Abstract: China’s economic growth over the past three decades has been spectacular, but the veneer of doubledigit growth rates has masked gaping liabilities that constrain China’s ability to close the wealth gap with the United States. China has achieved high growth at high costs, and now the costs are rising while growth is slowing. New data that accounts for these costs reveals that the United States is several times wealthier than China, and the gap may be growing by trillions of dollars every year.
Introduction
This conclusion may surprise many people, given that China has a bigger GDP, a higher investment rate, larger trade flows, and a faster economic growth rate than the United States. How can China outproduce, outinvest, and outtrade the United States—and own nearly $1.2 trillion in US debt—yet still have substantially less wealth?
The reason is that China’s economy is big but inefficient. It produces vast output but at an enormous expense. Chinese businesses suffer from chronically high production costs, and China’s 1.4 billion people impose substantial welfare and security burdens. The United States, by contrast, is big and efficient. American businesses are among the most productive in the world, and with four times fewer people than China, the United States has much lower welfare and security costs.
GDP and other standard measures of economic heft ignore these costs and create the false impression that China is overtaking the United States economically. In reality, China’s economy is barely keeping pace as the burden of propping up loss-making companies and feeding, policing, protecting, and cleaning up after one-fifth of humanity erodes China’s stocks of wealth.
The Real Wealth of Nations
For decades, analysts have measured national wealth in gross rather than net terms, relying primarily on GDP and its components, such as trade and financial flows and investment spending. These gross indicators, however, overstate the wealth of populous countries because they count the benefits of having a large workforce but not the costs of having many people to feed, police, protect, and serve. These costs add up. In fact, they consume most of the resources in every nation. Analysts, therefore, must deduct them to accurately assess the wealth of nations.
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Natural Capital
The main elements of natural capital are water, energy resources, and arable land, all of which are
necessary to sustain life and power agriculture and industry. The United States has 10% more
renewable freshwater than China, and the actual gap is much larger, because half of China’s river
water and 90% of its groundwater is unfit to drink, and 25% of China’s river water and 60% of its
groundwater is so polluted that the Chinese government has deemed it “unfit for human contact” and
unusable even for agriculture or industry.
China’s per capita availability of water is less than one-quarter of the United States’ and less than
one-third the world’s average, and roughly one-third of China’s provinces and two-thirds of its major
cities suffer from extreme water scarcity. Beijing, for example, has roughly the same amount of water per person (145 cubic meters) as Saudi Arabia. Dealing with water scarcity costs China roughly $140 billion per year in government expenditures and reduced productivity versus $12 billion for the United States.
The United States has three times as much oil and natural gas as China and twice as much coal. China heavily subsidizes its renewable energy and nuclear power industries, but both combined still
account for less than 5% of China’s energy use compared to 12% of the United States’.
China has large reserves of shale oil and natural gas, but it has not been able to tap them and may
never do so. One reason is that China’s shale deposits were left behind by prehistoric lakes and,
consequently, have rock layers that are more ductile and less amenable to hydraulic fracturing than
the brittle marine shales in North America. Another reason is that China lacks the water necessary
for fracking. Each shale-gas well requires fifteen thousand tons of water a year to run, and China
would need to drill thousands of wells a year to launch a successful industry. China has nowhere near that amount of water located close to its major shale basins, which are concentrated in Jilin and Liaoning, two of China’s driest provinces.
China currently depletes $400 billion of its energy resources per year and pays foreign countries
another $500 billion in energy imports, whereas US annual depletion and net import costs are
currently $140 billion and $120 billion respectively. This divergence in energy fortunes is likely to
expand in the decades ahead, because the United States will become a net energy exporter around
2025, whereas China, already the world’s largest net energy importer, will import 80% of its oil and
45% of its natural gas.
Finally, the United States has 45% more arable land than China, and again the true size of the gap is probably much larger because large chunks of China’s farmland are too polluted, desiccated, or both to support agriculture. According to a recent Chinese government study, water pollution has destroyed nearly 20% of China’s arable land, an area the size of Belgium. An additional 1 million square miles of China’s farmland has become desert, forcing the resettlement of 24,000 villages and pushing the edge of the Gobi Desert to within 150 miles of Beijing. In 2008, China became a net importer of grain, breaking its traditional policy of self-sufficiency, and in 2011 China became the world’s largest importer of agricultural products. The United States, by contrast, is the world’s top food exporter and China’s top supplier.
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