The share of G8 countries, comprising the United States, the United Kingdom, Germany, France, Italy, Russia, Japan and Canada, in the global economy fell from 47% in 2000 to 34.7% in 2018 while China’s share grew from 6.9% to 16.8%.
The Group of Eight lost its ability to manage conflicts in the world. That’s why it was expanded to G20. At the same time, the US wanted to use its advantages in technology and military to curb China’s growth.
By maintaining a dynamic economic development and an open mind on reform, China will ensure that its gross domestic product is twice that of the US one day. At that time, the US must trade and maintain good relations with China, while a new world order will be established. (Translator’s summary)
I am very glad to be here at the roundtable forum. I’ve just heard the keynote speech of Professor Ray Dalio (co-chief investment officer of Bridgewater Associates, the world’s largest hedge fund). My part is a supplement to his speech. At the same time, I will refer to some similar topics, from China’s perspective and also an economic point of view.
The world is going through tremendous changes. To understand such changes, we must understand the reasons behind them. These major changes are also seen in the global economy, especially among major powers in the world.
In 1900, at the beginning of the 20th century, when the “Eight Nations Alliance” invaded Beijing, they represented about half of the world’s GDP (50.4%). The alliance consisted of the United Kingdom, the United States, France, Germany, Italy, Russia, Japan, and Austria-Hungary.
In 2000, the G8 was also composed of eight countries, namely the US, the UK, Germany, France, Italy, Russia, Japan and Canada, which together accounted for 47% of the world’s GDP.
We can see that in the 20th century the world’s economic landscape was very stable. It was basically composed of seven or eight national powers, which accounted for 50% of the global GDP. With their economic power, they could determine global politics and conflicts.
Things have changed a lot after we entered the 21st century. In June 2018, Xi Jinping, general secretary of the Communist Party of China (CPC), said in a speech at the Central Conference on Work Relating to Foreign Affairs: “At present, we are in the best period of development since modern times, and the world is undergoing profound changes unseen in a century. The two are simultaneously intertwined and agitated with each other.”
In 2018, the contribution of the above-mentioned eight countries to the global economy dropped from 47% to 34.7%. Because of the decline in their economic output, the G8 lost the ability to manage conflicts in the world. This is one of the reasons it was expanded to G20.
Why was there such a big change in the global landscape? It’s not only because the growth rates of these top countries were declining. On the one hand, their annual economic growth stayed at around 3%, and on the other hand, emerging market economies, especially China, were growing rapidly. In 2000, China’s share in global GDP was 6.9%, and in 2018 it accounted for 16.8%.
What is the reason for China’s rapid economic growth? How can emerging countries achieve this in the new century?
I think this is because the emerging economic markets have latecomer advantages and can promote technological progress and industrial upgrading at low costs. Big countries need to invent and create new technologies to upgrade their industries while latecomers benefit from globalization. Globalization allows emerging markets to have enough markets and opportunities to exert their competitive advantages.
In such a change in the global landscape, the US is the biggest loser from a psychological perspective because it had been the world’s largest economy throughout the entire 20th century.
By 2014, China surpassed the US to become the world’s largest economy (in terms of purchasing power parity). Because of this, the US wanted to take some measures to maintain its own economic output and curb China’s development.
Economically, China is the largest but its per capita GDP is much lower than the US. What does that mean? It means the US has a leading advantage in technology, greater financial strength and the strongest military power. According to our observation, there is a new trend in the US. The US wants to form an alliance of companies to decouple from China in a bid to restrain China’s economic development.
To a certain extent, the US also hopes to encircle China through its strategy in the Asia-Pacific region and some military actions. Professor Dalio has just said in his speech that in the past history, whenever a great power declined and another arose, global conflicts and contradictions would increase while these conflicts could only be resolved through war.
In today’s situation, what is China’s best strategy? First of all, I very much agree with Professor Dalio’s point of view. I think that at this point in time, China will do everything it can to avoid war. China should avoid war under any circumstances. I have two recommendations for China.
The first is to maintain dynamic economic development.
The second is to keep an open mind on reform.
In the process of globalization, we must maintain an open attitude. If we look into history, we will find some patterns with similar trends and some others with differentiated developments.
For example, in the past, whenever a new power emerged, it would replace the original one. They should have similar levels in GDP and technology. But now, China’s per capita GDP is equivalent to a quarter of that of the US. China is still in a state of catching up.
Of course, we found that China has a lower per capita GDP, and technology level, than the US. The US is higher in these two aspects, so it can definitely use technology as a tool to sanction or contain China. But China can still make great strides to catch up.
China has a latecomer advantage. Through some special research, I found that China’s current technology penetration rate is a bit like Germany’s in the 1940s, Japan’a in the 1950s and South Korea’a in the 1980s. These latecomers had annual growth of 8-9%.
Besides, China has an enormous domestic market, plus a high share of the international economy. Politically, we have a stable environment to ensure steady growth. These are China’s advantages. China should turn them into treasures to maintain dynamic economic growth.
The second suggestion is that China should actively stay open and become a promoter of globalization. Why do I suggest this? Because China is now the world’s largest economy. We can maintain a potential economic growth rate of 8% and achieve an actual annual growth rate of 5-6%. So you will find that China’s share in the global economy is particularly large.
Since 2008, China has accounted for one-quarter to one-third of annual global growth. If China can maintain such rapid growth, it will continue to contribute to at least a quarter of global economic growth, or even more.
Second, in terms of purchasing power parity, China is not only the world’s largest economy, but also the world’s largest trading nation. Now China is the largest trading partner of more than 120 countries, and the second-largest trading partner of more than 70 other countries.
So you can calculate that for 90% of the countries in the world, China is either their largest or second-largest trading partner.
We all know that trade is a win-win issue. Especially in the context of the contemporary globalized economy, it should be a win-win situation that one plus one should be greater than two. A lot of countries can benefit from their bilateral trade with China. If China can maintain high-speed dynamic economic growth and an open-minded attitude for reform, China’s growth will be an opportunity for many countries, except the US.
Many countries may find that their trade growth, together with their new jobs and economic growth, are actually driven by China’s domestic growth. Therefore, it is very important for them to maintain good trade relations with China, so that they can maintain their economic growth, keep jobs and promote business development. So I think if China can achieve the two recommendations, it can stop the US from decoupling from it.
In terms of purchasing power parity, China’s per capita GDP is now 50% of the United States’. But the world will change and have a new look in the future. China has a population equivalent to four times that of the US. With such a huge economy, China’s GDP will be twice that of the US one day.
When that day comes, the US will have to make a balance and a choice. It must trade and maintain good relations with China. Only by coupling with China, the US will be able to maintain its employment rate and protect its benefits. This new order will be able to ensure the world’s stability and peace.
This article first appeared in Guancha.cn (“Observer”), a Chinese-language news and opinion site. Justin Yifu Lin is the former World Bank chief economist and senior vice-president, The article is a compilation of Lin’s speech delivered during the Tsinghua PBCEC Chief Economist Forum on May 14. It has not been reviewed by Lin himself.