Doom vs boom: America vs China

Dennis Morrison, Gleaner Writer

The overwhelming sophistication of the United States' military prowess was on display in the operation leading to the capture and killing of Osama bin Laden last weekend. America's superior military apparatus comes, however, with a heavy price tag, as last year, it spent US$687 billion, or nearly five per cent of their gross domestic product, on defence spending. Very far behind was the People's Republic of China, which had military expenditure of US$114 billion, or just over two per cent of its national output. In other words, America spent more than six times that of its nearest rival on its military.

The burden of US military spending on its economy is evident in the heavy borrowing that it has had to undertake to finance the wars in Iraq and Afghanistan which, by 2010, had added US$1.3 trillion to its national debt. But worse is to come, because according to estimates by Nobel Laureate Joseph Stiglitz, when the full costs of these wars are taken into account, the figure could well triple in coming years. This means that defence spending is an important part of America's deficit and debt problems, which are now its greatest national challenge.

Main rivals

While the US has sustained its massive outlay on the military even after the end of the Cold War, its main rivals have been directing a greater share of their spending towards economic and social infrastructure. China, in particular, has lifted the scale of its investment to a level not seen since the infrastructure programme implemented by the Roosevelt administration in the 1930s in the US, and the building of the US highway system after World War II.

As a result, China, which 15 years ago ran a ramshackle railroad system that was a major obstacle to economic activity, now boasts state-of-the-art, high-speed trains. Its investment in modern airports and other physical infrastructure has proceeded at rapid pace when most developed countries had to cut back as the Great Recession struck. With this investment in infrastructure, the momentum of its economic expansion has taken it to second spot behind the US in terms of the size of its economy.

In this regard, the recent IMF report predicting that the Chinese economy is set to surpass that of the US before the end of this decade, should not be surprising. The fund points out that using a measure that compares what people earn and spend in real terms in both countries - purchasing-power parity - China's annual output, or GDP, is projected to reach US$19 trillion in 2016, compared with US$18.8 trillion for the US. China's share of world annual output will climb to 18 per cent, surpassing the US at 17.7 per cent, while 10 years ago, the US economy was three times that of China.

As the Chinese economic juggernaut has emerged as the 'workshop of the world', pushing past Japan, and overtaking Germany as the largest export nation, it now generates enormous trade surpluses and possesses the world's largest foreign-exchange reserves. With these resources at its command, China is now investing in the far-flung corners of the globe, from Australia to Africa, to North America and Latin America, in companies, mines, plants, and other property.

Largest trading partner

In Latin America, it has become the largest trading partner of Brazil, Chile and Peru, and its trade with the region, which stood at US$8 billion in 1999, grew 16 times to US$130 billion in 2009. [China is now the region's biggest partner: John Paul Rathbone, Financial Times, April 26, 2011]. This expansionist role by China in America's 'backyard' is a matter of geopolitical concern for the Americans. Latin America's trade with the US, however, was four times that with China, at US$486 billion in 2009.

As far as the Caribbean is concerned, China's investment had, until recently, been directed at social infrastructure in Jamaica and the Eastern Caribbean, but has increasingly moved into physical infrastructure in roads and ports. The much-talked-about Jamaica Development Infrastructure Programme is an example. Now, Chinese investment is flowing into direct economic enterprises, like the acquisition of the assets of the Sugar Company of Jamaica.

In The Bahamas, the Export-Import Bank of China and the China State Construction Engineering Corporation are participating with Bahamian investors as financiers of the US$3.4-billion Baha Mar Integrated Resort Project on the Cable Beach strip. This project will be the largest resort in the region and will represent around 10 per cent of the GDP of The Bahamas and is projected to generate 6,500-7,000 permanent jobs and 4,000 construction jobs. It is expected to be completed by late 2014, and in its first full year of operation is slated to attract an additional 430,000 stopover visitors to The Bahamas.

This project, which had been stalled by the recession when traditional investors withdrew, has now been revived with Chinese investment capital. It is the first major Caribbean resort development to get under way since the meltdown in the global financial system and may well represent a model for future Chinese involvement in the economic development of the region.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.