Guest lecture by Prof. Arvind Subramanian

Senior Fellow, Peterson Institute for International Economics

China Center for Economic Studies

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

Introduction of the professor

Arvind Subramanian, an Indian national, is senior fellow jointly at the Peterson Institute for International Economics and the Center for Global Development. He was assistant director in the Research Department of the International 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 Harvard University'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, and intellectual property. He has published widely in academic and other journals, including the American Economic Review (Papers and Proceedings), Review of Economics and Statistics, Journal of International Economics, Journal of Monetary Economics, Journal of Public Economics, Journal of Economic Growth, Journal of Development Economics, Brookings Papers on Economic Activity, Oxford Review of Economic Policy, International Monetary Fund Staff Papers, Foreign Affairs, World Economy, and Economic and Political Weekly. He has also published or been cited in leading magazines and newspapers, including the Economist, Financial Times, Washington Post, New York Times, Wall Street Journal, Newsweek, and New York Review of Books.

Eclipse

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

Professor Subramanian’s main reasons for writing Eclipse

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

Prof. Subramanian stated the following:

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

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

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

–      China must start to lead

–      Economic partners worldwide are to empower not contain China

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

The beginning of the book is starting with a fantasy scenario with an economic crisis in the 21th 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 the economic dominance of the bigger economies worldwide, the professor created the Economic Dominance Index. The index is based on three key determinants, GDP (recourses for power), Trade (power of market access) and external financial strength (“Insolvents Must Fawn”). The index states back to economic figures from 1870 – 2010 till 2030 to track and show that the outcoming results are plausible. Key growth assumptions that project the economic dominance in the nearby future show that the US will have 2.5% growth percentage (1.7 per capita, PPP) and China will still have 6.9% growth percentage(5.5 per capita, PPP). As developing countries get richer, growth percentage will decline, but because of the vast size of the growing economy of China. China’s growth will decrease not as much as we think.

What kind of superpower will China be?

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

China could become two different types of superpower. It could be either the ‘soft power’ which attributes to the use of democracy, openness and based on technological leadership. This certainly inspires the followership of the people. Or China could otherwise use ‘hard power’ which means to influence others and resist the influence of others. Especially two manifestations will be eminent. How China will deal with Europe and how China will develop their currency policy and the impact 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 central banks 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 on many changes for that to happen. For example, market-determined interest- and exchange rates but also deep and liquid financial markets. Even after the right circumstances are met, the changes has to deal with a lot of countervailing forces and are politically very difficult, because of the domestic financial system and different view in political parties worldwide.

The internalization of the RMB offers the political prize of displacing the dominance of the U.S. Dollar and offers a plausible political economy exit from mercantilist status quo. This will add symbolic gains to offset the opposition from vested interests

China’s open-door policy

China’s already experienced quite a rapid development in the past years; China’s opened economic system is one of the reasons that it went that fast. But will China’s open economic system survive China’s dominance? There are factors that we have to keep in mind. For instance:

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

•       China’s development process is far from finished;

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

•       China’s need for an open system is an existential economic 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 economic superpower also means that there is a lot of exposure to external threats that can harm China’s rapid development. For instance, China has to deal with global financial instability. China is creditor rather than most Western countries that are debtors.

That means that China 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 power equivalent to US and Europe, no more vetoing by the US and EU. 

The second problem China has to deal with is protectionism. Lately there are lots of cases where Chinese businesses are involved. It is very normal for a country to stimulate the own economy and in some cases protect its economy to too much of foreign investments and enterprises, but in the long term using protectionist measures will harm the world economy and China’s economic development. Also in this case, China has to take the lead and revitalize the WTO. There is need for a China Round of trade negotiations in WTO (Mattoo and Subramanian, 2011): China must take lead.

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

What rest of the world should do

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

Final thoughts

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

About the Author:

Caspar vander Plas, coming from the Netherlands and majors in TradeManagement aimed at Asia (International Trade) at the Rotterdam BusinessSchool, Rotterdam University of Applied Sciences. He attends the ContemporaryChina Studies Programme at Fudan University and works for the Fudan DevelopmentInstitute and Shanghai Forum 2012 Committee as an internship.