Top 10 Myths about the Global Economy

The 2000’s was a decade of rapid economic change. The Chinese economy grew enormously, and to a lesser extent so did the economies of Russia, Turkey, Saudi Arabia, Brazil, South Korea, India, and others. Mobile phones, smartphones, and the Internet changed the way billions of people live their lives and conduct business. Near the end of the decade there was a major shock to the global economy, dropping growth from about 4% between 2005 and 2007 to 1% between 2007 and 2009. The slowdown thrust millions of people into unemployment.

One of the byproducts of such speedy transformations has been confusion regarding the present configuration of the global economy. According to a 2011 Gallup poll, more than half of Americans believe that the world’s largest economy is China, whereas only thirty percent believe, rightly, that it is the United States. While some of the blame for ignorance of this kind should presumably go to the American education system and media, its root cause is probably just that the world has been changing so fast that people have not had the time to catch up to what is really going on.

With that in mind, in this article we have tried to compile the ten most widely held myths about the global economy. They are as follows:

1.      China Owns All Of America’s Debt

Contrary to popular belief, China only owns about 8 percent of American government debt and 2.7 percent of total American debt. This is not so unique: Japan, for example, owns 6 percent of American government debt, and England owns 2.5 percent of American government debt. China also does not receive as much leverage over the United States from these debt holdings as is commonly thought, because its economy is considerably more dependent on trade with the United States than the American economy is dependent on trade with China. China’s exports to the United States are equal in value to around 6% of China’s gdp, whereas American imports from China are equal in value to only around 1.8% of American gdp. Chinese leverage over the United States is also compromised by the fact that the United States military dominates the Indian and Pacific Oceans that China requires access to for nearly all of the imports and exports it depends on.

2.      China Will Soon Overtake the United States

For China’s economy to equal America’s even ten years from now it would have to grow at an average of 9 percent in real terms, assuming the economy of the United States would only continue at the relatively unimpressive rate of 2.5 percent per year it is currently growing at, and that exchange rates remain at their present rate. This would be a remarkable feat; in its entire mod­ern history China has only twice averaged an annual growth rate of more than 9 percent over the course of a decade, and no country in modern history has grown at an average of more than 10 percent over a period of five and a half decades, which China would accomplish if it  were to grow at such a pace over the next ten years. To say that China will definitely achieve such growth, therefore – when it is facing a huge number of challenges, including high commodity prices worldwide and slow growth among the Japanese and European consumers of its exports – is a bit of a reach. And of course it is also possible that the American economy will grow faster than it is expected to in the years ahead.

3.      America Doesn’t Make Anything Anymore

It has become popular to argue that the United States is becoming economically or even morally bankrupt because it no longer produces tangible goods, but instead focuses on service-sector industries like fast food and finance. The fact is, however, that America does produce tangible things: it still boasts the world’s first or second largest industrial sector (depending on which data you accept), even as the share of its GDP that the sector accounts for has shrunk significantly over the course of the past generation. America arguably manufactures more than China does, and it certainly manufactures far more than Japan and Germany do. In fact, because energy prices in the United States have recently become much cheaper than in Europe or Japan, the US may now also be able to grow its high-end manufacturing base faster than those of other large developed economies.

4.      2008 Was the Worst Recession Since The Great Depression

Okay, this myth may technically be true, perhaps. Still, by everyone constantly repeating it, the idea that 2008 was unprecedentedly similar to the Great Depression has been widely and wrongly perpetuated. The fact is that for most large economies – with the possible exceptions of Spain and Italy, and perhaps a few others – the 2008 crisis and the ongoing European crisis it spawned are actually more similar to the string of recessions that have occurred since the Great Depression than they are to the Depression itself.

Indeed, there might even be a case to be made that 2008 was the least painful of the major American economic crises to occur since the Great Depression, for instance because today’s unemployed have access to technologies that did not exist in previous recessions. Certainly the recessions of the 1970s and early 80s are too often overlooked in this discussion, perhaps due to nostalgia. In any case, it is still too early to tell. The Great Depression in the US saw little economic or employment growth for an entire decade, so at the very least we will not find out how apt the comparison is for  several more years.

 5.      Greece Matters

Greece`s economic problems have been discussed so often in the news that many people have gotten the idea that the country is a significant contributor of Europe’s overall economic crisis. It is not. Though extremely troubled, Greece is actually too small to affect Europe in any meaningful way beyond serving as a harbinger of or catalyst to its real problems – which include, for example, fifty percent youth unemployment in Spain, the world’s twelfth largest economy. The entire Greek economy is actually only about the size of that of Maryland; it is smaller than 16 other European economies. In other words, believing that Greece is the cause of Europe’s problems is sort of like believing that poor sales of snacks is why Blockbuster went bankrupt.

6.      India Is a Major Economic Power

Despite having a population of 1.3 billion people, India has a nominal economic output that is only about as large as those of Canada, Spain, or Mexico. Though India is undoubtedly a regional economic power, boasting an economy larger than those of Pakistan, Bangladesh, Saudi Arabia, Iran, Sri Lanka, and Myanmar combined, it is not yet a global power, and does not belong in the same breath with China as it is so often put.

One reason for this confusion is that economic size is often adjusted for purchasing power parity rather than looked at nominally, which puts India as the third largest economy in the world. While ppp-adjusted gdp is by no means irrelevant, it ignores the fact that India is one of the world’s most import-dependent economies: it is, for example, the largest or second largest importer of coal, oil, and weapons, and imports equal about 30% of its gdp, quite a bit higher than China and much higher than the US or Japan.  As a result, India’s exchange rates – i.e. its nominal gdp – cannot be ignored. Of course, India may still become a major economic power very soon. It might even wind up the world’s biggest economy at some point. But don’t be fooled: today India is a just an impoverished, second-tier economic power, with comparatively little say in world affairs beyond its own region.

7.      It’s Over For Japan

A rapidly aging population, two decades of economic stagnation, a highly publicized nuclear meltdown, and the spotlight-stealing dynamism of its Chinese and South Korean next-door neighbors has flipped perceptions of Japan from that of the rising power of the world in the early 1990’s to a fallen one today. Behind Japan’s low-growth exterior is an economy that is still the world`s third largest by far, however, bigger than those of Germany and England combined. In fact, if instead of using gross domestic product as a measuring stick you use the United Nations’ Inclusive Wealth Index – which attempts to measure not only growth itself but also the medium-term socio-political and financial sustainability of such growth – Japan’s economy ranks second, with a rating greater than those of China and Germany combined. So don’t count Japan out just yet.

8.      The World Is Flat

Globalization is real, but it is not yet as real as many people think. Here are a couple of statistics that should prove this: only an estimated 35 percent of people in the world have even the most basic access to the internet; North America relies on extra-continental trade that is equal in value to only around 7% of its economic output; Europe relies on extra-continental trade that is equal in value to only around 12% percent of its economic output. Among large economic regions only Northeast Asia is significantly globalized in its trading patterns, buying huge quantities of natural resources from the Persian Gulf, Southeast Asia, and the rest of the world,  and selling huge quantities of manufactured goods to North America, Europe, and the rest of the world.

But even Northeast Asia is far from being truly globalized. China, for instance, trades roughly 75 percent as much with Japan and 60 percent as much with South Korea as it does with the United States, even though the United States’ economy is more than three times larger than that of Japan and more than thirteen times larger than that of South Korea.For now, therefore, the world is not flat: local, regional, national, and continental links still remain economically more important than global ones.

9.      China Has A Massive Surplus

Politicians around the world often complain that China floods their markets with unnaturally cheap goods but is not willing or able to buy anything back in return. The fact is, however, that China’s economic surplus is not as large as it is generally portrayed, but only seems so because statistics falsely tend to treat Hong Kong and Macau – former British and Portuguese protectorates, now semi-autonomous administrative districts – as if they are still not part of China, though they both speak Cantonese and were officially integrated into the country’s political system in the late 1990s. Paul Krugman wrote an essay on this topic back in 1997, when China was acquiring formal control of Hong Kong back from the British.

Being metropolises, Hong Kong and Macau both import much more merchandise than they export; they can afford to do so because of sales of services – like tourism and finance – and through money that their wealthy residents earn on property or businesses that they own in other parts of China and throughout the world. Thus, when Hong Kong and Macau are counted, China’s trade surplus shrinks by about 15 percent, becoming significantly smaller than those of Germany, Russia, or Saudi Arabia, and smaller in proportion to total economic output than 10 of the world’s 25 largest economies. This reflects the fact that China actually does import a decent amount of manufactured goods, and a massive amount of natural resources, from countries around the world.

10.    It`s All About Culture

Lots of people believe that culture is the driving force of economics – that lazy Greeks, efficient Germans, ‘backward’ Arabs, Confucian Chinese, responsible Canadians, and innovative Americans are the determining players of the world we live in. This is mostly nonsense, in my opinion. Not only may such cultural descriptions be over-exaggerated stereotypes, they also fail to take into account the fact that culture – and, relatedly, politics – does not emerge from a vacuum, but instead stems from more fundamental influences like geography and historical circumstance. Indeed, it should not come as a surprise that physical geography alone does a far better job at explaining present economic outcomes than culture does.

Take Europe, for example. Its north-south economic split is not, as many people think it is, primarily the result of Siesta-inclined Mediterranean cultures, but rather is due to the fact that the Mediterranean region is fairly dry and almost entirely hilly or mountainous, whereas the North European Plain and England are mostly flat and filled with navigable rivers. This has led the two regions to develop very different social and political dynamics, and given a sharp economic advantage to northern Europe ever since the discovery of  trade routes to Asia that circumvented the Mediterranean.

Similarly, the few areas of Mediterranean Europe that are flat, fertile, and easily accessible by water (which are located almost entirely in southern France, northern Italy, and Catalonia) occupy less than 20% of the land in Europe that is situated within 400 km of the Mediterranean, yet account for more than half of its wealth. Geo-economic patterns such as these are hardly unique to Europe, in fact. For example, nearly every country in the world to the north or south of the Tropics has a per capita nominal gdp of more than $10,000, whereas nearly every country within the Tropics has a per capita nominal gdp of less than $10,000.