Martin Wolf's Exchange

I am writing this in Xi’an, ancient capital of the Chinese empire. This is where the famous terracotta warriors were found, mute witnesses to the scale, resources and organising capacity of the ancient Chinese state. Xi’an is a city of 8m, in the middle of the country. The road from the airport is surrounded with half-finished buildings, a sign of the construction boom of recent years. The economic changes are palpable, as they are elsewhere in this vast country.

China is a nascent superpower. According to the wonderful database published by the Conference Board, its gross domestic product, at purchasing power parity, was 80 per cent of that of the US in 2009. Its GDP per head has risen from a mere 3 per cent of US levels in 1978 to close to 20 per cent in 2009.

By 2014, at current rates of relative growth, China’s economy will pass the US, in absolute size, to be the biggest in the world, at PPP. Its GDP also seems almost certain to surpass that of the US at market prices before the end of this decade, partly because of its rapid growth and partly because of the inevitable appreciation of the renminbi.

In short, however measured, China will shortly displace the US from the position it has held as the world’s biggest economy since approximately 1890. To put this in context, this transition is occurring even faster than Goldman Sachs predicted in its celebrated initial report on the BRIC (Brazil, Russia, Indian and China) economies in the early part of the last decade.

Moreover, China is already the world’s largest exporter of goods (in gross terms) and is probably the world’s largest net creditor nation, though almost all of these assets are invested in the low-yielding government debt of the advanced countries, especially the US.

The question I want to explore this week is what this epoch-making transition is going to mean for the world?

Let me start by suggesting what it will not mean. China will remain a middle-income country for quite a while longer, with average productivity far below that of the US and other leading high-income countries.

The US will also surely remain the world’s technological leader for many decades, though the durability of this advantage is no longer guaranteed, given its current policies towards education, science and immigration. At the same time, whether a country as inimical to free individual expression as China can catch up with the US scientifically and technologically, even in the long run, is open to question. I would not be surprised if free-wheeling India ended up doing better than China, in this regard.

Partly as a result of the technological gap, the Chinese military will also remain behind that of the US, in terms of global reach and technological capacity for quite a few decades. On whether this will prove a serious handicap for China, one might differ: my own view is that much of current US military spending is not only a waste of resources, but a temptation to folly.

Furthermore, it seems unlikely that China will be able to exert the political, intellectual and cultural influence that the US has done over the past six decades. US popular culture remains extraordinarily attractive. Moreover, even though anti-Americanism is widespread, the appeal of American ideals of freedom, democracy and the rule of law to the people of the world is, and will remain, greater than the centralised communist party-state of China, with its oppressive attitudes towards its own population.

I still believe this even though I recognise how short the US has frequently come of its ideals. What I think of as the “torture presidency” of George W. Bush inflicted massive damage on US influence and prestige. So, even more, has the financial crisis. The US had the reputation of knowing at least how to manage modern capitalism. That has gone with the winds that whistled down Wall Street in 2008. Yet I am an optimist and so hope that the US will yet recover from its current political and economic mire.

China, in short, will not become the predominant power that the US has been, at least over the next few decades.

Nevertheless, we have to recognise what the rise of China does obviously mean.

First, we are seeing the end not only of the brief period of the US vision of itself as the “sole superpower”, but, more broadly, of centuries of western domination. The rise of India, though closer the west, as the world’s largest democracy, reinforces this transition. Over the next few decades a west in relative decline will be forced to co-operate with the rest of the world. This is a good thing. But it will create huge challenges.

Second, China is not only non-Western, but has a distinct history, culture and political system. The latter may be the most important point. It is hard to sustain trusting relations with a country whose government mistrusts its own people. It is no less difficult to enter into binding agreements with a government that cannot accept the fundamental principle of the rule of law – that the law binds the state to the people as much as the people to the state.

Third, we have to recognise that transitions of power always create huge frictions, with the incumbents trying to protect what they see as the “natural” order of things and the insurgents resentful of always delayed recognition of their rising power and status.

Yet we also need to understand the potential advantages of the transformation now under way. The population of the world could, with luck and judgement, share in prosperity and contribute its ideas and energy to securing a better future for everybody.

So how might this end? I envisage three possible outcomes.

First, the “positive sum” view wins out. Awareness of the absence of any deep ideological conflict, of mutual economic dependence, of a shared planetary destiny and of the impossibility of war in a nuclear age force adequate levels of global co-operation. For this to happen there must also be a profound commitment to co-operation, not much evident recently in such areas as climate change or global imbalances.

Second, the “negative sum” view wins out. Power is relative. The incumbent and the rising powers compete for dominance. Resources, similarly, are finite. In this world, economic disarray and the struggle for scarce resources lead to a retreat from globalisation, while balance of power politics dominate international relations. We may see the emergence of a balancing coalition against China, consisting, at the least, of the US, Europe, India and Japan, possibly joined by other powers.

Third, we muddle through, with a mixture of the above two approaches: globalisation and a degree of economic co-operation survive, but classic balance of power politics become more significant, as China, in turn, becomes more assertive of its rank in the world system. This, roughly speaking, was the world before the first world war – not an encouraging precedent.

These are just preliminary thoughts on what is surely the fundamental challenge of our era and the one on which solution of all other challenges depends.

What do readers think will and should happen to manage this great transition?