widely available means of calculating just how rich a country and its citizens are.[1] In 2010, China’s GDP was 14.12 trillion yuan (measured in 1990 yuan to control for inflation), according to the nation’s statistical office; U.S. GDP was $13.25 trillion (measured in 2005 dollars to control for inflation).

Two adjustments are required to compare the two numbers and determine which economy is bigger. We set a common year for both price series and convert them to a common currency unit. The simplest approach is to measure GDP in U.S. dollars at 2005 prices and use 2005 exchange rates. Doing so results in estimated 2010 Chinese GDP of $3.88 trillion in 2005 dollars, or just less than 30 percent of U.S. GDP. China’s economy will exceed that of the U.S. in 2025 if it continues expanding at its past-decade rate of just more than 10 percent a year and the U.S. keeps growing at the 1.7 percent annual rate it experienced during the period.

Per capita GDP allows us to compare the relative well-being of residents of the two nations. Based on the 2010 U.S. population of 309 million, per capita GDP was $42,874 last year. China, with a 2010 population of 1.34 billion, had per capita GDP of $2,893 last year, or 6.7 percent of the U.S. figure.

Some countries do exceed US per capita GDP but they are either oil exporters or small financial centres. So one cannot really take them as the success stories. Other than them, others struggle to reach US income levels. Some reach US leveks but cannot cross it. Overall, countries cannot grow as fast  as they get richer. They fall into the middle income trap.

Basic growth theory suggests that poor countries should grow more rapidly than rich countries. That is, the lower the level of per capita GDP at the beginning of a decade, the faster a country should expand over the following 10 years. And, indeed, this is generally what the chart shows. Note that some poor countries experienced growth disasters: Despite low levels of per capita GDP, living standards declined over 10 years or more. Excluding these observations from the sample, the tendency of growth to slow as countries get richer becomes more apparent.

China and even G7 countries have a long way to go before the reach US standards. Why is this so?

Why do countries fail to reach U.S. living standards? Therein lies something of a mystery. Economists speak of a middle-income transition, or middle-income trap, where previously rapidly growing economies slow down dramatically and never achieve the same standard of living as the technological leader. The reasons for this are unclear. It may be that policies appropriate for one stage of development are less effective at later stages and that the institutional structure lacks the agility to adjust as circumstances change.

In a recent paper, economists Barry Eichengreen, Donghyun Park and Kwanho Shin examined a large number of growth slowdowns over the past 50 years (declines in per capita GDP growth rates of at least 2 percentage points from rates of at least 3.5 percent per annum).[5]

So, overall China will become a larger economy than US but its per capita income levels are likely to remain lower than US for a while. China was the largest economy in 1820s and would move to its position now. But overall income levels will take a while before it goes anywhere near US:

Barring some major shock, it appears China’s economy will inevitably become larger than that of the U.S. sometime in the next decade. In many ways, this simply reflects the sheer size of China’s population, currently more than four times that of the U.S. population. Even so, a lot of uncertainty remains about whether individual Chinese citizens will ever be as rich as their American counterparts.

In 1820, China was responsible for about one-third of global GDP, while the U.S. accounted for just 1.8 percent. So, the likely shift in relative size in the next decade is in some ways simply a return to what we previously experienced.[6] Even then, U.S. living standards were twice those of China. If China were to become the first country to completely close the gap with the U.S., it would mark a significant break with development patterns observed over the past half-century.

US will remain the technology frontier most countries will try and reach. Nicely put paper..

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3 Responses to “Will China Ever Become as Rich as the U.S.?”

  1. PB Says:

    I have a simplistic argument. Perhaps the US had the advantage of holding the world’s reserve currency, which allows it to borrow resources at no cost. After all, the Chinese are selling their labour and goods to get paper currency in return.

    I apologize if the above argument sounds silly.

  2. Amol Agrawal Says:

    not really…well yes USD is a world currency for many years and US gains a lot from that..

    but income standards are much more than just currency….you become a world currency when you are the biggest economy which US has managed for many decades….so it is strength of US economy which determines host of factors…Economy in turn is dependent on many other factors….

    The point is US has excellent institutions compared to any other country…hence one can never really play the catch up game..

  3. India economy Says:

    Yes it is very nice article very impressive and good question.. I think it may be in future. Us is most rich country and china is not rich country. Us population is less as well as china population is more..
    there are some reasons to become rich. both countries are perfect with electrical and scientist.. I can’t say clearly..
    —————
    Arrow

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