The US Secretary of State John Kerry visited India recently. A month ago, Chinese Foreign Minister Wang Yi visited too. This is analogous to two contending teams wanting to pull India towards them in the ongoing tug-of-war between the two big powers. We will have to choose which of the two to embrace.
Unquestioningly, the US is the largest economy today. Its GDP at about $16 trillion is nearly double that of China at $8 trillion. But the growth rates are in the opposite direction. The US growth rate was 1.9 per cent last year in comparison to the seven per cent of China. Therefore, China is fast catching up. The bigger problem is that of debt. The US is living beyond its means. The US Government is borrowing huge amounts from the world markets in order to meet its expenditures. The level of debt is usually measured against the total income of the country, known in economic parlance as Gross Domestic Product or GDP. A debt less than annual income of the country is considered okay, while that above this is considered troublesome. The US debt was 67 per cent of its GDP in 2007. That was acceptable. It has become a trifle higher than 100 per cent in 2014. The US economy has entered the danger zone.
Indeed the fiscal deficit of the US Government has been declining in the last few years. The deficit was $1.1 trillion in 2012. It has declined to $561 billion in 2013. Some further reduction is projected in 2014. But this is not sufficient to pull the US economy out of the woods. The US Government has to run a surplus to be able to repay the debt. According to a report in USA Today, the debt is slated to rise to $27 trillion in the next decade, despite this reduction in deficit. Thus, only the immediate shock of the recession has been overcome. The underlying structural problem remains as previously. It is as if the US economy has been taken out of the ICU but still in the hospital.
China is on an altogether different footing. It has been giving loans to the US. The Chinese Government is the biggest buyer of US Treasuries and holds nearly $2 trillion worth of these securities—and rising. Therefore, the future of the Chinese economy is on a much stronger wicket than that of the US.
The second touchstone of assessing friendship with the USA and China is the availability of advanced technologies. Like the economy, here too, the US is by far the biggest player today. Most advanced technologies are coming out of that country. The invention of these technologies is given a big push by the American university system, which produces high-class engineers and scientists. But China is catching up. Stanford University has recently undertaken a comparative study of the status of higher education in the BRIC countries—Brazil, Russia, India and China. The report says: “BRIC undergraduate education increased from about 19 million students in 2000 to more than 40 million students in 2010. The largest increase was in China, which went from less than three million to almost 12 million bachelor’s degree students during that period…” This is the story of elite higher education in BRIC countries. The report goes on to say that the situation is not so good at the mass higher education level. Low-quality graduates are being churned out in large numbers by ordinary colleges.
Even the present leadership of the US is under question for another reason. An article in Scientific American tells us the tale of foreign students in American Universities: “Can the U.S. stave off the erosion of its longtime preeminence in science and engineering? For decades the nation’s stature in those disciplines has attracted many of the brightest and most talented students from around the world to America’s advanced degree programs. Citizens of other countries now receive more than half the PhDs awarded by U.S. universities in engineering, computer science and physics, on top of earning one third of all college degrees in science and engineering… If and when those students depart from America, they will in effect constitute an unacknowledged version of foreign aid. The advanced education they receive in the U.S. is underwritten by American taxpayers in the form of sponsored research, financial aid, and a wide array of subsidies and grants… If current trends continue, America’s scientists and engineers—the basic drivers of innovation and prosperity—will ultimately be surpassed by U.S.-educated competitors in other countries that are more serious about teaching their youngsters.” So there is the catch.
We have to choose between the US and China in this backdrop. The short run calculation clearly favours the US. It is the biggest economy and also has the most advanced technologies. But the long-term situation is exactly the opposite. China is lending massive amounts of money to keep the US afloat and can pull the rug from under the US any time. The technological strength of the US is also eroding, as foreign students dominate the higher education output in that country. Therefore, we need to embrace a new type of non-alignment, by building long-term friendship with China while garnering short-term benefits from friendship with the US.
The author was formerly Professor of Economics at IIM Bengaluru.