Who Wields the Power?

July 27, 2015

Economic power. It is a concept that is both central to the world yet slippery to define. Last week one of us delivered a keynote address (if you are interested, accompanied by a slide deck available here) that tried to frame a workable, meaningful definition at the level of countries.

This talk posited that a country’s economic power is shaped by five main factors.

1. Economic Growth: How large is its total output of goods and services, and is that output expanding?
2. Income Distribution: Conditional on what output is being created, how is the income from that output being distributed among different kinds of workers and companies?
3. The Rest of the World:  How does a country’s growth and other metrics compare with that of other countries?
4. The Fiscal Budget: Through its government’s ability (or lack thereof) to levy taxes and spend those resources, does a country have the fiscal means to project its power?
5. The Sense of the Citizenry:  Given that economic policies and thus performance have much to do with the preferences of a country’s citizens, do these citizens feel secure economically?

There is no law of physics (or economics or any other discipline) that dictates how these five factors combine into a single measure of national economic power. That said, anecdotal and research evidence shows that countries with faster productivity growth, rising incomes for many workers, and strong fiscal positions (low and/or falling fiscal debt as a share of output) tend to be more economically powerful—both in practice and in perception.

Pick your favorite country and gauge its economic power. Is it a country in Africa? You may well agree with the recent McKinsey assessment that, “with 27 of its 30 largest economies expanding more rapidly after 2000,” many African countries appear to be “Lions on the Move.” Is it India? With growth in India’s gross domestic product this year that might exceed that of China for the first time in decades, you might have been an eager participant in January’s “India Rising” celebration.

What about the home country of your two authors? Well, not so much with the lions and rising and all that. As the presentation above documents, America’s productivity growth is decelerating, its income distribution is becoming more unequal, its share of global GDP has been falling, its fiscal future is sobering, and its citizens voice widespread anxiety about the economic future.

So, what do people around the world think about the economic power of nations? According to a recent report issued by the Pew Research Center in Washington, D.C., across 35 countries the median share of respondents who say that the United States is the world’s leading economic power is today 51 percent—versus just 26 percent who say China. But past may not be prologue. Forty-eight percent say that China will replace or already has replaced the United States as the top economic superpower—versus just 35 percent who say China will never surpass the United States.

The concept of economic power is both important yet somewhat ephemeral. As you head off to your August holidays, this might be a topic to ponder amidst some deserved rest and good cheer.

Your co-authors plan on doing the same as we rest our pens for the month of August. We look forward to resuming the Slaughter & Rees Report on Monday, Sept. 7. Until then, happy summer.

 

Articles © 2015 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2015 Trustees of Dartmouth College. All rights reserved.