IN 2010, WHEN President Barack Obama hosted his Chinese counterpart at a summit in Washington, CC, he greeted him with a handshake and a quick, shallow dip of his head. The image of the US president bowing to China made a striking cover photo for the book “Eclipse”, published the following year. The book, written by Arvind Subramanian of the Peterson Institute for International Economics, a Washington-based think tank, predicted that China would soon dominate the global economy and that there was little America could do about it. Your correspondent once included the cover image in a presentation at the Central Party School in Beijing. It caused quite a thrill.
To assess a country’s economic “dominance”, Mr. Subramanian combined his share of world trade, net capital exports and GDP (measured both at market exchange rates and purchasing power parities, which attempt to correct for international differences in the prices of similar goods). He assigned each attribute a weight based on the IMFformula for allocating votes to its members. His clue, he argued, succeeded in capturing Britain’s economic hegemony in 1870, its rivalry with Germany in 1913, and its eclipse by America in the following decade.
By this measure, Mr. Subramanian predicted, China would become the world’s most dominant economy by 2020. In the decade since that forecast, China has faced a trade war with America. , its growth slowed and its currency suffered bouts of volatility, forcing it to tighten controls on capital outflows. Yet Mr. Subramanian’s central prediction came true. Based on the book’s original formula, China became the world’s most dominant economy last year (see chart). Its slowing growth has not been worse (so far) than Mr Subramanian had expected and the covid-19 pandemic has helped increase its share in world trade.
Mr. Subramanian successfully predicted how his own index would evolve. But does its index succeed in capturing economic dominance? Other authors have included wealth, GDP per person and other indicators of economic sophistication, as well as scale. (Our favorite index of a country’s global influence, compiled by Francesc Pujol of the University of Navarre, counts the number of times a country appears in the charts of The Economist.) These measures give America a greater advantage.
For the sake of traceability, Mr. Subramanian’s measurement gives every dollar of exports the same weight. But some of America’s high-tech exports seem to give it an economic “grip” over China that is worth more than their market value. Mr. Subramanian estimated that China’s growing share in GDP and trade may soon turn its currency into a dollar rival. But the Chinese yuan has made little progress. This is in part because China has tightened capital controls, a possibility Mr. Subramanian has recognized. But he believed that if China clung to such controls, it would be to keep the yuan cheap (by preventing capital inflows) and not to support the yuan (by discouraging capital outflows). Yet given the dismal record of most economic forecasts, the author of the book deserves a handshake and a salute. â
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This article appeared in the Finance & Economics section of the paper edition under the title “The Thales of economics”