Guest lecture by Prof.Arvind Subramanian

Senior Fellow,Peterson Institute for International Economics

China Center forEconomic Studies

On the 2th of March Professor Arvind Subramanian held a lecture at FudanUniversity about his book “Eclipse”. The theme of the book is about China’sEconomic developing dominance in the world Economy to 2030.

Introduction of the professor

Arvind Subramanian, an Indian national, is senior fellow jointly at thePeterson Institute for International Economics and the Center for GlobalDevelopment. He was assistant director in the Research Department of theInternational Monetary Fund. During his career at the Fund, he worked on trade,development, Africa, India, and the Middle East. He served at the GATT(1988-92) during the Uruguay Round of trade negotiations and taught at HarvardUniversity's Kennedy School of Government (1999-2000) and at Johns Hopkins'School for Advanced International Studies (2008-10). He has written on growth,trade, development, institutions, aid, oil, India, Africa, the WTO, andintellectual property. He has published widely in academic and other journals,including the American Economic Review (Papers and Proceedings), Review ofEconomics and Statistics, Journal of International Economics, Journal ofMonetary Economics, Journal of Public Economics, Journal of Economic Growth,Journal of Development Economics, Brookings Papers on Economic Activity, OxfordReview of Economic Policy, International Monetary Fund Staff Papers, ForeignAffairs, World Economy, and Economic and Political Weekly. He has alsopublished or been cited in leading magazines and newspapers, including theEconomist, Financial Times, Washington Post, New York Times, Wall StreetJournal, Newsweek, and New York Review of Books.

Eclipse

Bymost accounts, China has quickly grown into the second largest economy in theworld. In this controversial new book, Subramanian argues that China hasalready become the most economically dominant country in the world in terms ofwealth, trade and finance. Its dominance and eclipsing of US global economicpower is more imminent, more broad-based and larger in magnitude than anyonehas anticipated. Subramanian compares the economic dominance of China with thatof the two previous economic superpowers, the United States and the UnitedKingdom, and highlights similarities and differences. One corollary is that thefundamentals are strong for the Chinese currency to replace the dollar as theworld's reserve currency. The final chapter forecasts how the internationaleconomic system is likely to evolve as a result of Chinese dominance.

Professor Subramanian’s mainreasons for writing Eclipse

He wrote this bookto let people around the globe understand that the Western countries need tochange their views of political and economic thinking when doing business withChina, China should have a bigger role in diverse worldwide organizations, forexample the WTO and IMF. He also hopes to gain impact or ‘enlighten’ theChinese people that when becoming the biggest economy they will use ‘soft power’when dealing with (inter-)national affairs. There are a few very importanttopics he describes in the book.

Prof. Subramanianstated the following:

•       China’s economic dominance is more imminent, largerin magnitude, and broader in scope than currently believed

•       The RMB could become the internationalreserve currency within 10-15 years

•       Preserving open economic system: Multilateralism isthe way forward especially as insurance with rising China

–      China must start to lead

–      Economic partners worldwide are to empower notcontain China

•       Is United States vulnerable? Especially for bigger economy’sgrowth and trade lead to economic prosperity and will have a win-win mutually beneficialdimension. Will the US also benefit from the fact that China’s economy isdeveloping to become larger than that of the United States?   

The beginning ofthe book is starting with a fantasy scenario with an economic crisis in the21th century year 2021. He states back to the Asian economic crisis in 1998,but now the roles of economic dominance is turned.

Economic Dominance Index

To measure theeconomic dominance of the bigger economies worldwide, the professor created theEconomic Dominance Index. The index is based on three key determinants, GDP (recoursesfor power), Trade (power of market access) and external financial strength (“InsolventsMust Fawn”). The index states back to economic figures from 1870 – 2010 till2030 to track and show that the outcoming results are plausible. Key growthassumptions that project the economic dominance in the nearby future show thatthe US will have 2.5% growth percentage(1.7 per capita, PPP) and China will still have 6.9% growth percentage(5.5 percapita, PPP). As developing countries get richer, growth percentage willdecline, but because of the vast size of the growing economy of China. China’sgrowth will decrease not as much as we think.

What kind of superpower willChina be?

What kind ofsuperpower and what kind of dominance will China have/use when becoming thelargest economy? Prof. Subramanian thinks that China will at least be aprecocious superpower. The US and the UK were very rich when they were asuperpower, but China’s standards of living in 2030 will be about the half ofthe United States. India also will have to deal with the same problems. Thepeople in India will still be very poor when becoming the 3th economy in 2030.

China could becometwo different types of superpower. It could be either the ‘soft power’ whichattributes to the use of democracy, openness and based on technologicalleadership. This certainly inspires the followership of the people. Or Chinacould otherwise use ‘hard power’ which means to influence others and resist theinfluence of others. Especially two manifestations will be eminent. How Chinawill deal with Europe and how China will develop their currency policy and theimpact it will have on the exchange rate.     

Rise of China’s Currency

Today, the U.S.Dollar is the main currency for international trade, but more and more centralbanks are gathering RMB’s. The Professor expects that in the next 10-15 years,the Renminbi will be the main international trade currency. It will depend onmany changes for that to happen. For example, market-determined interest- andexchange rates but also deep and liquid financial markets. Even after the rightcircumstances are met, the changes has to deal with a lot of countervailingforces and are politically very difficult, because of the domestic financialsystem and different view in political parties worldwide.

Theinternalization of the RMB offers the political prize of displacing thedominance of the U.S. Dollar and offers a plausible political economy exit frommercantilist status quo. This will add symbolic gains to offset the oppositionfrom vested interests

China’s open-door policy

China’s already experiencedquite a rapid development in the past years; China’s opened economic system isone of the reasons that it went that fast. But will China’s open economic systemsurvive China’s dominance? There are factors that we have to keep in mind. Forinstance:

•       Delivering growth and development is critical forChina’s policy makers;

•       China’s development process is far from finished;

•       China’s development has relied and will continue torely on trade;

•       China’s need for an open system is an existentialeconomic necessity unlike for the US after World War II;

•       In addition, China is becoming hub of“criss-crossing globalization”.

Threats to China’s Economic Development and what China should do

By becoming an economicsuperpower also means that there is a lot of exposure to external threats thatcan harm China’s rapid development. For instance, China has to deal with globalfinancial instability. China is creditor rather than most Western countriesthat are debtors.

That means thatChina will have substantially bigger part in funding the IMF ($1-2 trillion).China then has to take the lead by contributing and in return get more powerequivalent to US and Europe, no more vetoing by the US and EU. 

The second problemChina has to deal with is protectionism. Lately there are lots of cases whereChinese businesses are involved. It is very normal for a country to stimulatethe own economy and in some cases protect its economy to too much of foreigninvestments and enterprises, but in the long term using protectionist measureswill harm the world economy and China’s economic development. Also in thiscase, China has to take the lead and revitalize the WTO. There is need for aChina Round of trade negotiations in WTO (Mattoo and Subramanian, 2011): Chinamust take lead.

The last bigthreat that can harm China’s development is climate change. The costs ofclimate change are greater for China and India than the US and EU. But thecosts will be much higher if China and other developing countries won’t takethe lead by preventing climate change, because the West may decide to adapt toclimate change rather than to prevent it. There is need for developing a new Greenprint for cooperation (Mattoo andSubramanian, forthcoming) where thefocus lays on taking the lead in preventing climate change, focus on technologygeneration, but all should contribute in different ways.

What rest of the world shoulddo

China has a lot todo and change in the climb to becoming the biggest economy, but the rest of theworld also needs to take responsibility. The rest of the world must empowerChina and reinforce China’s stake in the current system, thriving for a win-winsituation. That means that China will play a bigger role in IMF and the WorldBank. The rest of the world should also avoid encirclement in Trans-PacificPartnership Agreements (TPP) and promote Renminbi’s internationalization. 

Final thoughts

From the professor’sperspective he already clearly believes China'seconomic dominance vs. the U.S. may already have begun, andthat our future is more in China's hands than our own. But the professor thinks that although the West hasto pay close attention to the development of China, China can only develop byalso take a big part in the transition. Chinese policymakers need to articulateits vision for the global economic system and need to think more of their internationalroll in the world economy. Responding to China’s partners ‘concerns’ will be awin-win situation, because actions in China’s interest are good for partnersbut also good for the system itself.

About the Author:

Caspar van der Plas, coming from the Netherlands and majors in Trade Management aimed at Asia (International Trade) at the Rotterdam Business School, Rotterdam University of Applied Sciences. He attends the Contemporary China Studies Programme at Fudan University and works for the Fudan Development Institute and Shanghai Forum 2012 Committee as an internship.