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Fears over Chinese dominance unfounded

Individuals and nations become rich by investing in human capital

ONE DISADVANTAGE of being 60 is that you have to get up in the middle of the night, often more than once. But a big advantage of advancing age is that you get to recognise news media silliness when it happens.

This comes to mind in terms of the economic relationship between the United States and China. Partly because a company affiliated with the Chinese government has made a bid to buy Unocal, a large American oil company, there is a lot of talk in the news media about how powerful China has become and how weak and pitiful the U.S. has become.

There is talk of Chinese dominance over the world economy, and, from what I can gather, a general fear that soon we will be in peonage to the Chinese.

It all reminds me a lot of how the news media and the CIA went berserk after the launching of Sputnik in 1957, and it was forecast that the Soviet Union would soon be the world's technological and economic hegemon. That talk was based on a number of faulty assumptions and a good deal of hysteria. Obviously, it did not happen.

In the case of China, the confusion is slightly similar, but with some important differences — and one immense fact that the news media regularly overlooks about personal responsibility.

First, let's look at the data. But the problem is that the data are extremely confusing when it comes to reporting the real size of China's economy. On the one hand, if you take what is reported about the output of China, you get a range of estimates, but generally the gross domestic product of China in 2004 is estimated to be substantially less than $2 trillion.

That would roughly make it one-sixth the size of the U.S. economy. Yet China has nearly five times the population of the U.S. That means the per capita GDP of China is about one-thirtieth the per capita GDP of the U.S., estimated to be about $40,000 at present, in rough terms.

Obviously, this puts Chinese per capita GDP far behind that of any major industrial country. But some economists, especially at the CIA (which loves to puff up estimates of the power of other countries, as we have learned at great cost), say that one should count only "`purchasing power parity'' GDP.

That means we adjust Chinese GDP and per capita GDP drastically higher to account for the lower prices that the Chinese pay for things like food and medical care. (It is a mystery to me how these economists account for the fact that tens of millions of Americans have a house on a quarter-acre of land with three bedrooms and air-conditioning, a type of property that is simply not available except to maybe the richest 10,000 families in China. Maybe that should ratchet up our purchasing power parity GDP, but I don't think it does.)

Consider the most optimistic CIA data about China in 2004. It says China has a purchasing power parity GDP of (very) approximately $8 trillion, compared with roughly $12 trillion for the U.S. Again, this is for a nation with nearly five times the U.S. population. Even when using this most astoundingly optimistic estimate — I would almost say a preposterous estimate — China has a per capita GDP of about $6,000, or about 15 per cent of America's and well below that of any nation in Western Europe, or of Japan, Israel, Taiwan and many other countries.

In other words, the U.S. is vastly richer than China by any measure. This is not to boast, but it is also not to be afraid of imminent world-pauper status.

It is true that China is industrialising at a fantastic pace. It is estimated that China has been growing at roughly 9 to 10 per cent annually for several years, while the U.S. has been growing about 3 per cent annually. Torrid growth, however, never goes on forever, in companies or in nations. (At least it never has so far.)

But suppose that these trends continued for 25 more years. Chinese per capita GDP would be about $65,000 in 2040, and American per capita GDP would be about $84,000. Again, this assumes that we use the most optimistic possible estimates of current Chinese GDP.

If we used the more conservative, non-CIA estimates of where Chinese per capita GDP is now, in 25 years it would be about $17,500 — and this assumes the continuation of China's recent sizzling growth rates. That would put China's per capita income in 2030 at roughly one-sixth of the U.S. level.

In other words, it will be a long time before Chinese per capita GDP matches that of the U.S. And for that to happen, it will take a previously unheard-of growth rate for an unheard-of length of time.

This is a big series of ifs, especially for a country with a rapidly aging labour force and an inherent contradiction between dictatorship and free markets.

But suppose that it does happen. Suppose that China becomes a larger economic power than the U.S. Suppose, in our great-great-grandchildren's day, that the average Chinese citizen is about as rich as the average American.

How would it hurt us? Why would we be worse off? If the Chinese were richer, they could buy more from the U.S. and employ more of its workers. They could buy more of its stocks. They could tour the beautiful America more.

The fact that our neighbours are worse off does not make us richer, and the fact that they are better off does not make us poorer. But another factor is even more important: personal responsibility. Americans who want to make sure they stay well off accomplish nothing by worrying about China.

But they can certainly learn something from China. Individuals and nations become rich by investing in human capital — getting a good education, learning good work habits, saving and investing prudently, and living healthy lives.

Young Americans who want to keep up with the Chinese can get a good education, work hard, save as much as possible, invest prudently — and they will be just fine now, in 25 years and in 50 years.

The moral here is simple: Learning from our friends, the Chinese, means something. Fearing and envying them means nothing.

BEN STEIN

New York Times News Service

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