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Since the invasion of Iraq, anti-Americanism in Europe has spilled over from foreign policy seminars into economic debates. Both advanced and emerging market countries are challenging the US economic model as the paradigm to be emulated. This critical reassessment is undoubtedly influenced by the cyclical weakness of the US economy since the late 1990s coupled with the cyclical strength of China and the Asian tigers. However, this critique also raises the larger question of whether the international economic structure of the post-World War II era, as defined by a benign but largely dominant superpower, is now past its prime.
The concept of national power has both military and economic dimensions. While the two are related, they can also exist independently. The Soviet Union during the 1960s and 1970s, for example, was a military superpower but economically weak and isolated, while Japan during the 1980s was an economic superpower with a weak military. Much attention has been devoted, on both sides of the Atlantic, to the military aspect of US power and how it is exercised both in unilateral action and through alliances like NATO. By contrast, the question of economic power has been relatively neglected, perhaps because it is more difficult to define and measure. This article is an attempt to remedy the imbalance and provoke further discussion on the emerging shape of the world economy and the ability of the United States to influence it.
The United States in the World Economy
A few facts are needed to set the stage for an assessment of US economic power. The United States currently produces just over 30 percent of total gross domestic product (GDP) when measured at market exchange rates, or 21 percent at purchasing power parity (PPP) rates. This is down from 46 percent just after World War II, but up slightly over the past decade due to the strong dollar and stock market boom of the mid-1990s. Looking ahead, it is most likely that the US share of world GDP will continue to shrink due to faster growth in poorer countries. The four big ones—sometimes called BRIC for Brazil, Russia, India, and China—already make up 23 percent of world output in PPP terms and are expected to grow by at least five percent per year for the next decade.
Although the US share of world GDP is likely to decline further, economic power is related to per capita income as well as size. According to this measure, the United States is by far the world’s richest major country. Income per person in the United States, based on PPP, is about 30 percent higher than the average for the traditional 15 member states of the European Union.
On closer examination, however, this measure overstates the US advantage. There are some significant quality of life trade-offs, both voluntary and involuntary, that should be taken into account. For example, the higher US figures are partly due to the longer work hours of US citizens compared to Europeans, and the choice of more US mothers to stay in the workforce after having children. A recent study by investment bank Goldman Sachs in London reflected such quality of life choices by disaggregating the difference in GDP per capita between the United States and Euroland into two components: the number of hours worked per capita (labor utilization) and the income produced per hour worked (productivity). As shown in the table labelled “Finding Euroland,” Euroland productivity in 2003 was only four percent below US levels. The rest of the 31 percent difference in GDP per capita was due to US citizens working more hours. The fact that Europeans have chosen a different balance between work and leisure, as reflected in longer holidays and fewer dual income households, does not imply that they are either less well-off or less productive. Appropriately measured, as output per hour, productivity in the United States and Euroland are roughly equal.
At this broad macroeconomic level, it appears that the economic position of the United States has either diminished (in terms of size, relative to the world as a whole) or remained roughly constant (in terms of wealth, relative to Europe). The 1990s was a very successful decade for the US economy, but part of that success turned out to be a stock market bubble that subsequently burst and part of it reflected illusory accounting devices that have since been exposed. Hindsight enables a more sober assessment to be made: the United States does not appear to have a significant economic lead over Europe, the other large economic bloc. This makes it necessary to dig deeper into the meaning of economic power.
What is Economic Power?
The very concept of economic power is more nebulous than that of military power. The ultimate test of military power—war—is the classic zero-sum game. If Country A has a more powerful military than Country B, then Country A is likely to win in a war between the two. And in the lead-up to war, Country B is more likely to back down. So having military superiority is clearly a good thing.
There is no parallel in economics because economic competition is not a zero-sum game. Country A may be richer than Country B, but both will be better off through trade if the other grows richer. In the general case of a free-trade agreement between a rich and a poor country (say, the United States and Mexico), the poor country gains more. Similarly, in joining a common currency such as the euro, the poorer countries will benefit more than the richer ones. European experience since 1999 supports this: Portugal and Greece have grown faster than their historical rates while Germany and France have grown more slowly. But on the economic battlefield, the success of one country does not imply the defeat of another.
This does not make the concept of economic power meaningless. Indeed, for the citizens of most countries today, the success of their economy in the harsh world of global competition is of paramount importance. Governments must be concerned with the levers that they have to wield economic power and to protect themselves against the economic threats posed by others. In this broader context, there are at least five types of economic power, as set out below.
