China will become world's largest economy, but when?

To continue growing rapidly, China needs to make the next transition, from sweatshop economy to innovation economy. This transition is the one that has often proved difficult elsewhere. Once a country has turned itself into an export factory, it cannot keep growing by repeating the exercise. It can’t move a worker from an inefficient farm to a modern factory more than once. It cannot even retain its industrial might forever. As a country industrializes, workers will demand their share of the bounty, as has started happening in China, and some factories will start moving to poorer countries. Eventually, a rising economy needs to take two crucial steps: manufacture goods that aren’t just cheaper than the competition, but better; and create a thriving domestic market, so that its own consumers can pick up the slack when exports inevitably slow. These steps go hand in hand. Big consumer markets become laboratories where companies know that innovations will be tested and the successful ones richly rewarded. Those products can then expand into countries with less mature consumer markets. Look at the telephone, the personal computer and the iPhone and iPad, all of which were designed in the United States and are now sold around the world.

Source:
In China, Cultivating the Urge to Splurge
David Leonhardt
Published: November 24, 2010

In China’s halting efforts to build a new economy today, there is an intriguing parallel to the United States: Both the world’s largest economy and its latest challenger need to remake themselves. As Guo bluntly told me, “You are facing transformation, too.” The United States needs to shift away from debt-financed consumption with little long-term benefit and toward investments that can create good-paying jobs, like education, infrastructure, energy and scientific research. China needs to invest less and consume more — to keep growing rapidly and, in the process, to stimulate economic growth around the world. In both countries, significant changes are necessary to create more sustainable growth. And in both countries, they inspire fierce internal opposition.

We tend to think of the United States and China as rivals, and they will continue to compete in coming years, over which will build the industries of the future and which will be the dominant power in Asia and the world. But our problems are also linked, just as the Chinese export boom and the American consumption boom depended on each other and, together, helped create the financial crisis. The worst outcome now, for both countries, might well be economic stagnation in China. That would slow U.S. growth and could lead to political chaos in China. The best outcome would be for both countries to reshape their economies gradually, benefiting both. In neither country will it be easy.


About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.

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