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It is not clear whether China understands that it has reached the top. It is one of the G2. It is the second largest economy in the world, closing in, if still distant, on the US but extending its lead over Japan.
For China to become the largest economy is a matter of time and mathematics, some say by 2020, some by 2030. What is likely to happen is that China will become the world’s largest economy faster than anyone thinks. The 5 percent compounded growth that China has over the US annually, plus the appreciation of the RMB, may well see China as the world’s number one economy before this decade is out.
It is too a function of China’s huge population, moderate regulation and a government that permits ordinary people to make their own economic decisions. The lesson is that giving away a little power and influence benefits all. China should therefore already be taking its seat at the world’s very highest economic table – one that it occasionally appears to take reluctantly.
The US has filled this role for the last 20 years, prior to which it was, for 60 years, together with the USSR. Great Britain’s economy had been destroyed by World War I. The USSR always appeared to have a sense of inferiority, of fighting to catch up. It did not allow its people to travel, to make their own economic decisions and two generations of people grew up not knowing how to look after themselves. The USSR saw might as a way of gaining narrow political and national influence; the US had a broader view – influence was important but responsible influence was better. It could make everyone richer.
Being a superpower means that sometimes a view must be taken to make the world a better place. To encourage trade, flexible markets and individual decision-making. Natural economics has its own energy and if allowed to prosper it makes everybody prosper. The UK in the 1800s restricted the British Empire from making manufactured products that were made at home. If they had had less narrow interest and more broader interest, those industries could have developed in places like India. At a time when British power over the empire was complete, the law of comparative advantage would have made everyone richer. But it meant change at home, and resistance to that change proved costly – the empire was finally lost. The broader approach would have made the colonies richer – but also made Britain richer.
Sometimes it must be the position of economic superpowers to become involved in an active, broader, altruistic intervention in world affairs that will not just lead to the narrow benefit of the superpower but of the world itself. This concerns China being asked to support the European Union’s debt raising efforts. China should be more involved, not less. This is not an involvement of narrow sovereign interest. This is an involvement that results from an understanding that we are no longer in a small world.
The recovery of Europe, indeed its future prosperity, is of major interest to China. The two economic units will continue to be major trading partners – in future years almost certainly the largest trading partners on the planet. For at least a generation, China will need Europe’s engineering, experience and export markets, and Europe will need China’s manufactured goods and demand for chic; that can only be developed over a century of chic. They need each other.
The best way, politically and economically, for China to assist Europe is through the International Monetary Fund. For virtually all of the IMF’s existence, the IMF has fallen under US and European influence. The US and Europe have run it well by supporting debtor nations while imposing a strict regime of reform. Now is the time for China’s capital to make a difference with the IMF.
Not only is this shrewd economic policy in keeping with the world’s second largest economy, but it would also temper the political implications of direct Chinese intervention, which might tempt both sides into taking a more extreme negotiating stance. Countries get into trouble and Europe has inflicted this debt crisis upon itself. The IMF has typically lended money to countries with moral hazard, offering funding with strings – with strict but fair economic terms. An IMF-type system that ensures funding with reform, supported by Chinese capital, would be the silver bullet for the current European economic crisis.
A more proactive foreign economic policy from Beijing might even make the inevitable liberalization of the currency and internationalization of the Chinese economy less of a daunting prospect from within.