Let me admit my transgression upfront: I stole the catchy title from a blog post that David Dollar wrote almost a year ago. David was then the World Bank’s country director for China and Mongolia. It was in fact the title of a conference he had just attended.
I had to think about this question again when we looked this week at high-frequency data (see graph below).
Looking at the momentum of industrial production, China clearly seems to be leading the recovery. And high-income countries seem to be following. So almost a year on, the more intriguing question today is: has China already become the engine for world economic growth?
In answering that modified question, I deviate from David’s response in his blog. David argued then that China is still too small to be compared with, for example, the United States; but that China could, under certain conditions, become a major player. That view seems logical. China’s share of global domestic demand is merely around 4.6% (see table below prepared by Cristina Savescu). Domestic demand in the United States, on the other hand, makes up almost one third of global demand—about 7 times bigger than China’s. Consequently, it seems that the world economy still depends on the U.S. consumer.
But perhaps not. The forces behind global demand growth—and especially behind the cyclical swings during a deep crisis—are more complicated than this simple observation suggests.
Because domestic demand in China is growing much faster than in high-income countries, China’s contribution to global demand growth is significantly larger than its share of global demand. During the boom of 2003-2007, China contributed 0.3 percentage point to the annual growth of global demand for all goods and services, against 0.9 percentage point that originated in the United States. So while U.S. domestic demand is almost 7 times that of China’s, in terms of contribution to growth, the United States is “only” three times as important.
More importantly, China’s role in global investment demand, the main driver of the large swings during and after a crisis, already surpasses the U.S. role, even under normal conditions. In the period preceding the crisis, China’s annual contribution to global investment growth was more than 1 percentage point, exceeding the U.S. contribution of less than 0.9 percentage points. During the crisis, China’s role was much more dominant, as their investment demand continued to grow, even as investments in many other parts of the world sharply contracted.
With the global recovery dependent on a revival in investments, we might indeed conclude that China has already become the engine for world economic growth.