By Arvind Subramanian
Arvind Subramanian is senior fellow at the Peterson Institute for International Economics and at the Center for Global Development. This article is adapted from his book Eclipse: Living in the Shadow of China's Economic Dominance (2011).
To debtors, creditors can be like dictators. Governments in financial trouble often turn to the International Monetary Fund as supplicants, and acting at the behest of its own major creditors, the IMF often imposes tough conditions on them. After the Asian financial crisis of the late 1990s, Mickey Kantor, U.S. trade representative under President Bill Clinton, called the organization "a battering ram," because it had served to open up Asian markets to U.S. products. During the 1956 Suez crisis, the United States threatened to withhold financing that the United Kingdom desperately needed unless British forces withdrew from the Suez Canal. Harold Macmillan, who, as the British chancellor of the exchequer, presided over the last, humiliating stages of the crisis, would later recall that it was "the last gasp of a declining power." He added, "perhaps in 200 years the United States would know how we felt."
Is that time already fast approaching, with China poised to take over from the United States? This is an essential question, and yet it has not yet been taken seriously enough in the United States. There, this central conceit still reigns: the United States' economic preeminence cannot be seriously threatened because it is the United States' to lose, and sooner or later, the United States will rise to the challenge of not losing it. China may be on its way to becoming an economic superpower, and the United States may have to share the global stage with it in the future. But, the argument goes, the threat from China is not so imminent, so great, or so multifaceted that it can push the United States out of the driver's seat.
Thus, the economist Barry Eichengreen concludes in his recent history of different reserve currencies, Exorbitant Privilege, "The good news, such as it is, is that the fate of the dollar is in our hands, not those of the Chinese." And in December 2010, as he was leaving the White House as President Barack Obama's national economic adviser, Larry Summers said, "Predictions of America's decline are as old as the republic. But they perform a crucial function in driving the kind of renewal that is required of each generation of Americans. I submit to you that as long as we're worried about the future, the future will be better. We have our challenges. But we also have the most flexible, dynamic, entrepreneurial society the world has ever seen." In other words, if the United States can get its economic house in order, it can head off the Chinese threat.
But such views underestimate the probability that China will be economically dominant in 20 years. And they reveal a one-sided, U.S.-centric perspective: that world dominance will be determined mostly by the actions of the United States, not those of China. In fact, the outcome of this race is far more likely to be shaped by China.
THE WORLD IN 2030
Broadly speaking, economic dominance is the ability of a state to use economic means to get other countries to do what it wants or to prevent them from forcing it to do what it does not want. Such means include the size of a country's economy, its trade, the health of its external and internal finances, its military prowess, its technological dynamism, and the international status that its currency enjoys. My forthcoming book develops an index of dominance combining just three key factors: a country's GDP, its trade (measured as the sum of its exports and imports of goods), and the extent to which it is a net creditor to the rest of the world. GDP matters because it determines the overall resources that a country can muster to project power against potential rivals or otherwise have its way. Trade, and especially imports, determines how much leverage a country can get from offering or denying other countries access to its markets. And being a leading financier confers extraordinary influence over other countries that need funds, especially in times of crisis. No other gauge of dominance is as instructive as these three: the others are largely derivative (military strength, for example, depends on the overall health and size of an economy in the long run), marginal (currency dominance), or difficult to measure consistently across countries (fiscal strength).
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