America was by far the largest economy in the world, accounting for upwards of 60 per cent of world output. The United States alone still accounts for almost a quarter of global gross domestic product, calculated at current exchange rates and around one fifth measured in real (or purchasing power parity). The European Union is collectively larger but no single country is yet a match for American economic power, nor the influence that power still has in shaping the global rules whereby economic behaviour is regulated or shaped.
As Wendy Dobson observes in this week’s lead essay, China’s embrace of the global institutions and the norms which the United States and its partners have created over the past sixty years has helped guide and drive China’s spectacular economic growth and integration into the world economy. The most immediate question that surrounds China’s economic rise is not how China’s new economic power will translate into political and military power, but how China’s economic power affects the running of the global economic system. Indeed, more than any other factor it is the interaction between China’s growing economic power and the global rules of the economic game which will condition the shape of China’s political and military choices down the track.
China’s impact on the global economic order is, of course, still an open question. China’s sheer size and dynamism make it a major force to be reckoned with.
Dobson argues that so far China’s influence has been constructive and, despite recent signs of political assertiveness in the Asian region and at home, China’s deliberative behaviour and policy strategies have worked to support the status quo in managing the global economic order, not to undermine it. China has played by the rules and assumed a largely constructive role in the international system and a positive and responsive role in Asia Pacific economic cooperation. China appears overwhelmingly to be a ‘responsible stakeholder’ in the international system, not as a regime spoiler.
As Dobson also argues, just playing by the established rules will be a less and less adequate strategy the larger China’s impact on the global economy. Chinese policy initiative and change will be a more and more important element in the stability of the global economic order. Nowhere is this more pressing than in the management of China’s role the international exchange rate regime. China’s foot-dragging on modernising its exchange rate regime is seen as damaging to the international order. The Chinese leadership openly accepts that change is required but pleas for time to set its own pace according to the political importance of steady growth in output and employment. In any case, the transition in the exchange rate regime will not be easy as it will need to be accompanied by extensive domestic restructuring, challenging powerful interests at home. Adjusting the exchange rate alone will not solve the problems that US Congress-people hold undervalued RMB responsible for. It may reduce some of the pressure but the pace and extent will be limited by the need for China to painstakingly put in place the reforms that will allow retreat from capital controls to be and heavy exchange rate management.
As soon as we accept that just playing by the rules is not enough, it follows that the rules-based international system is dynamic and Chinese initiative will be important in shaping the evolution of the rules down the track. The global financial crisis saw the rules tested and found wanting. The key to whether China’s contribution to running the global economic system will continue to be constructive lies in the interface between the state and the market. Notwithstanding the differences in approach, there are no signs that China intends to retreat from entrenchment of the market economy. Even if China’s leadership could do so, a retreat from market based reform is not possible because of what it would do to economic growth and stability, inflicting massive political damage at home.
Internationally, the establishment of the G20 opens up a cooperative space within which China and the other emerging economies can, together with the established powers, contribute to constructing a more robust set of rules to make markets work better. Here too, in the G20, China is playing a constructive role.
The lesson of history is that rising economic powers only slowly assume global economic leadership. America left that burden to Britain for decades after America’s rise. As struggle with exchange regime reform illustrates so starkly, the institutional and policy capacities for leadership take time to acquire, the responsibilities for provision of global public goods are weighty and difficult to exercise without taking on the huge domestic challenges that ultimately lead to success.
This all suggests that China is not in a position, and will remain most reluctant, to take over running the world economy any time soon despite its growing economic weight.