This article came across my news feed:
Musk made one big point – that China’s economy would become double that of the US.
Could happen. But I think I can show how unlikely it is – at least based on the US and Chinese history of the major indicator of the size of an economy – GDP.
My argument is entirely based on looking at the history of GDP – certainly black swan events or something else could change the analysis, but my assumption is that Musk was mostly basing this on the history of both countries’ GDP. Any underlying factors that cause the GDP to rise or fall, or change its rate of growth will be slow processes underway already, because that’s how large economies work – they do not change overnight.
Additionally, the main story of China’s economy at the moment is their attempt to rise up the global value chain: to compete more directly with the US, Western European, and Japanese economies (meaning higher value exports). The problem with this, in predicting continually high GDP growth is two fold: 1) wealthy economies built on high value chain products do NOT have high GDP growth as a percent of their economies, and 2) it would mean China would begin to compete with economies that have decades of experience in these markets and therefore enormous advantages in the skilled labor, institutions, education, and other factors – after all, this is why China is known for pirating, copying and reverse engineering highly advanced technology from the West. (And selling everything as a cheaper, lower quality version of something else is not how to truly compete at the top of the value chain).
But whatever the specifics, long term economic processes and changes are still reflected in GDP growth, because that is the universal indicator of the size of an economy.
All of my calculations come from the data from this website: https://www.theglobaleconomy.com/China/GDP_current_USD/
And for all of this, we’ll also ignore the idea that plenty of experts agree that official numbers of China’s economy are inflated. We’ll use the reported numbers at face value.
First, the simplest of calculations – projecting the average GDP growth of the past into the future.
Historical GDP growth rates for US and China (2017 is the most recent year in that data):
|Average of these Years:||US Growth (Percent of GDP)||China Growth (Percent of GDP)|
|2000 – 2010||1.81%||9.38%|
|2010 – 2017||2.11%||7.35%|
|1990 – 2017||2.35%||8.84%|
Let’s use the most recent grouping (2010 to 2017) and use that average GDP growth to project out 10 years to 2017. I then calculated additional years until China’s GDP was at least double US GDP, which turned out to be the year 2042.
|YEAR||US GDP with 2.11% yearly growth (the 2010-2017 avg.)||China GDP with 7.35% yearly growth (the 2010-2017 avg.)|
Using the 2010’s as our guide, it will take a generation before China is double the GDP of the US. Obviously if we used the 27 year average (2.35% growth for US and 8.84% for China) it would look slightly better for the US, but also better for China. Using those numbers, China’s economy is double that of the US by the year 2035, seven years sooner. But still almost a generation away.
Did Musk mean twenty years down the road? He certainly didn’t pin himself down by specifying a decade or timeline. But it sounded more immediate to me.
Even if he did mean to speak about it being a generation away, this is the laziest calculation – and the least likely. Growth rates change over time. Assuming that the last 7 years average growth will be the same for the next decade is too simplistic (all three of the past decades’ had averages that could be 2 percentiles different after all).
Even taking a 27 year average to project for the next 27 years is a stretch, because the decade averages fluctuate by a few percentiles. For both countries, the 1990s saw the best average growth. But the 2010s saw the worst for China, while the US saw much improved growth compared to the 2000s. And if we stretch it back before the ‘90s to take even longer averages, things would look much dicier for China (but that wouldn’t be fair).
The CHANGE in growth rates
More complicated, but also more accurate, would be to look at the historical change in growth rates and use that to project future changes in growth rates, and then use those future growth rates to project future GDP. This is a two step process that I’ll walk through.
First, here’s a chart that summarizes much of the initial data we’ll need. Everything is calculated using constant 2010 USD (just because that’s how my source for this data had it).
|Average of these Years:||US CHANGE in Growth, year to year||China CHANGE in Growth, year to year|
|2000 – 2010||-0.18%||0.23%|
|2010 – 2017||0.63%||-0.27%|
|1990 – 2017||0.09%||-0.08%|
The change in the percent growth is simply the change in the amount of growth from the previous year. For example, GDP growth for the US in 2006 was 2.6%, but it was only 1.75% in 2007, which means there was a change in growth of -0.85% (1.75 minus 2.6) between those two years. The US economy was still growing, but it was growing by a smaller amount (as a percentage of GDP) the next year. One would say that GDP growth slowed, from 2006 to 2007. China’s GDP growth has been slowing for many years, with no signs this trend is abating.
It is here we start to see things that can tell us a little more about the future. The US economy has far more years that see improved growth, year to year, than China. This is true across all 27 years, where the US has a positive average and China has a negative one. Additionally, two of the three decades had positive averages for the US, but two had negative averages for China.
Another important point is that China’s negative percent change is increasing as time goes on: China’s growth is unmistakably slowing down. And it has been since the 1990s. China’s percent change in real GDP growth was negative 62% of the time (16 of the 26 years between 1991 and 2017). By contrast, the US was negative only 13 of the same years (50%).
It has been slowing more rapidly in recent years. In the seven years from 2010 to 2017, China’s percent change was negative six years in a row (2011 through 2016), but the US’s was negative in only 3 of those years (2011, 2013, and 2016). That’s a negative change in the percent growth 86% of the time for China, but only 43% of the time for the US. While China’s growth is slowing, US growth is speeding up.
In other words, if the past 27 years predict the future, China’s GDP percent growth will be smaller than the previous year 62% of the time. And if the past 7 years are a prediction, the percent growth will be smaller 86% of the time! That is not a recipe for eclipsing the US economy, especially when the US percent change over time is more positive more often.
Now that we can see clearly the slowing of the growth, let’s project into the future. First, I’ll use all 27 years (1990 to 2017) – the complete period of China’s meteoric growth. Across that entire period, the average yearly change in percent GDP growth was -0.08% for China, and 0.09% for the US. Here’s a table using those averages to project into future years what the percent growth should be each year. It is projected for 27 years, since we’re taking the previous 27 years as our average:
Projecting Future GDP Percent Growth:
|Year||US Growth (Percent of GDP)||US – rate change (average of past 27 years)||China Growth (Percent of GDP)||China – rate change (average of past 27 years)|
Interestingly, it takes almost 27 years for US growth rates to exceed China’s with this projection.
Now, starting with 2017, and using these growth rates for US and China respectively, let’s calculate what the GDP (in 2010 dollars) would be through 2044 (27 years).
Projecting Future GDP:
|Year||PROJECTION – US GDP (trillions of 2010 USD)||US Growth (Percent of GDP)||PROJECTION –CHINA GDP (trillions of 2010 USD)||China Growth (Percent of GDP)|
Notice that they do converge, but not once does China have a bigger GDP than the US. In my excel document I used to calculate this, I ran it all the way through 2057 for fun. The numbers begin to really diverge, such that 40 years later US’ economy is 84 trillion compared to about 67 for China. But this is unfair, obviously, as taking a 27 year average to project for 40 years doesn’t make much sense. Too many things can happen in that span.
Seems to me that when you actually compare the GDP trends of the US and China of the past three decades it does not indicate China will eclipse the US any time soon – let alone become double the US economy!
Okay…how about using only the most recent 7 years we have data? More recent is more relevant, right? This is going to look worse for China, as the US averaged a 0.63% change in GDP growth year to year, whereas China averaged -0.27%. Let’s project the changes in growth out to the next ten years based on historical average:
|Year||US Growth (Percent of GDP)||US – rate change (average of past 7 years)||China Growth (Percent of GDP)||China – rate change (average of past 7 years)|
So, if the average yearly rate change of the past 7 years holds for the next decade, then by mid decade US growth rates will be larger, and then become double!
Now to the GDP projection, using these rate changes:
|Year||PROJECTION – US GDP (trillions of 2010 USD)||US Growth (Percent of GDP)||PROJECTION – CHINA GDP (trillions of 2010 USD)||China Growth (Percent of GDP)|
WHOA! Wait a minute. Using this analysis the US economy could be TWICE China’s economy before the end of the next decade? Wait a minute. That can’t possibly be accurate, could it?
No, I don’t think it’s accurate. First, I doubt that US percent growth will get anywhere near as high as 8% (probably not even 4%). However, I do think that China’s change in growth will continue to decline as it has been, until they even out at a low rate of around a 2% average, like the US. That’s what happens to wealthy, modern economies.
And that’s what happened to Japan – meteoric growth in the 60’s and 70’s, and then a leveling off as they became very wealthy and modernized. The same thing will happen to China. Such high growth rates cannot be sustained forever. And using the actual GDP numbers from the past 27 years the trend is clear. China’s growth has been slowing, and will continue to slow. And because of that, it is unlikely to catch up with the US in the next few decades.
China will eventually settle in at the types of GDP growth all huge, wealthy countries have – a couple percent per year on long averages. And this will happen well before it has “caught up” to the size of the US economy.
This may not be the prevailing wisdom – but as time goes on, it has become far more common among geopolitical thinkers to say that China won’t actually catch up anytime soon. International Relations scholars such as Stephen G. Brooks, Michael Beckley, Jacob Shapiro (not Ben), William C. Wohlforth, and George Friedman have published research on this subject that I find to have the most explanatory power, compared to others. I think Musk is reading older “conventional wisdom” that is changing.