the sticky superpower
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October 3rd 2015
S P E C I A L R E P O R T
T H E W O R L D E C O N O M Y
20151003_WORLECONOMY.indd 1 21/09/2015 15:03
The Economist October 3rd 2015 1
THE WORLD ECONOMY
SPECIAL REPOR T
A list of sources is atEconomist.com/specialreports
An audio interview with the author is atEconomist.com/audiovideo/specialreports
4 American politicsNeither leading nor ceding
6 Global monetary systemThrills and spills
7 A crisis scenarioWe all hang together
10 ChinaA longer march
13 A new world economicorderGlad confident mornings
IN JUNE THIS year Jack Ma, the founder of Alibaba, a giant Chinese e-commerce firm, addressed the EconomicClub ofNewYork, whose mem-bers include many Manhattan luminaries and Wall Street chiefs. MrMasmessage was that his company exists for the long-term good of society, afar cry from the creed of shareholder value followed by many in theroom. He pledged to help Americas struggling small firms export to Chi-nas 630m internet users, who between them now spend more onlinethan Americans do. The venue for the event was the WaldorfAstoria ho-tel, which, when it opened in 1931, in the midst of the Depression, washailed by President Herbert Hoover as an exhibition of confidence and
courage to the whole nation. To-day the Waldorf is owned by aChinese insurance firm run byDeng Xiaopings grandson-in-law. The whole event seemed tosymbolise a change in theworlds economic order.
Yet as a parable ofAmericandecline that would be too neat.The lesson from Mr Mas big dayin the Big Apple is more subtle:that America remains the worldsindispensable economy, domi-nating some of the brainiest andmost complexparts ofhuman en-deavour. Alibaba is listed in NewYork, not on Shanghais bourse,whose gyrations this year havealienated investors. Four of thesix banks that underwrote Ali-babas flotation were American.Alibaba makes only 9% of itssales outside China (and has justhired a former Goldman Sachsexecutive to increase that share).The Waldorf is run by an Ameri-
can firm, Hilton, that does well out ofowning intellectual-property rightsworldwide. Days after his speech Mr Ma spent $23m on a mansion inNewYorkstatesAdirondackmountains. No doubthe will enjoy the troutstreams, but like many Chinese tycoons he may also want a bolthole in acountry that embraces the rule of law. Two months later China devaluedits currency, causing panic about its economy.
This special report will examine the paradox illustrated by Mr Masspeech. It will argue that America is a sticky economic superpowerwhose capacity to influence the world economy will linger and evenstrengthen in some respects, even though its economic weight in theworld is declining. For some, this is a welcome prospect. Hillary Clinton,a front-runner for the job of Americas next president, wrote last year:Foranyone, anywhere, who wonderswhether the United Statesstill haswhat it takes to leadfor me the answer is a resounding yesevery-thing that I have done and seen has convinced me that America remainsthe indispensable nation. But if handled badly, the growing gap be-tween Americas economic weight and its power will cause frustrationand instability.
Power is the capacity to compel another to do what they otherwise
The sticky superpower
America remains the worlds economic hegemon even as its shareof the global economy has fallen and its politics have turnedinwards. That is an unstable combination, says Patrick Foulis
2 The Economist October 3rd 2015
SPECIAL REPOR TTHE WORLD ECONOMY
would not. It can be exercised through coercion, by setting rulesor by engendering expectations and loyalties. American poweris sometimes defined so broadly that it includes both the flightdecks of the USS Abraham Lincoln and the legs of Taylor Swift.This report will focus on a narrower point: how Americas gripon the global economyhelps, enriches, organises, bosses and an-noys the restofthe world . Thiskind ofpower isoften wielded in-advertently: for example, America has no desire to run India, yetIndias economy is affected by the Federal Reserves monetarypolicy; and two of the subcontinents leading industries, tech-nology and pharmaceuticals, are subject to American rules thatare a de facto world standard.
American economic dominance has never been absolute.Between 1946 and 1991 the Soviet Unions empire of queues andrust aspired to be a rival model. From the 1970s onwards Europepursued closer integration partly as a counterweight to America;the idea of a single European currency gained momentum asEuropeans grumbled about the ascendancy of the dollar. Japanappeared to pose a threat in the 1980sand in itspomp tried to per-suade Asia to join a yen zone. Even when the so-called Washing-ton Consensus of American-inspired liberal economic policieswas at its peakin the 1990s, many countries, most notably China,ignored it. Butuntil recentlyone thingwasclear: America had thebiggest weight of any country in globalGDP and trade.
In the first change in the world eco-nomic order since 1920-45, when Americaovertook Britain, that dominance is nowbeing eroded. As a share of world GDP,America and China (including HongKong) are neck and neck at16% and 17% respectively, measured atpurchasing-power parity. At market exchange rates a fair gap re-mains, with America at 23% and China at 14%. By a compositemeasure ofraw cloutshare ofworld GDP, trade and cumulativenet foreign investmentChina has probably overtaken Americaalready, according to Arvind Subramanian, an economist (seechart). Even if Chinas economy grows more slowly from nowon, at 5-6% a year, its strength on such measures will increase.
The experience of the 20th century suggests that such atransition can happen fast. In 1907 America lacked a central bankand suffered a banking collapse, but by the 1920s the dollar ri-valled the pound sterling as the worlds most widely used andtrusted currency. If the past isa guide, China could surpass Amer-ica in the blink of an eye, giving it the heft to issue the worlds re-serve currency and set the rules of trade and finance. A plurality
of people polled by the Pew Research Centre around the worldbelieve that China will become the worlds leading economicpower. Those aged under 30 are most likely to believe they willlive in a Chinese epoch.
But any reordering of the world economys architecturewill not be as fast or decisive as it was last time. For one thing, thecontest is more balanced. America is far stronger than Britainwasat itsmomentofprecipitousdecline, and China isweaker to-day than America was when it took off. For all its efforts to pro-mote its currency and its institutions, the Middle Kingdom is amiddle-income country with immature financial markets andwithout the rule of law. The absence ofdemocracy, too, may be aserious drawback.
Todays world also relies on a vastly bigger edifice of tradeand financial contracts that require continuity. Trade levels andthe stockofforeign assets and liabilities are five to ten times high-er than they were in the 1970s and far larger than at theirpreviouspeakjust before the first world war. The speed and complexity ofcapital flows surpass anything the world has ever seen before.Britain and America were allies, which made the transfer ofpower orderly, if often humiliating for the declining power. Hav-ing squashed Britains global pretensions at the Bretton Woodsconference on the international monetary and financial order in
1944, America helped cushion its financial collapse in 1945-49.China and America are not allies. The greater complexity andrisk involved in remaking the global order today create a power-ful incentive for current incumbents to keep things as they are.
Last, the nature of economic activity has changed, shiftingtowards intangible, globalised services (such ascloud computingand computerised financial trading) in a way that may allowAmerica to exert dominance by remote control.
Economists, Tea-Partiers, trade unionists and Bruce Spring-steen have chronicled Americas slide on traditional measures ofeconomicand institutional prowess. Judged by its share ofworldsteel production, manufacturing, merchandise trade, transportand commodities production and consumption, the country isgoing to the dogs (see chart, next page). The number of countriesforwhich America is the biggestexportmarkethasdropped from44 in 1994 to 32 now. Over the same period the equivalent figurefor China has risen from two to 43.
Americas lead in other areas, such as research-and-devel-opment spending, technology equipment and consumerbrands, is no longeras comfortable as it was. Many ofthe worldsmost valuable firms are still American, but this overstates theirclout abroad: their share of the stock of international corporateinvestment has fallen from 39% in 1999 to 24%.
America still shines in a number of fields. It has 15 of theworlds 20 leading universities. Its Food and Drug Administra-tion is the global benchmark for the efficacy of a new medicine.A patent registered in New
ork is far more credible than onebooked in Shanghai. And Hollywoods domination of theworlds box offices is as eternal as a Californian film stars youth.
What is less widely acknowledged is that in some domainsAmericas clout is increasing. The country has demonstrated anastonishing capacity to dominate each new generation of tech-nology. It is now presiding over a new era based on the cloud, e-commerce, social media and the sharing economy. These pro-ducts go global faster and penetrate more deeply into peoples
Until recently one thing was clear: America had thebiggest weight of any country in global GDP and trade
The Economist October 3rd 2015 3
THE WORLD ECONOMY