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China to Catch up with the United States by Way of the Economy

Updated on August 9, 2013

When China's and U.S.'s levels of income will have converged China will have caught up with the U.S.

China is on her way to catching up with the United States in terms of the economy.

On her own

Long time ago China had been the Middle Kingdom that Europeans learned about through Marco Polo. This kingdom had a culture distinct from that of the West. It developed its own calendar, system of writing, horoscope, music, medicine, art, religions, economic system and political system. It had been a peaceful place adapting with nature, which could be the reason why it did not develop science. It discovered gunpowder and used firecrackers for peaceful purposes especially celebrations for good harvests and driving away bad spirits.

China had had contacts with her neighbors but she did not conquer, or occupy them except for some cases. She was more content to fence in herself with a great wall.

Came the foreigners

China’s posture was in stark contrast with that of Western countries that took as their own any piece of land and its native inhabitants they could find. They were amazed at the firecrackers of the Chinese and found another use for it. In their hands the gunpowder became an instrument of destruction and death. Gunpowder turned the catapult obsolete.

In the spate for acquisition of outside territory and exploitation of its resources and peoples, Western countries raced against each other to grab a piece of China by unequal treaties. Portugal took Macao, England took Hong Kong, the French and the Germans went deeper into the mainland by means of building railroads. Japan wanted its share of China, having started by taking Manchuria (only to be stopped by the tactical alliance of Mao’s forces and that of Chiang-Kai-shek’s in the thick of WWII).

The United States was a late comer; it did not make much headway even with the “Open Door” policy it advocated. It made some incursions, though, by the sale of saccharin (first product of Monsanto) and American ginseng (Panax quinquefolium, growing in Alabama and Arkansas). Ginseng was patronized by Chinese wealthy landlords in the belief that it prolongs manhood even at a price ten times the value of gold. "In some of the early settlements in Minnesota, ginseng made the difference between success and failure" (Gibbons, Euell."Ginseng:more precious than gold. "Stalking the Healthful Herbs.1966:154-161). The Americans knew that if the Chinese increased the seams of their skirts even by just one inch all their cotton exports could find a market. That is why Admiral George Dewey was at anchor near China to watch for opportunities of getting American goods into the Chinese market. The Spanish-American war in the late 1800s and early 1900s, that started in Cuba provided that opportunity.

Filipino revolutionaries in exile in Hong Kong had contacts with Adm. Dewey who pretended willingness to give them support. When the Filipinos had gained their independence by a revolution against Spain, the United States used a ruse to buy the Philippines from Spain.

Dewey proceeded to “…Manila Bay, the same waterway U.S. Adm. George Dewey had steamed into as a conqueror in 1898. That invasion triggered the Filipinos’ bloody revolt against the expanding U.S. empire….” (Anon. “News Beast.” Newsweek. Nov. 28,2011:14).

The Americans, by force, annexed the people and islands for use as jumping board to the Chinese market.

The Americans found Chinese collaborators like Gen. Chiang Kai-shek who controlled the old feudal China. They supported him with arms, warplanes, and military advisers like Gen. Joseph Stilwell, Major General Albert C. Wedemeyer, and Gen. George C. Mashall. Some 113,000 American military personnel, including 53,000 U.S. marines, were landed in China (Kolko, J. and G. Kolko. "China: From Chaos to Revolution." The Limits of Power. 1972:246-276). American cotton exports were also landed. The U.S. was accused of intervention. In January 1947, Gen. Marshall stopped negotiating for peace between Mao and Chiang; the U.S. feigned neutrality throughout this Chinese civil war. Mao and company succeeded in preempting the U.S. from intervening for Chiang (unlike for South Vietnam in the Vietnam war).

The Americans wanted Chiang to appoint Gen. Stilwell as commander of Chiang's army which Chiang dilly dallied until Gen. Stilwell was recalled to the U.S. He was replaced by Gen. Wedemeyer, who as adviser, likewise failed to deliver. U.S. President Harry Truman dispatched Gen. George C. Marshall to advise Chiang Kai-shek with the aim to subdue the forces of Mao; Gen. Marshall failed in his mission. (Gen. Marshall, then U.S.armed forces chief of staff, and Gen. Dwight Eisenhower, Supreme commander of the Allies in WWII in the European theater, were responsible for the nitty-gritty of the invasion and defeat of Hitler's Germany). Gen. Marshall put the blame more on Gen.Chiang Kai-shek than on Mao for his failure.

Humiliation and resurgence

The seed having been sown by Dr. Sun Yat-Sen, Mao Tse-tung, Chou En-lai and company dismantled the feudal system. Unable to stop Mao's forces even with American support, Chiang Kai-shek fled to Formosa, now called Taiwan, with some followers. The United States lost its hold on China, now called People’s Republic of China. Still, America protected Taiwan by deploying a navy fleet between the belligerents that prevented Mao’s forces from invading Taiwan and prevented Chiang’s forces from invading China.

The Middle Kingdom rebounded in leaps and bounds. She grew in power to even challenge the USSR, an erstwhile errant ally, and eventually broke away from its influence.

The United States and other nations could no long ignore China that has asserted for herself an international law that says “for a siege to be legal, it should be sustained.” More than any other nation, the U.S. has been eager to get to China.

China prevailed upon the mood of the rapprochement treaty (1972). Kissinger presented to Premier Chou En-lai a draft that identified the similarities between China and the U.S. Chou En-lai rejected it; he wanted his draft that showed their differences. Kissinger marveled at the idea; he related so in his first memoir after his stint as national security adviser.

Following her rapprochement with the U.S. China proceeded to claim her seat in the United Nations which was still occupied by Taiwan. China has taken her seat in the United Nations that has left Taiwan a virtual province of China. The U.N. has adopted a one-China policy. Recently, China had reclaimed Macao and Hong Kong. China was host to the latest Olympics. China is now a world player, no longer confined by a Great Wall, as it were.

Eyes fixed on China market

Business interests drove the USA for a rapprochement with China and used President Richard Nixon their instrument and Henry Kissinger their errand.

Mass media has it that Nixon took Kissinger as his national security adviser because he was impressed with Kissinger during one dinner in a restaurant. They were introduced by Clare Boothe Luce, wife of Time magazine's founder Henry Luce. The truth of the matter is that Kissinger was a talent of Nelson Rockefeller whose clan owns 33% of the Federal Reserve Bank. The message on the rapprochement with China was scribbled on a small letterhead Nixon found on top of his desk one morning in the White House.

Kissinger went on to bypass the U.S. Department of State on matters of foreign relations. [Today, imagine Kissinger bypassing Hillary Clinton, Secretary of State.] In a celebration for the success of the rapprochement or ping-pong diplomacy, Nixon was visibly distraught instead of being proud as the architect of the rapprochement, according to Kissinger in his first memoir. Of course, Kissinger knew why Nixon could not claim credit for the success of the diplomacy. Earlier on, Kissinger took secret (unofficial) trips to China to prepare for the state visit of Nixon to China, the first for an American president after the ascension of Mao's regime.

China’s catching up

Let’s turn to the technicalities of how China is catching up with the United States in terms of the economy.

Let’s use a model called neoclassical theory of growth.

Let’s assume that China’s economy was on the steady state in 1970s. Deng Xiaoping visited the United States, the first time a high official the People’s Republic of China did.

What were the features of China’s economy being in steady state?

One: the income of each Chinese was constant.

Two: capital was also constant.

Three: saving was equal to investment needed to provide capital for new workers and to replace worn out machines.

From the steady state, China wanted its economy to grow. Growth in output could be attained by increasing inputs and increasing productivity from improved technology and capability of the work force. That is, output equals levels of technology times levels of labor and capital.

Instead of working with levels, let us work with growth rates, as follows:

Output growth equals labor share times labor growth plus capital share times capital growth plus technological progress. In the form of a formula:

Y/Y = [(1 - θ) X ∆N/N] + ( θ X ∆K/K) + ∆A/A

So China wanted to add technological progress. She adopted some Western technologies through the initiatives of Deng Xiaoping. "Under his leadership, China acquired a rapidly growing economy, rising standards of living, considerably expanded personal and cultural freedoms, and growing ties to the world economy. Deng also left in place a mildly authoritarian government that remained committed to the CCP's one-party rule even while it relied on free-market mechanisms to transform China into a developed nation" (Encyclopedia Britannica 2009). CCP means Chinese Communist Party.

One is reminded of a remark made by Bertrand Russell, Nobel Prize winner in Literature, when he was a guest lecturer in one university of China that was still under the reign of Chiang Kai-shek. Russell said that China, even when her political system was other than democracy, could adopt capitalism as her economic system.

With added new technologies, China’s economy grew and reached another plateau some three years ago, that is, she reached a new higher steady state.

During the intervening years, the income of each Chinese increased that each could save more. In a long run from the 1970s up to about 2008 saving rate increased the output level and capital per Chinese citizen.

“…Real wages for manufacturing workers in China have grown nearly 12% per year. That’s the result of an economy that’s been growing by double digits annually for two decades….” (Powell, B. “The end of cheap labor in China.” Time. June 27,2011:46).

However, the “growth rate of output per head” remained the same.

How else could China propel her economic growth from this new higher steady state?

There should be an increase in the capital-labor ratio. This can be attained by the infusion of capital stock such that capital stock grows faster than the labor force and depreciation.

China took a loan from the World Bank around three years ago.

Again, China is in another transition toward a new higher steady state. Another way to interpret that transition is: China is catching up with the United States. Already, China has surpassed the economy of Japan that used to be next to the United States in economic power.

“…Meanwhile, across the globe, the world’s fastest growing economy, China, has managed to use government involvement to create growth and jobs for three decades….” (Zakaria, F. “Worldview.” Time. June 27,2011:21).

The average wage rate in China is closing in on the average wage rate in the United States.

“…China’s average wage rate was 36% of the U.S.’s, adjusted for productivity. By the end of 2010, that gap had shrunk to 48%, and BCG estimates that it will be 69% in 2015…” (Powell, B. “The end of cheap labor in China.” Time. June 27,2011:47). BCG means Boston Consulting Group.

This is one reason why some American companies now operating in China are planning to return to the U.S with their manufacturing. Cheap labor will no longer be available in China. Interpreted another way, the increase in wage rate is a reflection of the increased productivity of Chinese workers and a parity between the U.S. dollar and yuan.

China will have caught up with the United States when China’s level of income equals U.S.’s level of income.

A convergence will happen when:

(1) their saving rates are equal; (2) their population growth are equal; (3) with access to the same production function [the formula given above]; and (3) technology -- “converge to equal incomes.”

Now, China is turning to population growth with the policy: one family one sibling. This could be the last turnkey in the levers towards a convergence with the United States.


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