Is China going to overtake the U.S. as the largest economy in the world? Will China supersede the U.S. as the leading superpower?

I like simple arithmetic because it enables me to quickly test the plausibility of various scenarios. So let me use some simple arithmetic to explore the first question.

In 2008, U.S. GDP was $14.3 trillion, or 24% of world GDP. China’s was $4.4 trillion, or 7% (all figures are in U.S. dollars at the existing exchange rates). Using some plausible assumptions for real GDP growth for China and the U.S., together with an annual inflation assumption of 2% for both, and an average annual appreciation of 1% for the renminbi against the U.S. dollar, I find that China’s nominal GDP might equal that of the U.S. in 18 to 25 years. To arrive at this estimate, I assumed that productivity growth might be 4% to 6% per year greater in China.

By the time China’s GDP equals that of the U.S., both countries’ GDP would account for about 20% of world GDP each. The aggregate share of these two countries would increases from 31% to 40%. In fact, China’s growth would account for almost 25% o total world GDP growth (in nominal terms) over the next 18 to 25 years. Are these realistic? Perhaps, but what about India, Brazil, the EU and other parts of the world?

In 2008, China accounted for 9% of total world exports. Under the assumptions I used, and assuming no change in the export propensity of China’s economy, within this time period, China would generate almost 25% of world exports. Indeed, during this time frame, China’s growth in exports would account for 30% of the total increase in world exports. Is it likely that China’s share of world exports could increase so dramatically? Perhaps, but what about Germany, India, Russia, Japan, the U.S. and other countries?

As I noted, for China to equal and surpass the U.S. economy within the next 25 years, productivity growth in China would have to be almost three times the rate of productivity growth in the U.S. during this period. Possible, but not likely.

China has had much higher rates of productivity growth than the U.S. over the past 20 years, primarily because China has been playing catch up. A country’s productivity can grow very rapidly through imitation and restructuring of the economy towards higher productivity sectors. Eventually however, to maintain very high rates of productivity growth, a country will have to start pushing out the technology and innovation frontiers. (Look at Japan’s experience during the post-war period. Productivity growth was much lower during the last 30 years than during the fist 30 years.)

Does China have the creative talent to push out the frontier? Of course. Will this creative talent flourish under a government command and control political and economic system? I doubt it!

Once upon a time, there were many who believed Russia would overtake the United States. It couldn’t with a communist system of government, and it didn’t. Even with its resource wealth, income per capita levels in Russia are about 25% of the level in the U.S. (by the way, China’s income per capita is currently about 7% of the U.S. level, and in 25 years it would only reach 25% of the U.S. level at that time).

Creativity and innovation do not flourish in rigid political systems with few degrees of freedom. India, with all its flaws, is much more likely to flourish and generate very high rates of productivity growth over a long period of time.

Thus, will China have the largest economy in the world one day? Possibly, but not within the next 25 years. Further, India, despite starting from much farther behind, will likely be breathing down China’s neck for this distinction.

Will China surpass the U.S. as the leading superpower? This is less likely because China is not likely to surpass the U.S. in creativity and inventiveness unless there is a dramatic change in its political system, and this could be quite de-stabilizing.