Dont worry america you arent poorer than china

On Wednesday, the front page of the Financial Times declared that China stands poised to surpass the United States as the world's largest economy -- and to do so much sooner than anyone expected. Citing new data from a consortium of leading statistical agencies, the paper explains that when the Chinese and American economies are compared on the basis of purchasing power parity -- or how much a yuan or dollar can purchase in their respective countries -- China is on the threshold of overtaking the United States in terms of economic output as soon as this year.

With a graphic set against Shanghai skyline, the ubiquitous metaphor for Chinese growth, the story proclaims that a geopolitical turning point has arrived:

That pronouncement is sure to provoke a litany of hand-wringing in Washington, where analysts worried about China's increasing power have considered the moment when it becomes the world's largest economy as a signal milestone in its potentially inevitable ascension over the United States. But are these purveyors of American doom and gloom right to worry that Beijing's arrival at the top the global economic pile portends American decline?

 

In short, no. Indeed, the citizens of the United States are far richer than the average Chinese person, and that's unlikely to change anytime soon. U.S. per capita income in 2012 sat at around $52,000; for China, that figure was about $9,000.

If anything, Wednesday's news is but the earlier arrival of a long-expected development. Given its massive population of about 1.35 billion -- roughly four times the size of the United States -- China was widely expected to eventually become the world's largest economy. It was just a question of when. According to World Bank data cited by the Wall Street Journal, the estimated value of the U.S. economy in 2012 was $16 trillion, double the value of China's. If those figures are accurate, it will be years before the Chinese economy overtakes that of the United States.   

Those figures, however, don't account for fluctuations in the exchange rates between the dollar and China's yuan. Wednesday's data, courtesy of the International Comparison Program, a coalition of statistical bureaus housed under the auspices of the World Bank, uses an updated measure of purchasing power parity, a way of comparing economies across borders by taking into account price differences between countries, to conclude that the Chinese economy is in fact much larger than thought. The FT headline is more a question of an update in accounting accuracy than a substantive change in economic reality. Another note of caution: Some analysts question the reliability of Chinese economic data, suggesting that the Chinese economy may be in much worse shape than official numbers would indicate and may have already begun slowing.

For the moment, Chinese policymakers are desperately trying to figure out how to ensure that their country doesn't get stuck in what is known as the "middle income trap," a phrase that refers to the tendency of economies to stagnate once they escape the clutches of poverty. Escaping national poverty is by no means easy, but entering the ranks of the truly affluent can be staggeringly difficult. (The Indian economy, which has the potential to rival the size of China's, is a good example of what the Chinese government fears. After years of breakneck growth, the Indian economy has slowed, and some analysts are predicting the end of the Indian growth miracle.)

Having expanded its economy enormously, Beijing has been throwing its weight around abroad, fueling fears that Beijing will gradually overtake the United States as the world's leading superpower. China, for example, is investing heavily in Africa and has become embroiled in a nasty dispute with its neighbors over a set of disputed islands.

There's no guarantee, though, that China's economy will continue growing -- or even maintain its current strength. While China was able to escape the recent financial crisis relatively unscathed, many analysts believe that a homegrown economic implosion may not be far off. China's investment-fueled growth have sent real estate prices skyrocketing and seen China's banks issue huge amounts of credit. If growth slows, borrowers may default on the loans used to build the highways and gleaming trains that have come to symbolize China's meteoric rise, China could potentially see a cascading series of bank failures. If enough of them went under, the banking failures could spur widespread social and political unrest.

These are but some of the things to keep in mind when commentators inevitably bemoan the end of American power and the arrival of China.

http://blog.foreignpolicy.com/posts/2014/04/30/dont_worry_america_you_arent_poorer_than_china