A ascensao financeira da China e o declinio do dolar - Arvind Subramanian

Why the Dollar-Renminbi Transition Is Getting Much Closer Despite Debt Deal

by Arvind Subramanian
Foreign Policy, October 17th, 2013

The debt deal will do little to delay the day of reckoning for the dollar as the world’s reserve currency.
In my book, Eclipse: Living in the Shadow of China’s Economic Dominance, I argued that the renminbi could overtake the dollar as the world’s premier reserve currency sometime during the next decade. My prediction was based on an econometric analysis of the fundamental economic determinants of a reserve currency (chapter 3) and applying the lessons from the sterling-dollar transition (chapter 5). Such a shift was definitely already imaginable—it was memorably fictionalized in American novelist Gary Shteyngart’s dystopian Super Sad True Love Story, where the only worthwhile currency in America is yuan-backed dollars.
At the time, my prediction elicited three criticisms:

• First, it took nearly 60 years after the US economy overtook the UK economy for the sterling-dollar transition to occur. This was said to imply that even if the fundamentals were moving in China’s favor, the renminbi’s ascendancy was some long way off.
• Second, deep and liquid financial markets, and especially an open capital account were essential for maintaining a reserve currency, and China did not fulfill these requirements.
• Third, and perhaps most important, even if China fulfilled them, reserve currency status for the renminbi was nowhere close to imminence because that status is fundamentally based on trust—and not just any trust, but the trust of foreign investors and traders that China would not misbehave, especially in hard times, by expropriating or (God forbid!) defaulting on its obligations to foreigners. This was Simon Johnson’s critique in his review of my book.

Two years and several bruising political battles on, how does my prediction look in light of these criticisms? Pretty good.
The first critique was based on a misinterpretation of the sterling-dollar transition (see pages 106 to 114 of my book). Nothing has changed on that score. But it is worth noting that that transition was effectively only 10 to 15 years even without the United Kingdom inflicting demonstrably self-destructive costs as the United States is today. Moreover, in the last three years, the renminbi has displaced the dollar as thedominant reference currency in Asia.
On the second point, China today looks more likely to fulfill the requirements for running a reserve currency. The creation of Shanghai as a free trade zone with full renminbi convertibility and the designation of London as an offshore renminbi center attest to China’s intentions to gradually open the capital account. While the financial system is still neither liberalized nor developed, policies to move in that direction may well be announced at the Third Plenary Session of the Communist Party later this year.
There are two key points to remember here. First, China needs to make the necessary changes not immediately but over the next five years or so to create the conditions for a reserve currency. That is doable. Second, a reserve currency does not need an American-style, turbo-charged and sophisticated financial sector. It needs a reasonably open, reasonably transparent, reasonably liquid, and reasonably well-regulated financial system. China can also achieve that over the next decade.
It is on the third point that things have changed dramatically and in the most unexpected way. My prediction was based on an unstated assumption about the United States being normal. But now, the Johnson critique that the United States has unusual trust among investors has been turned on its head. Can investors now trust the United States not to default on its obligations (and thereby on the very instrument that provides the financial plumbing for the depth and liquidity important for a reserve currency)? Will this new distrust persist beyond the bad times, even in normal times?
Making matters worse, the US problem leading to investor uncertainty and mistrust is not a one-off breakdown but a structural problem of ongoing dysfunctional politics. Even though the United States has averted (just about) a debt default this time around, the Great Menacing Farce that we have just witnessed will be replayed a few months down the road and perhaps many times thereafter.
As Michael Clasey, arguing for a downgrade of the US credit rating, put it: “Triple-A credits do not behave like this.” Only a change in the underlying politics can restore the attribute that China does not currently have but that the United States is squandering away.
The bottom line is that, for two years now, China has burnished its credentials and the United States  has undermined them from a reserve-currency perspective. And if the dollar’s loss is the renminbi’s gain, my prediction is looking more not less likely to be realized.
When Gary Shteyngart was asked what he always carries with him, his response was: “Renminbi in 100¥ denominations. You never know anymore.”

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Trade integration in eight figures - Arvind Subramanian and Martin Kessler

REALTIME ECONOMIC ISSUES WATCH

Twenty-first Century Trade Integration in Eight Figures

by Arvind Subramanian and Martin Kessler 

Peterson Institute of International Economics, July 12th, 2013 

In this short post (based on our recent paper), we present eight attributes of the current phase of trade integration which began towards the end of the last millennium.

Hyperglobalization

Since 1870, there have been four phases of trade integration, as figure 1 shows. The first three were (1) globalization of the late 19th century; (2) the collapse of globalization in the Great Depression; (3) reglobalization after World War II. In this fourth phase of hyperglobalization, trade has grown substantially faster than world GDP and now represents about a third of world GDP. Trade in merchandise will soon reach twice what it was at the peak of the first globalization (just prior to World War I). This is true whether trade is measured in gross or value-added terms. (A chart on global foreign direct investment flows would show a similar trend.)

Figure 1 World exports as share of GDP, 1870–2011 (current dollars)

Sources: Klasing and Milionis (2013) for historical data, WTO for 1960–2011, Johnson and Noguera (2012) for value-added adjustment.

Dematerializing Globalization

Trade is becoming less about stuff and more about, well, fluff. But because services (fluff) are not traded directly, but embodied in goods which cross borders, their footprint is only visible when trade is properly measured (in value-added terms). Under this measure, services represented 43 percent of global trade in 2008 against 29 percent in 1980 (figure 2). Services are also becoming more tradable.

Figure 2 Exports of goods and services, in gross and value-added terms

Sources: World Development Indicators, Johnson and Noguera (2012) for value-added adjustment.

Democratic Globalization

Hyperglobalization is not confined to a few countries. It is not occurring because some large countries are emsbracing trade. It is a very broad phenomenon occurring across all countries, rich and poor, populous and less so (figure 3a).

Figure 3a Global openness, 1870–2010 (PPP dollars)

Notes: This chart shows two global openness indices: a simple average (holding the sample constant of export-to-GDP ratios), and a population-weighted measure.

Sources: Maddison for historical estimates, Penn World Tables 7.1 for 1951–2010.
It has been widely documented that hyperglobalization can be attributed to the sharp drop in transportation costs and to the revolution in communication technologies. Hyperglobalization also reflects a more democratic distribution of world output (figure 3b). If there were one country with all or most of the world’s output, there would be zero or little trade. The more output is spread the more there will be trade. Since the mid-1990s, as poorer countries have started growing faster than rich ones (the phenomenon of “convergence”), output is being more equally (less unequally) spread over the globe, leading to an increase in trade. It is as if now there are more countries and hence more trade.

Figure 3b Dispersion of world output and world exports, 1970–2010

Notes: Country-equivalents , where s_i is the share of each country in world output. A higher number denotes a more equal distribution of output.
Source: UNCTAD

Criss-crossing Globalization

More than before, flows, and similar kinds of flows, are going in both directions. After World War II, similar goods were flowing (think cars) between the rich countries. With integrated supply chains, unfinished goods go back and forth. This is criss-crossing globalization. We illustrate this with the example of foreign direct investment (FDI). It is much harder today to speak about “receiving” and “sending” countries, as FDI goes in both directions, between rich countries themselves, but also increasingly with emerging market countries investing in the developed world.

Figure 4 Two-way foreign direct investment flows, 1970–2011

Note: The Grubel-Lloyd index is computed for each country with nonzero positive flows. Each country is then weighted by its share of total FDI flows, with weights corresponding to the current year (red line) or with weights that are fixed at their mean over the period (blue line). The figure shows five-year moving averages (to avoid large spikes).
Source:UNCTAD various years.

The Rise of a Mega-Trader—China—the First since Imperial Britain

China has become a “mega-trader” in two senses. First, it recently overtook the United States as the world’s largest trader. Under realistic growth projections, it will pull further away from the United States and other countries. Second, and more impressive, is that China is a mega-trader compared to its own characteristics: A country is expected to trade more relative to its GDP when it is richer and when its size is smaller. Controlling for those criteria, China substantially over-trades, only slightly less than the United Kingdom did at its peak. On this second criterion, the United States in its heyday and Japan in the 1980s were under-traders (figure 5).

Figure 5 Trade openness and population size

Britain: 1870

China: 2008

Note: We regress exports to GDP (in log) on size (population, in log) and income (GDP per capita, in log). For 2008, we exclude small (<5 million habitants) and oil exporting countries. The charts present the bivariate relation between size and openness, controlling for income. A country above the line is more open than expected given its size.
Source: Maddison for 1870, Penn World Tables for 2008

Rise of Preferential Agreements and Impending Rise of Mega-Regionalism

A lot of the liberalization in the era of hyperglobalization has occurred in the context of preferential trade agreements, which increasingly address “behind-the-border” barriers (see figure 6). In part, this is because the Doha Round of multilateral negotiations remained stalled. This trend will be reinforced with the two mega-regional agreements being negotiated by the United States, the Trans-Pacific Partnership (TPP) with Asia, and the Transatlantic Trade and Investment Partnership (TTIP). About $2.5 trillion of trade in merchandise takes place within these two blocs, which accounts for 17 percent of world trade (the number would be higher if one includes services).

Figure 6 Number of new preferential trade agreements, 1958–2012

Source: World Trade Organization.

Decline of Formal Barriers

We have witnessed a long-term decline in tariffs across the world. This phenomenon is true across regions and has withstood the financial crisis, despite fears to the contrary.

Figure 7 Average most favored nation tariffs by income group, 1981–2009

MFN = most favored nation
Note: Spikes should not be over-interpreted as countries sometimes drop or enter the sample

Source: World Bank.

But Is the World Less Open Policy-wise?

There is a paradox: Liberalization is occurring all across the globe but the world may be getting more closed, or at least less open than people believe. This is because of two compositional shifts. Global output is moving away from less-protected manufacturing toward more-protected services (see figure 8) and from less-protected rich countries to more-protected poor countries (as shown in figures 7 and 8). Those shifts make the world as a whole less open and attenuate the liberalization trend that stems from all countries reducing barriers.

Figure 8 Index of services trade restrictiveness, by sector and region, 2008–10

Source: Borchert, Gootiz, and Mattoo 2012.

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Tags: globalization, services, trade, world economy

Um debate sobre a China - Foreign Affairs

The Great China Debate
Will Beijing Rule the World? 
By Derek Scissors; Arvind Subramanian 
Foreign Affairs, January/February 2012 


ESSAY 
The Inevitable Superpower 
Arvind Subramanian 
Is China poised to take over from the United States as the world’s leading economy? 
Yes, judging by its GDP, trade flows, and ability to act as a creditor to the rest of the world. In fact, China’s economic dominance will be far greater and come about far sooner than most observers realize. 
ESSAY 
The Middling Kingdom 
Salvatore Babones 
Sure, China’s economic growth has been unprecedented, even miraculous. But the country is unlikely to keep up its breakneck pace. Instead, China’s growth should level out soon, returning to rates more like those of comparable middle-income countries, such as Brazil, Mexico, and Russia. 
SNAPSHOT 
The Challenge for China's New Leaders 
Yukon Huang 
In recent years, Beijing had plans to balance equality with rapid economic growth. But rigid government controls over land and labor have instead exacerbated divides, and in turn, social tensions. Now a new set of leaders taking power this year will have to fight the party system. The problem is that they could lose, and set the Middle Kingdom on a path to another decade of unequal growth. 


 THE WOBBLY DRAGON 
Derek Scissors:  
Arvind Subramanian claims that China will unquestionably replace the United States as the dominant global power in the next two decades (“The Inevitable Superpower,” September/October 2011). 
He is right that if the U.S. economy continues on its current trajectory, the United States will not be able to maintain its position of global leadership. But he is far too bullish on China. Subramanian overlooks Chinese policies that will complicate the country’s economic rise and ignores the possibility that Chinese growth will simply stop. And he uses a definition of “dominance” that bears little resemblance to the U.S.-style preeminence he sees China assuming. 
 Consider how Subramanian measures China’s growing power. He cites the ability of Beijing to convince African countries to recognize it instead of Taipei, but outmuscling Taiwan diplomatically is hardly a sign of global leadership. He sees the ease with which China undervalues the yuan by pegging it to the dollar as proof of the country’s strength, but hiding behind a foreign currency is not a sign of economic might. 
He forecasts that China in 2030 will have an economy that is one-third larger than the United States’, yet he admits that it will remain only half as wealthy. These are notable trends, to be sure, but not ones that indicate China will attain anything close to the position the United States has held over the past 60 years. 
 The biggest flaw in Subramanian’s index of dominance is the importance he assigns to China’s status as a net creditor. Based on this alone, he is prepared to say that China’s economic strength is already comparable to that of the United States. 
But China’s creditor status does not make up for the fact that its economy is presently less than half the size of the United States’ and its people are barely one-tenth as wealthy as Americans. Creditor status is also a misleading metric by which to judge China because it is usually used to describe financially open economies, and China is largely closed. Countries with open economies can invest their money in many places. Beijing, because it cannot spend its foreign reserves at home, is forced to keep buying U.S. Treasury bonds. 
 China’s creditor status arises largely from its weaknesses, not its strengths. The country’s $3.2 trillion worth of foreign currency holdings represents an imbalance between investment and consumption. Instead of loaning money to rich countries, China should be importing capital in order to speed its domestic development and meet its sizable needs, starting with properly capitalized pension and financial systems. 
 China’s financial books are strictly divided, with huge assets in foreign currency (primarily dollars) on one side and huge liabilities in local currency on the other. Local governments have incurred high debts by spending heavily on programs such as railroad expansion and by borrowing to fund the 2009 stimulus (which came mostly from local, not national, government coffers). Beijing should be paying down this debt and addressing other domestic shortfalls with its mountain of foreign currency, but it cannot do so under its present balance-of-payments rules, which are designed to keep foreign currency in the hands of the national monetary authorities. 
Due to a closed capital account, domestic holders cannot send money overseas, and foreign currency can be converted to yuan only through the state financial system. The Chinese government has not let money flow freely because doing so would undermine its control of domestic interest rates, reducing its ability to influence economic cycles, and it would expose the domestic banking sector to devastating competition. If domestic entities were allowed to send money abroad, hundreds of billions of dollars would flee the country for financial ­institutions that operate commercially, unlike Chinese banks. Such a stark fear of competition does not suggest a country ready to exert dominance anytime soon. 
Lastly, Subramanian inflates China’s financial influence over the United States, forgetting that influence in a buyer-seller relationship is determined not by what-if scenarios but by who has better alternatives. The United States has already diversified away from Chinese debt by having the Federal Reserve flood the U.S. financial system with liquidity. This is hardly ideal, but it has driven down the Chinese share of U.S. debt while keeping interest rates historically low. 
In contrast, Beijing, despite its best efforts to diversify, still holds 70 percent of its foreign currency reserves in dollars. The reason is simple: those reserves are so large and growing so quickly that there is no alternative. The United States needs China to keep U.S. interest rates below historic norms; China needs the United States to maintain its entire balance-of-payments system. 
 Even if Subramanian acknowledges that China’s lopsided financial system is holding the country back now, he assumes that Beijing will soon rewrite its balance-of-payments rules and become an open economy. This assumption underestimates the Communist Party’s antipathy to change. In fact, the principal advocate for such reforms has been Washington, which hopes to encourage China’s transformation from an investment-led to a consumption-led economy. Such a transition would undermine China’s net creditor status -- what Subramanian sees as its main claim to dominance. 
But implementing market reforms would also allow China to keep growing at its blistering pace and surpass the United States in GDP. If China insists on maintaining government control over development, on the other hand, its long-term growth prospects will be dim. Salvatore Babones (“The Middling Kingdom,” September/October 2011) warns against drawing conclusions about China’s trajectory by simply projecting its growth rates forward. Indeed, it is entirely possible that Chinese GDP growth will simply stop. Growth depends on land, labor, capital, and innovation. China has depleted its ecology, its labor surplus will soon begin to erode, and vast overspending has driven down the return on capital -- all discouraging trends from the standpoint of growth. 
 As for innovation, Subramanian praises China’s growing technology sector and its ability to absorb new advances. But a true economic leader must create, not absorb, and Beijing’s favoritism toward large state firms will hinder innovation. Moreover, the quality of the Chinese higher-education system is poor and not necessarily improving. A no-growth scenario is a genuine danger -- just ask the Japanese. 
 By underemphasizing or ignoring China’s various weaknesses, Subramanian underestimates the United States’ ability to influence the competition with China. That said, his criticisms of the United States are valid; indeed, his baseline prediction of U.S. growth at 2.5 percent annually may be too optimistic. 
Crippled by debt, the United States faces a period of stagnation. If the overall economy remains sluggish, a lack of import growth will cause trade to lag and further reduce the United States’ global influence. Still, the Chinese dragon will not fly forward indefinitely, as Subramanian suggests; it may even crash. For the foreseeable future, China will not attain the kind of dominance the United States has long held. 
The world should not expect to crown a new global leader but prepare for the absence of one.


DEREK SCISSORS is Research Fellow in Economics at the Asian Studies Center of the Heritage Foundation and Adjunct Professor of Economics at George Washington University.


 SUBRAMANIAN REPLIES 
 Derek Scissors argues that my article prematurely heralds the rise of China and overstates the dominance that it will achieve. Above all, he takes issue with the importance I give to China’s status as a net creditor and disputes my assessment of the country’s prospects for growth and reform. 
 For starters, Scissors is simply wrong to claim that my characterization of China’s economic might is driven by its status as a net creditor. In the index I designed to measure economic dominance, I give net creditor status a weight of just five percent; the size of a country’s economy and the amount it trades account for the rest. 
I argue not that China’s dominance in 2030 will depend on the country’s remaining a creditor nation but rather that it will mostly stem from China’s economy and trade outpacing those of the United States by nearly 50 percent. That said, history is replete with ­examples of countries whose status as creditors has given them great power. 
After World War II, for example, the United States used its position as Europe’s major creditor to design the rules of the International Monetary Fund, which, not coincidentally, favored the United States. Today, Europe is assiduously courting the world’s new major creditor, China, in the hope that Beijing will put up the money for an EU bailout fund. 
If it does, it will surely use this leverage to shape the rules of international finance and trade. Scissors also argues that China’s creditor status reflects an underlying weakness because it is caused by “an imbalance between investment and consumption.” 
But China’s creditor status is the result of a strategy that has delivered humanity’s most dramatic economic transformation in the shortest period of time, posting unprecedented rates of growth and consumption. That is hardly a sign of weakness. Still, it is true that this strategy has distorted the economy, especially the prices of capital and foreign exchange. Keeping these prices artificially low will certainly entail future costs. Moreover, when China’s exchange rate reverts to normal levels, its hoard of foreign reserves will lose value in terms of yuan. But whether these future costs will prove catastrophic for China, as Scissors contends, depends on the country’s prospects for growth, since rapid growth makes all problems manageable. On this issue, Scissors alleges that I am being too bullish; I would argue that he is being far too pessimistic. My central growth forecast assumes that China will grow at a rate of seven percent over the next two decades, about 40 percent slower than its current growth rate of 10.5 percent. This is a conservative estimate. Plenty of countries at China’s level of economic development have posted that kind of growth. 
And as long as China’s standard of living remains lower than those of Western countries, its wages will stay low. This will continue to make China an attractive destination for investments and exports and will spur more growth. For this reason, Scissors’ Japan analogy is misleading: at the time of its slowdown in the 1990s, Japan had already achieved Western standards of living and exhausted its catch-up possibilities. 
China, by contrast, has a GDP per capita that is only about 20–25 percent of the United States’, which means China will remain internationally competitive for the foreseeable future. Scissors nonetheless insists that China’s growth could soon stop because the Communist Party will resist making necessary financial reforms. But China’s policymakers know that delivering steady growth, which their legitimacy hinges on, will require reform. And although growth could always be derailed by developments overseas (such as a European crisis), China has shown that it can ably counteract such problems. In 2008, when the financial crisis caused Chinese exports to collapse, Beijing implemented a mammoth stimulus package to offset the shock in a way that few other countries could. As this suggests, China still has both the political will and the fiscal ability to grapple with problems as they arise. Finally, Scissors argues that China will not be able to exercise economic dominance in the way that the United States has so long as it lacks the ability to create technology. True, innovation can give a country a unique kind of influence by inspiring others to want what it wants. As long as China remains politically closed, with a state-dominated economy and a lackluster technology sector, it cannot hope to attain this kind of dominance. But my article focuses on a different kind of dominance: the ability to get others to do what you want or to prevent them from forcing you to do what you do not want. With its large and rapidly growing economy, China already wields such power. Consider, for example, how China’s depressed exchange rate hurts economies from the United States to Bangladesh. Yet despite protests from across the world, Beijing continues to do what it wants. If that’s not dominance, what is? 


SNAPSHOT, APRIL 25, 2011 
Taxing China's Assets
 Joseph Gagnon and Gary Hufbauer 
For years, officials in Washington have complained loudly about Beijing's efforts to manipulate its currency. One novel option to stem the practice is both within international rules and would likely work: taxing the income on Chinese holdings of U.S. financial assets. 


ESSAY, JAN/FEB 2012 
The Future of the Yuan 
Sebastian Mallaby and Olin Wethington 
China seems to want the yuan to dethrone the dollar as the global reserve currency. But don’t expect China’s currency to take over anytime soon. The yuan will rise, but far slower than predicted, and Beijing’s puzzling efforts to help it along reveal flaws in the government’s divided and incremental approach. 


ESSAY, APR 1972 
China and Taiwan: The Economic Issues 
Robert W. Barnett 
Can Mao or the inheritors of Mao's authority entertain the possibility of some "separateness" for any Chinese within his egalitarian One China world? The answer to this question will influence Peking's attitudes toward peaceful coexistence with Taipei, intellectual and cultural diversities at home, and possibilities for future organization of China's economic system.

China a 'Precocious' Superpower? - Arvind Subramanian

China a 'Precocious' Superpower?

by Arvind Subramanian, Peterson Institute for International Economics

Op-ed in Business Standard, New Delhi
October 26, 2011 

Can a country that is not amongst the richest in the world and also not at the economic and technological frontier be a superpower? That is one of the most common questions raised against the central assertion in my recent book that China's economic dominance is more imminent, broader in scope, and greater in magnitude than is currently imagined.

My projections suggest that by 2030, China will not be poor; indeed, its per capita GDP (in purchasing power parity [PPP] terms) will be more than half that of the United States and certainly greater than the average per capita GDP in the world.

China's economic dominance will still be unique, because historically, the dominant powers (the United Kingdom and United States) have been rich, indeed amongst the richest relative to their competitors, when they have been dominant. In China's case that will not be so. But neither will it be a case of a poor country wielding power. China will be a middle-income or upper-middle-income country. So, perhaps China's future economic dominance should more aptly be described as that of a "precocious" rather than "premature" superpower as Martin Wolf of the Financial Times has described China.

But is precocious superpowerdom even possible? History is clearly on the side of those who believe that dominance requires a high standard of living. Why might this be the case?

First, a poor country might be inwardly focused because the tasks of maintaining internal stability and achieving a higher standard of living are the government's major if not exclusive preoccupation. In this case, projecting power internationally will have to be subordinated to addressing more pressing domestic challenges. Internal fragility sits uneasily, or is just downright incompatible, with external dominance.

Second, a poor country might not be able to raise the resources—at least on a sustained basis—for the projection of power internationally. The classic example is military resources. These will have to be financed. But the poorer a country, the more difficult it might be to tax the people to raise resources. For example, tax revenues generally rise with the level of development. Russia sustained military dominance for some time beyond its underlying economic potential, but eventually economics caught up with geopolitics. North Korea is a more extreme example of external power being incommensurate with internal stability and wealth. North Korea can be a nuisance, a country that can cause trouble, but hardly one that can exercise international dominance.

A third reason why a poor country cannot project dominance is that it may not have the "soft power" attributes—such as democracy, open society, and pluralistic values—for dominance. Put differently, the leadership that comes with dominance is only really possible if it inspires followership. And followership comes when the dominant country stands "for" something that commands universal or near-universal appeal.

The fourth reason, related to the previous attribute, is that only a rich country—which by definition is at the frontier of economic and technological possibilities—can be a fount or source of ideas, technology, institutions, and practices for others to follow and absorb. A poor country is less likely to be such a model worthy of emulation and an inspiration to follow.

So, clearly, dominance is inconsistent with being extremely poor, but if one reflects on these points, it is worth noting that with some exceptions, neither does dominance necessarily require being among the richest countries. There is, for example, no reason why internal cohesion, the ability to raise resources for external purposes, the possibility of being democratic, or possessing some emulation-worthy national narrative or values or ideals is inconsistent with being a middle-income power, as China is likely to be by 2030.

Moreover, China's current low standard of living is entirely consistent with different forms of the exercise of dominance. For example, China has used its surpluses to provide aid to and finance investments in Africa, extracting in return the closure of Taiwanese embassies. It has used its size to strengthen trade and financial relationships in Asia and Latin America. (China's offer to build an alternative to the Panama Canal to boost Colombia's prospects is one dramatic illustration of this phenomenon.) More recently, it is to China that the world will have to turn should things turn ugly in Europe and should additional resources be required to bail out some of the faltering European economies. ("China is Spain's best friend," effused Spanish Prime Minister José Luis Rodríguez Zapatero in April 2011, on the occasion of the Chinese president's visit.)

Most strikingly, China has been following an exchange rate policy that has adversely affected not just the United States and Europe but a number of emerging markets that compete with China, including Brazil, Mexico, India, Turkey, Vietnam, and Bangladesh. But the rest of the world has been powerless to change China's policies. If this is not dominance, what is?

Even the mighty United States has repeatedly threatened action against China but has not been able to carry it through. It barks but cannot bite. The shift in the balance of power in the US-China relationship is especially striking given that it was only about a decade ago that the United States was able to muscle China into radically opening its agriculture, goods, and services market as part of China's accession to the World Trade Organization.

So two possible conclusions suggest themselves. A form of dominance that naturally inspires followership and which might be necessary to create or build systems and institutions—as the United States did after World War II—might possibly elude China for some time, especially if it is unable to make the political transition to democracy. But other forms of dominance—to change the policies of other countries and resist change to its own in a way that can result in systemically negative externalities—are already being exercised by China at low levels of income. As China becomes considerably bigger and richer over the next two decades, what should we expect?

Arvind Subramanian is author of Eclipse: Living in the Shadow of China's Economic Dominance

O dragao ja passou a aguia, segundo Arvind Subramanian

Este analista econômico pensa que a China já ultrapassou os EUA, em termos de produto bruto. Pode ser, mas acho que vai demorar um bocado para ultrapassar os cidadãos americanos em PIB per capita... Talvez uns 150 anos... (sendo otimista).
Paulo Roberto de Almeida

In Growing Chinese Dominance, a Wake-Up Call for America
Op-ed in the Washington Post, April 29, 2011
by Arvind Subramanian
Peterson Institute for International Economics

The world's two economic superpowers will meet soon for the third installment of their Strategic and Economic Dialogue. Beyond the specifics, the real issue for the United States and the world is China's looming economic dominance. President Obama's State of the Union address, after President Hu Jintao's visit in January, showed the level of anxiety that policymakers feel about China as a potential rival and perhaps a threat, with growing economic, military, and political power, including its bankrolling of American debt. But judging from the reaction to the president's speech, that threat is not viewed as imminent. The same was said, some pointed out, of the rise of Russia and Japan, 40 and 20 years ago, respectively, and those threats turned out to be false alarms.

But what if the threat is actually greater than policymakers suppose?

According to the International Monetary Fund, for example, total US gross domestic product in 2010 was $14.7 trillion, more than twice China's $5.8 trillion, making the average American about 11 times more affluent than the average Chinese. Goldman Sachs does not forecast the Chinese economy overtaking that of the United States until 2025 at the earliest. Americans also draw satisfaction from their unmatched strengths of an open society, an entrepreneurial culture, and world-class universities and research institutions.

But these beliefs may be overly sanguine. The underlying numbers that contribute to them are a little misleading because they are based on converting the value of goods and services around the world into dollars at market exchange rates.

It has long been recognized that using the market exchange rate to value goods and services is misleading about the real costs of living in different countries. Several goods and services that are not traded across borders (medical care, retail services, construction, etc.) are cheaper in poorer countries because labor is abundant. Using the market exchange rate to compare living standards across countries understates the benefits that citizens in poor countries enjoy from having access to these goods and services. Estimates of purchasing power parity take account of these differing costs and are an alternative, and for some purposes a better, way of computing and comparing standards of living and economic output across countries.

My calculations (explained in greater detail on the Peterson Institute website) show that the Chinese economy in 2010, adjusted for purchasing power, was worth about $14.8 trillion, surpassing that of the United States. And, on this basis, the average American is "only" four times as wealthy as the average Chinese, not 11 times as rich, as the conventional numbers suggest.

The different approaches to valuing economic output and resources are not just of theoretical interest. They have real-world significance, especially in the balance of power and economic dominance. The conventional numbers would suggest that the United States has three times the capability of China to mobilize real military resources in the event of a conflict. The numbers based on purchasing-power parity suggest that conventional estimates considerably exaggerate US capability. To the extent that the service of soldiers and other domestically produced goods and services constitute real military resources, the purchasing-power parity numbers must also be taken into account.

The economic advantage China is gaining will only widen in the future because China's gross domestic product growth rate will be substantially and consistently greater than that of the United States for the near future. By 2030, I expect the Chinese economy to be twice as large as that of the United States (in purchasing-power parity dollars).

Moreover, China's lead will not be confined to GDP. China is already the world's largest exporter of goods. By 2030, China's trade volume will be twice that of the United States. And, of course, China is also a net creditor to the United States.

The combination of economic size, trade, and creditor status will confer on China a kind of economic dominance that the United States enjoyed for about five to six decades after World War II and that Britain enjoyed at the peak of empire in the late 19th century.

This will matter in two important ways. America's ability to influence China will be seriously diminished, which is already evident in China's unwillingness to change its exchange rate policy despite US urging. And the open trading and financial system that the United States fashioned after World War II will be increasingly China's to sustain or undermine.

The new numbers, the underlying realities they represent, and the future they portend must serve as a wake-up call for America to get its fiscal house in order and quickly find new sources of economic dynamism if it is not to cede its preeminence to a rising, perhaps already risen, China.