Is America In Decline? Three Reasons The Conventional Wisdom Could Be Wrong

America still has important advantages

For many, it is a foregone conclusion that America is in decline.

The conventional wisdom is that America’s economic dominance will begin to fade, and they will be overtaken by China, with India nipping at their heels. You can see that line of thinking in the chart below:

America In Decline - World's Largest Economies Over Time
Chart courtesy of the Economist

However, there are reasons to believe the conventional wisdom is wrong.

Here are three reasons why America’s decline should not be assumed.

China could get old before they get rich

While China has a massive population, the growth of that population has either peaked, or is about to peak. China’s key advantage – aside from their manipulation of trade rules – has been their gigantic pool of young workers. This massive worker army – and the absence of any worker protections – gave China a ruthless competitive advantage.

However, China is about to face the same issue that is causing Europe and Japan so many problems: China’s population is aging rapidly. Because of the one-child policy, China’s pool of young workers is shrinking, at the same time as the government must support a rapidly expanding number of elderly people.

This is where China faces a big problem: Unlike Japan and Europe, China is still a developing country. It’s easy to look at the gleaming skyscrapers of Shanghai and assume that China is rich, but in a nation of 1.4 billion people it would be surprising if there weren’t a few gigantic and wealthy cities.

However, the vast majority of China’s population is still relatively poor. China’s shrinking pool of workers will have to support a growing number of elderly citizens, and that will certainly cause a further economic slowdown. Thus, China may get stuck as a middle-income country, not reaching the GDP per capita of Japan, Europe, or the United States.

As well, China’s restrictive and oppressive political system could face serious instability if economic growth continues to slow. A full-blown collapse of the government and chaotic instability cannot be ruled out if there is a severe economic crisis.

India is still a very poor nation

Unlike China, India still has a young and growing population. However, India has its own very serious challenges. Despite a rapid growth rate, India is still an incredibly poor country. On a per-capita basis, many African nations are wealthier than India. India is also highly crowded, and faces severe infrastructure problems. India has to fit a population almost equal to China in a country 1/3rd the size.

India is a high risk, high reward country when it comes to predictions. They could easily continue to grow rapidly, achieve middle-income status, and then grow steadily into the world’s biggest economy. But it’s just as easy to imagine India failing to break through economically, and becoming mired in corruption and stagnation. India will also face a significant challenge in dealing with slowing worldwide growth. China’s economy boomed as America, Europe, and Japan (for a decade) were still growing. However, the European Union (The world’s largest economy when measured as a single market), is facing prolonged stagnation and uncertainty. Japan has been stuck for 20 years. And American growth is below the historic average.

As a result India would have to rely on growth in much smaller and less developed markets, while trying to develop their internal economy at the same time. That is no easy task.

Even if India’s growth fell to 4% per year – a level any western country would be glad to have – they would remain a poor nation for a very long time.

America still has the best balance between population and wealth

America is still the “Goldilocks” country when it comes to the balance between population size and overall wealth.

One thing people often overlook when analyzing America is how big their population really is. America generally gets compared to European Nations with 40-80 million people. But when America is compared to other nations with large populations – Brazil, Indonesia, Pakistan, Nigeria, Mexico – it’s easy to see how they are in a class by themselves.

America also has much more favourable demographic projections than China. While China is rapidly growing old. America’s population mix remains fairly balanced, due to both immigration and a high birth-rate. This means America will continue to grow in the forseeable future. And as I mentioned above, China is either already shrinking, or will be soon. This means that every year, America (still far wealthier per-person than China) will be closing the population gap with the world’s most populous nation.

This makes it quite possible that China could pass the United States in total GDP for a while, and then fall back into second place.

Don’t count America out

America still retains a dynamic and innovative spirit. Their capacity to reinvent themselves at an incredible speed gives them an adaptive capability many nations lack. America retains a free and open society – especially compared to China – and their military strength is a factor that can’t be overlooked.

When this is combined with their favourable demographics, China’s aging problem, and India’s poverty, America may not be facing a century of decline. Instead, they may be well positioned for another 100 years of influence, wealth, and power.

Spencer Fernando