Log In   

October 20, 2011

International Relations

Measuring Power

By Nitin Desai


Hindsight always works better than foresight.  Hence, from the present vantage point of 2031, one can sound wise about the prognostications made twenty years ago about the rise of China.  But it is worth asking why analysts thought that way then.  Was it an exaggerated reaction to the long recession the OECD economy was going through?  Was it a certain over simplification of the dynamics of power?

A well-known book, “Eclipse” by Arvind Subramaniam, published in 2011 came out with dramatic projections of how China was going to dominate the world economy in twenty years.  This thesis was based on some fairly simple bit of analogical analysis which sought to explain global economic dominance in terms of GDP at purchasing power parity (a concept much used in the old days when many services were immobile and non-tradeable), international trade and net capital exports, all measured as ratios to the world totals. He abstracted from factors like technology and human capital on the argument that they would be correlated with GDP.

The key to his prognosis was the differential in the growth rate between China and the West, more particularly the USA. He projected this forward to the present on the basis of assumptions that, according to him understated China’s growth and capital exporting potential.  His trade projections were derived from his GDP projections as they came out of a gravity model for predicting trade flows.  The net result of this playing around with exponentials was that what seemed like a plausible difference in growth rates led to projections of a large GDP difference between China and USA over a twenty year time span. 

He was not alone in this emphasis on observed growth differentials.  Earlier, an influential Indian analyst, Arvind Virmani had used GDP growth based calculations of power to forecast a tripolar world by mid-century. Expectations about the rise of China to economic dominance were shared by many other data bashers. The Composite Index of National Capability (CINC), an influential index produced in the USA and much quoted there, had placed China as numero uno even on the basis of 2007 data.  But this index also placed India at number three, which was hardly plausible at that point in time. 

Chinese researchers were much more circumspect..  A government-sponsored think tank in China had produced a measure of Comprehensive National Power (CNP) that placed China sixth, after USA, UK, Russia, France and Germany and placed India tenth with Japan, Canada and South Korea between it and China.

China has grown more or less at the rate projected by most data bashers and its weight in world trade has increased but not quite at the rate predicted by the gravity model.  But the biggest difference is in the role of the renminbi which, though important, has not displaced the dollar as the dominant international currency.   Why is that a method which was fairly successful at explaining the history of economic dominance in the 20th century does not do as well in explaining how global economic power relations have evolved over the first quarter of this century?

One reason is the possibility that the share in world trade is as much a measure of vulnerability to trade disruption as of power to use trade as a weapon. This was seen when China had to accept a variety of conditions which required 900 pages of legal text when it acceded to the WTO thirty years ago in 2001. 

Twenty years ago much of China’s industrial capacities was in the hands of multinationals and designed to produce products to meet foreign demand. Its own per capita income, even after a half century of relatively rapid growth, is only half the per capita income of its Western trade partners and a switch to domestic markets has not happened at the scale necessary to make up for the markets lost to new low cost producers from South Asia and Africa.  The renminbi up-valuation forced on China in 2012 by an aggressive US Congress and electoral dynamics worsened the situation.

The US came out fine because its ecosystem for taking game changing innovations to market remained intact. In 2020 a new company in the booming South West US came out with an energy storage technology that revolutionized energy systems by making renewables wildly profitable and electric cars a practical option.  US GDP growth and exports got a boost that narrowed the growth rate differential quite substantially.

The reasons why the renminbi has not displaced the dollar seem obvious now. The world economy recovered a high degree of capital mobility by 2015. Currency preferences in enterprises and in central banks were increasingly shaped as much by capital account as by trade considerations. The dollar remained the currency of choice for capital transactions even though the renminbi is convertible. The high investment economy that China ran in the first decade of this century led to a huge portfolio of bad debts in the books of Chinese banks which also contaminated the open capital market enclaves of Hong Kong and Shanghai.. This bad debt overhang, which required continuous nursing by the government, prevented the emergence of a globally competitive financial services industry. 

There are other factors that explain why the distribution of power is so different today from what looked likely twenty years ago.  The disruption of the world oil economy when the Middle East democracy revolutions reached a peak put a much more severe break on countries like China and India where urbanisation and rising car ownership were driving manufacturing growth.  There is also the butterfly factor-how a seemingly minor event can trigger a massive change as one saw in the agitations that followed the first direct election of the Hong Kong Chief Executive and led to the jasmine revolution of 2020.

Hence with hindsight one can say that the mistake is to take the latent power measured by numbers like GDP or trade as effective power.  For that countries need institutions that can transform latent power into a continuing social and political dynamism and a diplomatic and military capacity to project that power to influence others.  The analysts should have been more cautious since, even then, they had before them the examples of Japan and Germany where high GDP, trade share, and capital exports never got translated into effective global  power.

Comment on this article
Already Registered? Login in to your account