|Asian giant's economic expansion reveals need for pro-growth policies|
The Washington Times
6:18 p.m., Friday, June 3, 2011
The International Monetary Fund (IMF) predicted in its latest World Economic Outlook that China will overtake the United States as the world's largest economy as early as 2016. IMF economists believe the Chinese economy would by then reach $19 trillion, compared to a U.S. economy of just $18.8 trillion. This was seized as proof of superiority of the Chinese model of state-led capitalism and the end of American economic dominance. Don't believe it.
It's a bad idea to draw such an expansive conclusion from a single number. Long-term economic forecasts, especially linear predictions such as the IMF's, are notoriously inaccurate. Five years is a long time, and there are indications that China is in the midst of an unsustainable bubble.
The IMF's gross domestic product (GDP) numbers are in purchasing power parity (PPP) terms, which compare what people spend in real terms at home, rather than in nominal exchange rate terms - the rate at which currency is exchanged in the market. To talk about GDP in the aggregate without talking about how well off the people are is to risk making grave errors. On a per capita basis, China remains a relatively poor country. The population is about four times that of the United States. Our per capita income currently is about $47,500 on a PPP basis; per capita income in China is about $7,500. The Middle Kingdom has a lot of catching up to do.
China's growth - if it happens - is not bad news for the Land of the Free. Growth isn't a zero-sum game. In fact, the expansion of the world economy is the best thing that could happen for all involved. The more people move out of poverty the better. A wealthier China, India or any other country offers a larger market for American goods. Growth is, fundamentally, a positive-sum game.
How well the United States does, and how quickly it grows depends to a great extent on its own policies. We are the world's largest economy because we generally have followed a path of fiscal and monetary restraint, respect for property rights and a policy of reducing barriers to international trade (since signing the General Agreement on Tariffs and Trade in 1947). Not surprisingly, America has hovered close to the top of the rankings of the Economic Freedom of the World.
In recent years, however, our economic freedom ranking has slipped from third place in 2004 to sixth in 2010. This is largely a result of bad economic policy such as our outrageous 39.2 percent corporate tax rate, now the highest among developed nations. The budget deficit has also spun out of control, and the Federal Reserve is about to open the monetary spigot with quantitative easing for the third time since 2008. The federal government's intrusion into markets is increasing at an alarming pace, from automobiles to health care. There are currently three free trade agreements being held hostage.
Continuing these reckless policies, as championed by the Obama administration and congressional Democrats, will help make the IMF's prediction come true. As long as we return to the pro-market, limited government, lower tax principles of our founding, we won't have to worry about any other country knocking us down a peg.