Analysis: To Choose America or China
Intro: We have to choose between the US and China. The short run calculation clearly favors the US. It is the biggest economy and has the most advanced technologies. But the long term situation is exactly the opposite.
Aiming to engage with the Modi government, there is an ongoing race between the countries especially between China and US to push forward the bilateral relations with India. Recently US Assistant Secretary of State Nisha Desai Biswal and Chinese Foreign Minister Wang Yi visited India as contending teams wanting to pull India towards them in the ongoing tug of war between the two big powers. In fact quite recently, the US officials admitted in private that it would have been prudent for them to engage with Modi.
Here is an overview of both the country’s economy to decide which country we should engage with.
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Unquestioningly, the US is the largest economy today. Its GDP (Gross Domestic Product) at about 16 trillion dollars is nearly double that of China at 8 trillion dollars. But the growth rates are in the opposite direction. US growth rate was 1.9 per cent last year in comparison to 7 per cent of China. Therefore, China is fast catching up.
The bigger problem is that the US is living beyond its means. The US government is borrowing huge amounts from the world markets in order to meet its expenditures. The level of debt is usually measured against the total income of the country known in economic parlance as GDP. A debt less than annual income of the country is considered okay while that above this is considered troublesome. The US debt was 67 per cent of its GDP in 2007 which was acceptable. It has now become a trifle higher than 100 per cent in 2014 and it signals caution. Indeed the fiscal deficit of the US government has been declining in the last few years. The deficit was 1.1 trillion dollars in 2012. It has declined to 561 billion dollars in 2013. Some further reduction is projected in 2014. But this is not sufficient to pull the US economy out of the woods. The US government has to run a surplus to be able to repay the debt. According to a report in USA Today, the debt is slated to rise to 27 trillion dollars in the next decade despite this reduction in deficit. The hefty increase in deficit after the 2008 recession has certainly been brought into control. But the problem of deficit has not arisen after the recession. It has been brewing for a long time. The deficit was a huge 600 billion dollars in 2007 before the recession. The debt has been growing steadily in the last two decades. Thus only the immediate shock of the recession has been overcome. The underlying structural problem remains as previously. It is as if the US economy has been taken out of the ICU but still in the hospital.
China on the other hand is on an altogether different footing. It has been giving loans to the US. The Chinese government is the biggest buyer of US treasuries and holds nearly 2 trillion dollars worth of these securities—and rising. Therefore, future of the Chinese economy is on a much stronger wicket than that of the US.
The second touchstone of assessing friendship with USA and China is availability of advanced technologies. Like the economy, here too the US is by far the biggest player today. Most advanced technologies are coming out of that country. The invention of these technologies is given a big push by the American university system which produces high-class engineers and scientists. But China is catching up. Stanford University has recently undertaken a comparative study of the status of higher education in the BRIC countries—Brazil, Russia, India and China. The report says: “BRIC undergraduate education increased from about 19 million students in 2000 to more than 40 million students in 2010. The largest increase was in China, which went from less than 3 million to almost 12 million bachelor's degree students during that period. BRIC countries are pouring money into their elite colleges in an effort to create world-class institutions and have their graduates compete with the United States and Europe. The engineers and computer scientists are graduating with similar competency and training as those from developed countries.” This is the story of elite higher education in BRIC countries. The report goes on to tell that the situation is not so good at the mass higher education level. Low-quality graduates are being churned out in large numbers by ordinary colleges. That said there is no dispute that the BRIC countries are fast catching up with the US in elite higher education which is the backbone of technological innovation.
Even the present leadership of the US is under question for another reason. An article in Scientific American tells us the tale of foreign students in American Universities: “Can the US stave off the erosion of its longtime preeminence in science and engineering? For decades the nation's stature in those disciplines has attracted many of the brightest and most talented students from around the world to America's advanced degree programs. Citizens of other countries now receive more than half the Ph.D.s awarded by US universities in engineering, computer science and physics, on top of earning one third of all college degrees in science and engineering. If and when these students depart from America, they will in effect constitute an unacknowledged version of foreign aid.
The advanced education they receive in the US is underwritten by American taxpayers in the form of sponsored research, financial aid (for foreign students as well as Americans), and a wide array of subsidies and grants. If current trends continue, America's scientists and engineers—the basic drivers of innovation and prosperity—will ultimately be surpassed by US-educated competitors in other countries that are more serious about teaching their youngsters.” So there is the catch. America’s present technological supremacy is dependent in large measure on the contribution of foreign students that graduate from the US Universities and choose to work for US corporations. But the same foreign students are increasingly going back to their home countries and carrying those advanced technologies. They then teach the students in home countries and enable them to compete with the US. The edge that the US enjoys today in technological advances is, therefore, fast eroding.
We have to choose between the US and China in this backdrop. The short run calculation clearly favors the US. It is the biggest economy and also has the most advanced technologies. But the long term situation is exactly the opposite.
China is lending massive amounts of money to keep the US afloat and can pull the rug beneath the US anytime. The technological strength of the US is also eroding as foreign students dominate the higher education output in that country. Therefore, we have to develop a strategy of cultivating short run friendship with the US while making long term partnership with China. It is like buying technology from the US but making a joint venture with China.
-Dr Bharat Jhunjhunwala (The writer is a former Professor of Economics at IIM, Bengaluru .)