LONDON (Reuters) - In his landmark study of the history of economic growth, Joel Mokyr observed “the best predictor of the living standard that a newborn baby can expect to enjoy is the accident of where he or she is born”. (“The Lever of Riches”, 1990).
Babies born in North America and Western Europe in the second half of the 20th century were the equivalent of lottery winners, in contrast to their counterparts in Latin America, Africa and Asia.
But the rapid rise in China’s incomes over the last three decades is threatening that relative position, reshaping the distribution of consumption, energy flows, trade, investment, travel, and military spending.
For workers, voters, and policymakers in North America and Western Europe the changing balance of income, consumption and power is fuelling a sense of “decline” and sharp disagreements over how best to respond.
In the late 19th and early 20th centuries, Britain’s political elite was gripped by similar concerns about decline relative to Germany and the United States, and then Germany and Japan after the Second World War.
Britain was the first country to undergo an industrial revolution. As others went through their own revolutions and started to catch up, policymakers searched for, but never found, a strategy to recover their former advantage.
Britain’s real incomes and consumption continued to increase, faster than ever in the 1950s and 1960s, but the country’s elite became obsessed by the even more rapid growth, albeit from a lower base, in other countries.
First-move advantages do not last forever, as Britain discovered, and the country was bound to weaken relative to other countries as they became more successful.
“Even if the UK had the most efficient workers, the most ruthless entrepreneurs, the most inventive engineers, it would still have declined relatively,” the economic historian David Edgerton wrote.
Nonetheless, the political and intellectual elite became obsessed with trying to identify the sources of national decline and how to fix them (“The rise and fall of the British Nation”, Edgerton, 2018).
China’s rapidly increasing incomes and growing economy are now inducing the same sort of anxiety in the United States and its allies in Europe and Asia.
In the United States, gross national income per person increased by 56% in real terms between 1990 and 2018, but China’s increased by 960%, from a very much lower base.
In 1990, U.S. gross national income per person was 70 times higher than China’s in dollar terms, and almost 25 times higher once adjusted for differences in national price levels.
By 2019, U.S. gross national income per person was still six times higher than China’s in dollar terms, and four times higher at purchasing power parity (“World development indicators”, World Bank, 2020).
But China’s rapid industrialisation has profoundly disrupted the international balance of power because the country is large and is one of the very few major economies that has increased its relative income.
The incomes of the United States, Germany, France, Britain, Mexico and Brazil have remained broadly stable relative to one another over the last three decades, implying a roughly constant distribution of power.
China, and to a very much lesser extent India, are the only two large economies that have improved their relative incomes significantly since 1990.
China’s rapidly rising relative income is creating the same tensions Japan’s rise created between the 1960s and 1980s.
By the 1980s, the United States and its European allies had become concerned about Japan’s dominance of manufacturing, international trade, advanced technology and overseas investment.
But China’s economy is much larger and, unlike Japan, the country is not integrated into a military alliance system with the United States that can help manage political and economic tensions.
Intensified economic competition between China and the United States and its allies could spur faster technological innovation and economic growth on both sides of the divide.
Most economies most of the time do not naturally embrace the radical innovations that can spur rapid economic growth because major innovations create losers as well as winners.
Potential losers can often enlist the state to block the process. Political competition between states, however, can encourage government support for innovations that are intended to boost national economies and power.
“Nations that worry about their political standing in the world are more likely to be subject to the ‘Sputnik effect’, the discovery that a society has fallen behind in technological terms and is consequently threatened,” according to Mokyr.
“From Peter the Great’s Russia to Meiji Japan to the United States after the launching of the first Soviet satellite, nations have embarked on efforts to advance the techniques they employed primarily for political reasons. Some measure of competition between states is therefore healthy for technological progress.”
But the degree of competition has to be kept within limits.
“Unlike economic competition ... political competition may degenerate into military expansion, war and destruction, which may negate any possible beneficial effects of political competition. There is thus clearly a subtle optimum point between the advantages and the hazards of competition between states.”
The challenge is how to prevent competition - over relative incomes and position in the balance of power - from turning into military confrontation, with each competitor fearing for its survival.
The tension between a dominant incumbent power and a rapidly rising challenger was blamed by the ancient Greek historian Thucydides for causing war between Sparta and Athens.
In the last century, it contributed to wars between Britain and Germany, and between the United States and Japan. Now it threatens conflict between the United States and China (“Destined for War: Can America and China Escape Thucydides’ Trap?”, Allison, 2017).
If China continues to catch up with the West, the competition and tensions are likely to intensify. The challenge is to harness that competition constructively and prevent it spilling over into damaging armed conflict.
John Kemp is a Reuters market analyst. The views expressed are his own.
- United States and China enter a new cold war (Reuters, July 22, 2020)
- China and the world economy’s shifting centre of gravity (Reuters, March 5, 2020)
- With trade war, U.S. and China stumble into the Thucydides Trap (Reuters, April 4, 2018)
Editing by Emelia Sithole-Matarise
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