By Andres Oppenheimer

May 9, 2011

A forecast by the International Monetary Fund (IMF) that China will surpass the U.S. economy in five years -- much sooner than previously expected -- is creating a big buzz on the Internet. But is it true?

Judging from the headlines on the Web, it sure looks like something that's bound to happen shortly. "IMF Bombshell: Age of America nears end," screamed an April 25 column headline in "The age of America ends in 2016," read another headline in the website.

Granted, the U.S. economy is in a mess. The Standard & Poor's rating agency recently warned that the United States could lose its Triple A credit rating by 2012, because President Barack Obama and the Republican Party are not reaching an agreement to reduce the giant U.S. budget deficit. Days later, chief IMF economist Olivier Blanchard cautioned that the United States "does not yet have a credible plan" to reduce its deficit.

And then, the newly released IMF World Economic Outlook forecast shows that, measured in purchasing power parity (PPP), China's economy will grow from $11.2 trillion this year to $19 trillion by 2016, surpassing America's by that year. The U.S. economy will increase from $15.2 trillion to $18.8 trillion over the same period, it says.

Curious about this projection, I called Nicolás Eyzaguirre, the head of the IMF's Western Hemisphere Department, which monitors the U.S. economy, among others.

Do the new figures mean that America's days as the world's biggest economic power will end in 2016, I asked him.

"No, the U.S. economy will continue to be bigger than China's for quite some time, despite the fact that we are moving from a single economic superpower world to one of two economic superpowers," Eyzaguirre said.

But haven't you predicted that China will surpass America in 2016, I asked.

"That's measured by purchasing power parity, which isn't the most relevant measure for international comparisons," he said.

He explained that while that measurement takes into account domestic economic activities that can't be traded globally, such as haircut services, a better way to compare the size of economies is by taking into account the market value of their goods and services that can be traded with the rest of the world.

By the latter measurement -- in market-rate terms -- the U.S. economy is worth about $16 trillion, while China's is of about $9 trillion, he said.

And how much longer will it take for China to overcome the United States in market-rate terms, I asked.

"Since the Chinese economy is growing at about 8 percent, and America's by about 3 percent, it may take more than a decade, assuming things continue as they are," he said.

And do you think that China will continue to grow at its present rate, I asked. "Well, economics is a relatively accurate profession to foresee the next two or three years, barring crises that nobody predicted," he answered. "Farther ahead in time, it becomes pretty speculative."

My opinion: While I was amazed by China's development in my recent trips to that country, I don't see China overtaking the United States over the next five, or even 10 years.

First, the U.S. dollar still doesn't have a credible rival as the world's reserve currency. The day after Standard & Poor's announced that it might lower its rating of the U.S. economy, the value of the dollar went up, and U.S. Treasury notes rose.

Second, we are living in an information economy, and while China is producing more engineers and scientists than the United States, it has a long way to go to match U.S. scientific output.

Even in Shanghai University's list of the world's 500 best universities, eight of the top 10 universities are in the United States, and the remaining two are in Britain.

Third, we cannot rule out an economic downturn in China. In recent days, we saw an unusual picture out of China -- a truckers' strike to protest inflation. And even if China's dictatorship manages to avoid a social explosion, demographers are projecting that nearly 70 percent of China's population will have moved to the cities by 2019, crowding out urban areas and bringing the country's construction boom to an end.

There's no question that China's rise is the biggest story of our time.

But it's too early to predict the demise of the United States -- especially as early as within five years.


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