We've been told so many times that China is about to overtake the U.S. economy that a lot of people are beginning to believe it. Economists of the left-wing persuasion are especially infatuated with this notion because it implies the superiority of state-directed "semi-capitalism" over the free market.
Chinese media outlets naturally tout a new survey that claims the Middle Kingdom will have the world's largest economy in just eight years. By the numbers, this is true. China's economy is growing at a red-hot 7 percent rate. India is expanding by 6 percent, and America under Obamanomics can't even crack 2 percent.
If China and India keep growing at those rates, and America keeps slipping, China will indeed have the largest gross domestic product. But that's a pretty big "if." Harvard economists Lant Pritchett and Lawrence Summers argue that China and India are, by historical standards, due for a slowdown, and that would be bad news for the rest of the world.
Messrs. Prichett and Summers looked at how most countries performed over many years' time and discerned a tendency to "revert to the mean." That is, a nation's growth will return to an average level after a period of very high or very low growth. With three decades of expansion in China and a bumpier two decades in India, the Harvard economists predict the two countries will revert to an ordinary 4 percent growth rate over the next two decades. The difference between maintaining "big" growth and "normal" growth is $42 trillion in wealth by 2033.
Anders Aslund, an economist at the Peterson Institute, cites further evidence that the economic engines in China and India may be overheating. The source of the amazing performance in the developing world has been fundamental reform that captures the famous "low-hanging fruit." These economies had been bottled up for centuries, allowing no economic freedom; even a touch of capitalism at the margin yielded enormous returns. The easy policies have been implemented, and harder reforms are needed now to preserve and expand the gains. India, for example, is bedeviled by complacency and political resistance to opening markets further. The country can't kick its regulatory burden, and businesses still suffer under many coils of unnecessary red tape.
The biggest hitch in the developing world's plans for economic domination is the likelihood that the era of low interest rates is about over. Cheap borrowing has fueled China's exports to the United States, and when the money stops, so will the boom. The higher cost of borrowing will restrain the New Delhi government's taste for floating big deficits.
China and India have learned the wrong lesson from the continuing financial crisis in the West. Instead of avoiding the "too big to fail" arrangements that caused America's financial distress, the developing nations have taken it as an excuse to rely more heavily on state meddling in the economy.
These poor decisions make it more likely that the Asian giants will soon see lower growth, and there will be less wealth in the world economy. The world would be a happier, more prosperous place if all three nations — the United States, China and India — shared a greater faith in the free market and resist government meddling.