Angus Maddison

A giant among economists ...

I once saw him give a lecture in a suit and sneakers ...

In other words a man after my own heart

Here's how he begins one of the best studies of the history of the world economy: The World Economy: A Millennial Perspective.

Over the past millennium, world population rose 22–fold. Per capita income increased 13–fold, world GDP nearly 300–fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, and there was no advance in per capita income.

From the year 1000 to 1820 the advance in per capita income was a slow crawl — the world average rose about 50 per cent. Most of the growth went to accommodate a fourfold increase in population.

Since 1820, world development has been much more dynamic. Per capita income rose more than eightfold, population more than fivefold.

Per capita income growth is not the only indicator of welfare. Over the long run, there has been a dramatic increase in life expectation. In the year 1000, the average infant could expect to live about 24 years. A third would die in the first year of life, hunger and epidemic disease would ravage the survivors. There was an almost imperceptible rise up to 1820, mainly in Western Europe. Most of the improvement has occurred since then. Now the average infant can expect to survive 66 years.

The growth process was uneven in space as well as time. The rise in life expectation and income has been most rapid in Western Europe, North America, Australasia and Japan. By 1820, this group had forged ahead to an income level twice that in the rest of the world. By 1998, the gap was 7:1. Between the United States (the present world leader) and Africa (the poorest region) the gap is now 20:1. This gap is still widening. Divergence is dominant but not inexorable. In the past half century, resurgent Asian countries have demonstrated that an important degree of catch–up is feasible.

Nevertheless world economic growth has slowed substantially since 1973, and the Asian advance has been offset by stagnation or retrogression elsewhere.

Here's an obituary from the NYT.

Angus Maddison, Economic Historian, Dies at 83
By CATHERINE RAMPELL

New York Times
April 30, 2010

Some people try to forecast the future. Angus Maddison devoted his life to forecasting the past.

Professor Maddison, a British-born economic historian with a compulsion for quantification, spent many of his 83 years calculating the size of economies over the last three millenniums. In one study he estimated the size of the world economy in A.D. 1 as about one five-hundredth of what it was in 2008.

He died on April 24 at a hospital in Paris after a long illness, his daughter, Elizabeth Maddison, said. He lived near Compiègne, about 50 miles northeast of Paris.

Professor Maddison held various senior posts at what is now the Organization for Economic Cooperation and Development, an international research and consulting organization based in Paris. Most recently he was a professor at the University of Groningen in the Netherlands.

He also spent much of his career studying economic conditions in the developing world firsthand, living for extended periods in Pakistan, Ghana, Brazil, Mongolia and Guinea, among other nations. As an adviser, he helped emerging market governments determine how to measure their economic progress and improve policies.

In his research, he tried to reconstruct thousands of years’ worth of economic data, most notably in his 2007 book “Contours of the World Economy 1-2030 A.D..” He argued that per capita income around the globe had remained largely stagnant from about 1000 to 1820, after which the world became exponentially richer and life expectancies surged.

In another influential book, “Chinese Economic Performance in the Long Run,” in 1998, he tracked the history of Chinese growth since 960. The book demonstrated that China’s recent rise was merely a return to economic superpowerdom, as the Middle Kingdom had already dominated the world economy for many centuries.

In his archaeological excavation of the economies of other eras, he was “trying to explain why some countries achieved faster growth or higher income levels than others,” he wrote in an autobiographical essay, “Confessions of a Chiffrephile” published in 1994. He wanted to know what some countries did right and what others did wrong, and to figure out how growth influenced culture, and was influenced by it.

Professor Maddison often referred to himself as a “chiffrephile,” or lover of numbers, a term he invented to characterize economists and economic historians like himself who were prone to quantifying the world.

While macroeconomic research in the last few decades was dominated by elegant mathematical models and technical wizardry, his focus on meat-and-potatoes data and cross-country historical comparisons has come back into vogue in recent years, especially in the wake of the financial crisis.
Social class and inequality figured greatly in his research and personal memoirs, perhaps reflecting his early childhood in economically depressed Newcastle-upon-Tyne, a shipbuilding and mining town in northeastern England, where he was born on Dec. 6, 1926.

His parents both left school at age 12. His father, a railway fitter, and his mother invested in their only child’s intellectual development, taking him to scholarly lectures sponsored by the local cooperative movement. One lecture introduced him to the work of the British economist John Maynard Keynes.

Professor Maddison’s first collegiate pursuit was history, but he was drawn to economics because he realized it was a “useful discipline for solving serious problems,” he wrote in his autobiography.

He enrolled in Cambridge in 1945, on a scholarship supplemented by a part-time job lecturing to German prisoners of war. He later attended graduate school at McGill University in Montreal and the Johns Hopkins University in Baltimore, then decided to return to Britain.

In subsequent years he lectured at universities, including the University of St. Andrews in Scotland, and worked with the what is now the Weatherhead Center for International Affairs at Harvard University. He retired from the University of Groningen in 1996, but he was still pursuing his research until three weeks before he died, his daughter, Elizabeth, said.

Besides his daughter, Professor Maddison is survived by his wife, Penelope; two sons, George and Charles, who is also an economist; and five grandchildren.

The Endless Boom?

Booms and busts related to Australia's status as a major commodity exporter are a recurring theme of Australian economic history. There have been 4 major booms since WWII and they all ended pretty badly.
Many serious economic commentators sincerely believe that this boom is different and that it will be sustained over decades by demand from China and India. The Reserve Bank Governor, Glenn Stevens argues that Australia's future economic problem will be dealing with the problems of prosperity.

My contention is that this optimism is a big call in the light of our history. Paul Cleary in The Australian "With resources in the driver's seat, it could be a bumpy ride" canvasses the present debate.  On one side of the debate are those who see nothing but increases in the price of commodities:

When the resources sector really gets going it reaches into every corner of the economy beyond its remote locations in the Pilbara or on the North West Shelf, with its insatiable demand for infrastructure, labour and capital. It delivers generous payola to workers, suppliers and government, and creates an even bigger economic multiplier.

Rio Tinto chief economist Vivek Tulpule predicted this week that global metals demand would double in the next 15-20 years.

Westpac meanwhile, predicts increases in commodity prices of about 20 per cent in both this calendar year and next. Gains of this order are likely to be revealed in next month's budget, along with a resources-driven turnaround in the budget's bottom line.

But commodity prices even in the rosy scenario tend to overshoot.

Australia's increasingly resource-focused economy could be in for an even bumpier ride involving greater highs and even deeper lows, says Brian Fisher, former chief of the Australian Bureau of Agricultural and Resource Economics, who now runs BAEconomics.

Mr Fisher predicts more of what Australia has seen over the past five years: a steep surge in commodity demand and prices, followed by greater volatility and economic instability.

"I think we are headed for a world where there will be much more volatility, periods of high prices and periods of low prices," he says.

"There could be strong surges of growth, followed by macroeconomic instability in the developed world that cascades back on to the developed world, with big swings in prices."

What most of the boomers forget is that price increases encourage supply increases, which then lead to oversupply and falling prices. This is the nature of the commodity cycle. No one knows this better that economist Bob Gregory, who adapting ideas about the so-called "Dutch Disease" - the negative impact resource booms can have on manufacturing sectors largely through a temporary rise in the exchange rate - to Australian conditions in the mid 1970s and which was then designated the "Gregory Thesis".

Gregory would be considered a bit of a pessimist on the impact of resource booms particularly on their effect on employment.

Australian National University professor Bob Gregory, Australia's foremost resource economist for the past 40 years, warns about the fallacy of thinking that the business cycle has gone away, replaced by a so-called commodities supercycle. He argues that some economists make the mistake of thinking the boom will be endless and continue at this rate because they fail to appreciate the supply response from high prices -- more mines.

He also says the demand side is also suspect. China and India will have their ups and downs, he says, and this will affect prices and overall volume demand for Australia's commodities. China is already trying to rein in demand and the effect of this will be seen in perhaps in two to three years' time. "We don't want to make the mistake of thinking that the Australian business cycle will disappear," he cautions.

Fisher is concerned that Australia has become overly optimistic, with many economists thinking there won't be a substantial supply response to sharply higher prices.

...

"We should be careful not to think there would be no supply response," Fisher says. "People have been behaving as if the supply curve is vertical. Supply curves always have some slope in the medium term."

He predicts a very strong response to the return to high commodity prices. "If you believe in the China and India story, which I do, we are going to see some very serious pressure on prices. Whether such high prices can be sustained, I have my doubts. There's a lot of iron ore in the world, and the current high prices are an enormous incentive to bring more of this resource on line," Fisher says.

...

The nature of this current boom is really the result of weak supply rather than strong demand, even though the analytical focus has been mainly on the latter.

Weak supply has followed decades of poor returns in the resources sector, which discouraged companies from investing in greater capacity, as shown by the data compiled in 2007 by Reserve Bank economists John O'Connor and David Orsmond.

Their much overlooked paper, "The Recent Rise in Commodity Prices: A Long Run Perspective", shows how the trend for base metals prices was largely flat between the 1920s and the mid-1960s, until the Vietnam War.

From the 1970s onwards there was a steady though volatile downward decline, until the spectacular reversal last decade. A similar pattern is evident for oil, coal and gold, with occasional peaks induced by the OPEC oil cartel and war rising occasionally above a depressing trend line.

The paper by O'Connor and Orsmond is an important one for those interested in the more technical aspects of the debate and I cite them and their research in my book. Basically the long-run trend is for a decline in prices, but the more recent decline seems to have reversed since 2003. A couple of graphs of the terms of trade - the average price level of exports in relation to the average price level of imports - help to provide some perspective.

Chart 1

Terms of Trade

1972-1986

(2006-07=100)

Source: Treasury

Australia’s terms of trade went into freefall after the short-lived mineral booms of the mid-1970s and early-1980s. After gradually climbing from late 1982, it again plummeted over 1985 and early 1986. The current account deficit (CAD) went from a small surplus in 1973 to a deficit in 1974 from which it continued to worsen until the crisis of 1986. The current account is made up of the balance between exports and imports and the flow of interest and dividend payments to and away from Australia. The CAD became the fundamental policy problem for policy-makers for the rest of Labor’s period of office. The implications seemed clear: Australia was in almost terminal decline and external vulnerability was once again the fundamental issue of public policy. Keating’s banana republic warning was the public manifestation of crisis and is worth quoting at length:

We took the view in the 1970s – it’s the old cargo cult mentality of Australia that she’ll be right. This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through … In the 1970s …we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart … We must let Australians know truthfully, honestly, earnestly, just what sort of international hole Australia is in. It’s the price of our commodities – they are as bad in real terms since the Depression … If this government cannot get the adjustment, get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for … If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic well being, that it doesn’t deal with these fundamental problems … the only thing to do is to slow the growth down to a canter. Once you slow the growth under 3 per cent, unemployment starts to rise … Then you are gone. You are a banana republic.

Chart 2

Terms of Trade

1901-2009

(2006-07=100)

Source: Treasury

Many commentators and policy-makers believe that the concerns of the 1980s and early 2000s are no longer an issue for Australia – that the long-term decline in the terms of trade has been permanently reversed. Former Treasurer, Peter Costello, for example argued in 2007 that “our terms of trade will moderate, but will not be in long term decline, which was the story of the 20th century”. To argue that Australia’s terms of trade will remain at these levels would require a shift away from the variability that is evident from Chart 5. If we consider the longer-term there is some cause for concern.

Warning about Australia’s vulnerability to a return to lower prices for commodities should not be construed as a necessarily negative outlook on Australia’s prospects. Over the medium term, there is much to be confident about given Australia’s efficient mining operations. Economic weight has shifted to Asia and because much of Asia is in a developmental mode it will require considerable resource-intensive development. When starting from a low base growth can be very rapid indeed. Asia’s share of world GDP was only 7 per cent of GDP in 1990 (at market exchange rates), increasing to around 15 per cent by 2008. Growth in East Asia has averaged 7 per cent a year during this period compared to 2 per cent for the developed world. As far as industrial production goes Asia has done even better, especially China. In 1990 China’s share of industrial production was 2 per cent, in 2008 the figure was 13 per cent.

So in summary, the major short-term issue is whether commodity prices will stay high or whether they will revert to the long-term trend decline. Even if Asia continues to expand without major reversals or periods of stagnation, it’s likely that resource prices will decline as their supply increases. The most important growing market for Australian resources – China – is actively seeking to diversify its sources of supply. And it’s also possible that technological change could undermine demand, as happened to Australian’s pre-eminent export until the 1950s – wool. Wool is now Australia’s 26th most important export. Coal is currently our most important export, but it is possible that climate change could force the development of alternatives to the burning of coal for energy.

Military spending in pictures

The following is from David McCandless's informationisbeautiful.net and a blog he contributes to run by The Guardian called Datablog. Some of the graphics that McCandless produces are simply magnificent.

The following graphics of miltary spending are typically stunning and revealing as well.
They show just how dominant the United States is in the military arena, but how (relatively) easily it maintains this spending compared to other militarised countries.

As you may know from earlier posts I think that US 'declinism' is overdone by the popular media, the more sensationalists elements of academia, anti-American commentators of the left, and isolationalist US nationalists of the right.

The government's insulation scheme and fiscal stimulus

If you're looking for a balanced view of the govt's insulation or Building the Education Revolution schemes, The Australian newspaper is not the place to find it. The Australian has been running hard on a campaign against the govt, worried perhaps that the Opposition under Tony Abbott is not doing an effective job.

There is no doubt that there has been some significant rorting and that some builders have made inordinate amounts of money. The BER and the insulation schemes will provide important lessons for govt schemes and contracting, but they do not negate the important role of the stimulus during the worst of the crisis. Although the govt could have done a better job in its management of the contracts, the improvements in school infrastructure will be overwhelmingly beneficial.

A good way to consider the impacts of these schemes is to imagine the normal practice of building and insulation instalment and consider accident rates, fires, rorting etc and then consider these percentages in relation to the significant increases in the rate of building and instalment. Only then will we get an accurate representation of the problems associated with the programs.

If you want a more balanced account of these developments then I think it is worth reading Rodney Tiffen's "A mess? A shambles? A disaster?"

TO EVALUATE the achievements and failings of the scheme, it is important to recognise that home insulation was already a sizable industry. The government’s policy did not introduce new activities; it radically increased the scale of existing practices. So, in assessing the government’s responsibility for developments during 2009 and early 2010, the task is to disentangle which problems arose from an accentuation of existing sub-standard practices and which occurred because of an emphasis on quantity over quality and a drop in standards as new operators flooded into the industry. While some conclusions – for example, that the standard of work fell – are plausible, we can’t know for certain because there are no baseline measures of previous practices and outcomes.

In 2008, 3.18 million Australian dwellings (or 61 per cent) had insulation, and approximately 67,000 homes were insulated each year. The largest number of insulated homes had batts in the ceiling; a minority used foil. On average, between eighty and eighty-five fires per year were attributed to insulation faults, but no breakdown is available to show which of these arose from newly installed insulation and which from longer-standing insulation.
The Rudd government’s scheme was unprecedented in its scope, aiming to insulate two million homes in two and a half years at a cost of $2.45 billion. By the time the program was suspended last month, 1.1 million homes had been insulated with $1.4 billion approved for payment. These installations amount to roughly half the number of homes that had no insulation in 2008. It should also be remembered that the work done was disproportionately in older dwellings, which no doubt added to the difficulties of safe installation.

The benefits of home insulation have not been questioned by any of the program’s critics. The Department of Environment estimated that insulation would cut the normal household’s energy bills by around $200 a year. According to one estimate during the controversy, putting ceiling insulation in 2.2 million homes would save as much energy as taking a million cars off the road; a more conservative estimate said that 1.1 million insulated homes was the equivalent of taking 300,000 cars off the road. Another estimate said that ceiling insulation cuts household energy use by up to 45 per cent, while the Total Environment Centre said it would cut it by 25 per cent in centrally heated homes and 18 per cent in space-heated homes. Whatever the actual figures, the environmental benefits are clearly substantial.

When the program began, home insulation had few special regulations, although it was, of course, subject to normal work and safety provisions and employers’ duty of care. No certification was needed to enter the field, and indeed insulation was frequently installed by householders themselves. The lack of licensing and training in the area allowed sub-standard work to be completed and sub-standard occupational safety procedures to be followed. Although the numbers and proportions of each almost certainly increased as a result of the stimulus, the lack of existing safeguards also meant that an unknown number of instances of both shortcomings probably occurred in the past but had passed beneath the public radar.

Both licensing and training have been dramatically improved as a result of the program. As the increased scale and perhaps the decline in the quality of some work exposed more problems, the department mounted a national training and audit program, largely filling the regulatory vacuum that had permitted the previous abuses and problems. At best there is a grey area here. On the one hand it can be argued that it would be unreasonable for the department to anticipate all of these issues, and it can be argued that it acted fairly quickly once problems became apparent. On the other, should it have anticipated that such an expansion of funding would attract problematic operators and practices, and therefore acted pre-emptively?

“Every new fire and its front page headline will remind voters of the Rudd government’s recklessness and ineptitude,” the Australian’s columnist Janet Albrechtsen has written. Politically, she is surely correct, but that will happen largely because of the media’s innumeracy and lack of historical perspective. Under the program, the number of installations rose from 67,000 a year to 1.1 million; the number of fires rose from around eighty to 120. In other words, as Crikey’s psephological blog Pollytics has demonstrated convincingly, there is no statistical evidence that the existing problem of fires became worse with the program. Rather, because fires from insulation were now newsworthy and previously hadn’t been, this was seen as a new problem, one caused by the new policy, whereas in fact the number of insulation-related fires increased only slightly in absolute terms, and there was a decrease from previous patterns in proportional terms.

I think in coming years, commentators will look back on Australian economic policy during 2007-09 and realise that the govt  and the Reserve Bank did a pretty good job in keeping the Australian economy out of recession.

We can't blame the media for being sensationalist, but we don't have to play their game and believe the hype.

Measuring Economic Weight

The Economist recently ran a story on putting the rise of Asia in perspective it's worth a read and is a useful corrective to many of the arguments that think the future is already here! The Balance of Economic Power: East or Famine The Economist.

There are two main ways to measure the size of economies. We can convert the value of Chinese gross domestic product (GDP), for example, into US dollars and compare it to the GDP of other countries. The advantage of this method is that it provides a neat comparison of a particular country with any other country at any particular time. But the problem with this measure is that it varies with the dollar–renminbi exchange rate and doesn’t accurately reflect the cost of things within the Chinese economy. If the renminbi was revalued this would immediately increase the measured size of the Chinese economy. This is not completely spurious because a higher valued renminbi would enable the Chinese to buy more goods and services on the international market and would increase their ability to invest in other countries. When exchange rates do vary considerably over time, such as the dollar–yen exchange rate since the 1970s, this method may be a problem. For example compare the difference in size of the Australian economy when measured at a time when the Australian dollar was 47.75c against the US dollar in April 2001 to when it reached 98.49c against the US dollar in July 2008. Although for measuring purposes the exchange rate is averaged over a period, variation still poses obvious problems.
Such discrepancies have led to the increased use of an alternative method of measuring the size of economies based on the concept of purchasing power parity (PPP). Statisticians measure purchasing power within individual economies and then makes comparisons on that basis. PPP measures GDP adjusted to reflect different costs of living and production within different economies. Goods and services and production costs are considerably less in China than they are in the United States. We all know that our currency goes further in some countries and less in others. You can live, for example, much more cheaply in Indonesia than you can in Sweden! A popular representation of PPP values is the Economist magazine’s tongue-in-cheek Big Mac Index, which compares the price of Big Mac’s around the world. A Big Mac in Sweden ($4.58) will cost you a lot more than a Big Mac in Indonesia ($1.74) or even the United States itself ($3.45). According to PPP theory, the cost of Big Macs should be the same across countries once local currencies are converted to US dollars. In these February 2009 prices, the Index suggests that the Swedish Kroner is overvalued against the dollar and the Indonesian rupiah is substantially undervalued. Big Macs are not really a good marker of PPP because they are generally considerably more expensive than local-food items in developing countries! There is also now an iPOD Index, which does the same thing, but with a high technology, tradeable item rather than a basic food item. This is significant because products that can be easily traded should, through the process of arbitrage, end up with the same price (allowing for exchange rates).

If we compare what a given amount of dollars will buy in the Chinese economy and compare it to what a given amount of dollars buys in the US economy we can, according to advocates of this approach, get a better idea of the size of an economy. The problem with this method is calculating the different costs of production and living on an ongoing basis. To do a proper analysis of PPP, the World Bank compares a large range of goods and services. It is very difficult to get a comparable basket of goods for diverse countries with substantially different cultures and consumption norms. In December 2007, the International Comparison Program co-ordinated by the World Bank revised down its PPP estimate of China’s economy by 40 per cent making a considerable difference to the measured size of the Chinese economy in 2005!

The best solution to the problem is the messy one of considering both measures together. Table 3.1 below shows that the United States accounted for 21.1 per cent of global GDP on a purchasing-power-parity basis in 2007, down from 23 per cent in 1995 and 24.5 per cent in 1980. China has rapidly caught up, accounting for 10.1 per cent in 2007 (revised down by the Bank by 6 per cent from earlier 2007 estimates!), up from 5.7 per cent in 1995 and 2.2 per cent in 1980. Measuring shares of global GDP by converting a country’s GDP to US dollars at market exchange rates produces very different results. On this basis, as Table 3.2 shows, in 2007 the United States was more than four times larger than China, accounting for nearly 25.3 per cent of global GDP, compared to 6.0 per cent for China. In 1995, according to this measure, the United States was 10 times larger than China. On an exchange basis, Japan’s relative position increased significantly between 1980 and 1995, with the increased value of the yen in the mid-1990s improving Japan’s position. On an exchange basis, Japan’s share of the world economy declined by half between 1995 and 2007. On a PPP basis, Japan’s economy has declined by a much smaller amount. These tables show that US decline has been gradual and that China’s rise has been mainly at the expense of Japan.
In 2006, the developing world accounted for more than 50 per cent of global GDP (measured on a PPP basis), signalling its growing importance. Developing countries grew at a faster rate between 1995 and 2005 than they did during the previous two decades and considerably faster than developed countries. In 2006, developing countries accounted for 43 per cent of world exports, up from 20 per cent in 1970; half of the energy consumption; and 70 per cent of currency reserves. Many see India as a major challenger to China’s mantle as the most important developing country. While China causes considerable anxiety in the developed world about its growing domination of manufacturing, India creates concerns because of its competitiveness in higher paid service and technology jobs. Outsourcing to India will increase in coming years and become even more important as a topic of debate.

But as The Economist reports:

Since 1995 Asia’s real GDP (even including less sprightly Japan) has grown more than twice as fast as that of America or western Europe. Morgan Stanley forecasts that it will grow by an average of 7% this year and next, compared with 3% for America and 1.2% for western Europe.

Yet a closer look at the figures suggests that the shift in economic power from West to East can be exaggerated. Thanks partly to falling currencies, Asia’s total share of world GDP (in nominal terms at market exchange rates) has actually slipped, from 29% in 1995 to 27% last year (see chart 1). In 2009 Asia’s total GDP exceeded America’s but was still slightly smaller than western Europe’s (although it could overtake the latter this year). To put it another way, the output of the rich West is still almost twice as big as that of the East.

As the graphic makes clear, Asia's (especially) China's growth is considerably more significant when it comes to measurements based on PPP. China's currency is kept artificially low and if allowed to rise China would increase its economic weight, but at the same time it would slightly undermine China's export growth potential as Chinese exports became relatively dearer on global markets.

So what about Asian exports? The Economist reports

the region’s 31% share of world exports last year was not much higher than in 1995 (28%) and remains smaller than western Europe’s. Indeed, the shift towards Asia appears to have slowed, not quickened. Its share of world output and exports surged during the 1980s and early 1990s. Although China’s share has grown since then, this has been largely offset by the decline in Japan, whose share of output and exports has halved.

A renewed emphasis on exports by the US could be an outcome of the economic crisis and the Obama administration aspires to doubling US exports in 5 years. (See "Can Obama Really Double Exports in Five Years?".) This doubling figure of course also requires some unpacking. It would be more meaningful if it meant a doubling of exports in comparison to the rise of GDP rather than a simple doubling of the USD figure.

What about the financial sphere?

Asian stockmarkets account for 34% of global market capitalisation, ahead of both America (33%) and Europe (27%). Asian central banks also hold two-thirds of all foreign-exchange reserves. That sounds impressive, but their influence over global financial markets is more modest, because official reserves account for only around 5% of the world’s total stash of financial assets. The bulk of private-sector wealth still lies in the West. The fact that Asian currencies make up only 3% of total foreign-exchange reserves indicates how far Asia still lags in financial matters.

While there is no doubt that on a PPP basis Asia has been expanding enormously, it's important to remember that Asia's international transactions are mainly conducted in USD. Asia (once again especially China) consumes considerably less than Western countries.

What really matters to Western firms is consumer spending in plain dollar terms. Although over three-fifths of the world’s population live in Asia, they only account for just over one-fifth of global private consumption, much less than America’s 30% share. But official figures almost certainly understate consumer spending in emerging Asia, because of the poor statistical coverage of spending on services. Figures from the Economist Intelligence Unit, a sister company of The Economist, suggest that Asia accounts for around one-third of world retail sales. Asia is now the biggest market for many products, accounting for 35% of all car sales last year and 43% of mobile phones. Asia guzzles 35% of the world’s energy, up from 26% in 1995. It has accounted for two-thirds of the increase in world energy demand since 2000.

Many Western firms are more interested in Asia’s capital spending than its consumption, and here Asia is undoubtedly the giant. In 2009, 40% of global investment (at market exchange rates) took place in Asia, as much as in America and Europe combined. In finance, Asian firms launched eight of the ten biggest initial public offerings (IPOs) in 2009 and more than twice as much capital was raised through IPOs in China and Hong Kong last year as in America.

Finally, The Economist, contains a graphic illustrating just how far Asia fell from its historical position of dominance up until 1800.

This graph, however, provides a lesson that The Economist, perhaps did not intend. Despite its continuing dominance of the world economy until the early nineteenth century, from the mid sixteenth century Europe - led by Spain and Portugal, followed by Holland and England - is clearly in the ascendancy. Gross economic weight is clearly not everything.

The Future of American Power?

The future of US power has been a major topic of discussion recently. The global economic crisis, which for once affected the US as much as any other country in the world and the rise of China and the s

It often seems that 'declinists' mistake one possible future for present reality. Other writers correctly acknowledge that US power remains preponderant, but suggest that the US could soon be rapidly overtaken by China or somewhat peculiarly by something called 'Asia', which assumes some sort of Huntingtonian 'civilizational' assault on the Western and US power.

Others seem to be saying that the US shift to deficits will undermine future US power as taxes need to be raised to drawn down the deficit.

This latter view is evident in a piece by Thomas Barlow in which he argues that the innovative capacities of the US are in danger. The 'self-made man' is under threat! He ignores the fact that US innovation has often been the result of a fairly typical mix of state and private initiative. Think the Internet! Indeed as Fred Block controversially argues the US has long had a "hidden developmental state".

Barlow points out that the US is on top when it comes to the knowledge intensive economy. Californian businesses, he points out spend more money on R&D than Germany. "If US states were countries ... 12 of them would be ranked among the top 25 nations globally by total business R&D expenditures."

My gut feeling is that the US is a long way from being seriously challenged by the great Asian powers and its dominant position will once again become clear in the light of (the albeit) slow recovery.

Contrary to Barlow, I think that if the US ever got its state intervention right by developing a comprehensive public health system and extending educational opportunities across the poorer sections of US society, its strength would be fundamentally renewed. In other words, if the US developed a fairer, more egalitarian society it would become an even more productive economy.

The greatest danger for the US and the world is a shift towards a reactionary aggressive isolationism caused by deepening economic problems and misguided interpretations of their causes.