The Complexity of Measuring National Power

The Complexity of Measuring National Power

Institute of Defence Studies and Analysis, 22 May 2012

Arvind Subramanian’s recent book, Eclipse: Living in the Shadow of China’s Economic Dominance, has renewed interest in measuring the potential of emerging powers. Subramanian argues that projections of gross domestic product (GDP), trade and creditor status make China’s future dominance inevitable.

The focus, however, on a narrow metric like GDP growth rate to anticipate the dominant powers of tomorrow is flawed. For one, the GDP figure tells us little about the quality of a nation’s economy or whether its wealth is being converted into competitive capabilities. For example, China’s $5 trillion GDP, second-biggest globally, hides more than it reveals. Nearly half of China’s GDP is driven by investment, mainly in real estate and infrastructure. It is unclear whether this build of fixed-asset investment is producing capabilities or knowledge that great powers typically possess. The other major driver of China’s economy is its role as a manufacturing hub. What is less known is that foreign multinational corporations (MNCs) account for 60 per cent of China’s trade and 80 per cent of the value of their exports is imported. In other words, the value addition that occurs in China itself is a tiny contribution in the overall production process. Even China’s creditor status is circumscribed by the fact that China’s reserve assets are denominated in currencies printed by its principal debtors who have, consequently, transferred the vulnerability of this imbalance onto China.