China's economic development continues to outpace the other major economies. After more than 30 years of rapid growth, China became the world's second-largest economy in 2010. Now, the International Monetary Fund (IMF) is predicting that China's economy will exceed the United States' in 2016.
Using the measure of Purchasing Power Parity (PPP), which compares what residents of countries earn and spend domestically, the Washington-based IMF announced the Chinese economy will grow from the current $11.2 trillion to $19 trillion in 2016. In contrast, the U.S. economy will grow from $15 trillion to 18.8 trillion in the same time frame.
"No country in the modern era has come close to matching the might of America's economy," writes David Gardner of London-based Financial Times, "at its very zenith, the USSR produced only a third of the goods and services of the U.S. Similarly, Japan at its peak managed less than half of America's output. China, on the other hand, has been accelerating towards the U.S. with remarkable speed. ... The International Monetary Fund's new prediction will effectively end the 'Age of America' a decade before most analysts had expected. It means that whoever wins the 2012 presidential election will have the dubious honor of presiding over the fall of the United States."
IMF's calculation, based on a single measurement of PPP, however, has many flaws. As Derek Scissors of the Heritage Foundation points out, "While PPP is a step in the right direction in principle, there are multiple pitfalls. For economies as large and diverse as those of America and China, differences in purchasing power within each country are huge. It is almost meaningless to find an average price for all of the U.S. or all of China. Perhaps even more important in comparing two economies, PPP changes over time. Because prices change at different rates in different places, purchasing power comparisons made at one point can be quite misleading just a few years later, and even more misleading when projected forward in time."
The PPP approach largely ignores the factor of inflation. Chinese inflation has been growing much faster than American inflation since 1994-from 1994 to 2010, the average annual inflation rate in China was approximately 4.5 percent. Due to the cumulative effect of high inflation, the World Bank has recently cut the size of its 2005 PPP estimate of China's GDP by more than 40 percent.
"In an instant," writes Derek Scissors, "the Chinese economy became 40 percent smaller. Moreover, since 2005, Chinese inflation has again been faster than American inflation. The World Bank has not yet adjusted for this faster inflation. Nearly all economic projections that show China surpassing the U.S. in the next few years are based on a PPP measurement that is out of date."
There are two other aspects of the Chinese high-speed growth which have been mostly ignored. First, as the Gallup Global Wellbeing Survey 2010 revealed, despite rapid growth and a general feeling that China is "on the up," most Chinese people are "down in the dumps." The recent Gallup survey covers 124 countries across the globe and puts people into three categories based on how they would describe their lives: "thriving," "struggling," and "suffering."
"Despite being the world's fastest growing major economy," summarizes Josh Nobel of Financial Times, "China's figures aren't happy reading: Thriving: 12 percent, Struggling: 71 percent, Suffering: 17 percent. To put that better into context, at 12 percent 'thriving', China is on a par with both Afghanistan and Yemen. At 71 percent 'struggling', China sits in similar territory to Haiti, Azerbaijan and Nepal. Meanwhile the 'suffering' 17 percent is a higher figure than Sudan, the Palestinian Territories, and Iraq."
Another alarming factor is the increasing gap between rich and poor. Even Beijing's official English mouthpiece, China Daily, recognizes the income disparity between China's rich and poor is reaching a dangerously high level. "China's Gini coefficient, a measurement of inequality," reports China Daily, "is approaching 0.5. Throughout the world, a commonly recognized 'red line', or point where society should start to be worried, is 0.4, while 0 represents an equal distribution of national wealth."
These factors are having profound negative impact on China's "sustainable growth" and the country's political and social stability. If not properly and swiftly addressed, they together will for sure slow down the speed of the Chinese economic bullet train and significantly delay the actual date when China surpasses the United States.
Xiaoxiong Yi is the director of Marietta College's China Program.