China or NAFTA: the world's largest market in the 21st century?

ABSTRACT

This paper addresses the economic role of these two countries: Will the Chinese economy, as many suggest, continue its strong economic advance under its system of "undemocratic capitalism" and surpass in size the United States and its economically-integrated partners (currently NAFTA), or will China convulse and stagnate? This paper explores the scenario that the United States will see its destiny at the heart of a Free-Trade Area of the Atlantic with an economy significantly greater than China's and with even a larger population. China will remain the dominant Asian economy, but independently and not part of a regional economic union.

MARKET AND POLITICS

World economies strongly affect international politics. At present, about 210 national economies interact on the world political and economic stages. This interaction raises important questions: Will the United States maintain not only military superiority, but also its economic dominance in the world? Will any country or group of countries challenge the U.S. as the superpower? Will the reconfiguration of the world market in the 21st century mean peace or war? Will it mean the "clash of civilizations," or the "end of history?"

Many books and articles have sprung up, suggesting that China will become the world's largest market (Lin and Robinson, 1994; Henderson, 1999; Foy and Maddison, 1999; Hines, 1997). The same kind of predictions were made back in the 1970s, when Japan's economy was growing 7 percent annually and very soon, according to some writers, would become the number one economy in the world.

However, since 1989 the Japanese economy has stagnated, real estate and stock markets have imploded, and the Japanese government has been unwilling, if not unable, to tend to its wounds. Japan's role in the world has contracted.

In the 1980s, when the Asian Tigers were also growing at 7 percent, a few writers even predicted that sooner or later they would become the largest economy. However, these implausible predictions were not fulfilled. The Asian crisis in 1997 proved that the Asian Tigers had switched to a restricted "diet" as the region passed through a disastrous economic contraction. It has become evident that the Asian Tigers are more economically dependent on the West than vice-versa. Both the "Tigers," collectively, and Japan, individually, are too small to become the world's dominant economy.

The People's Republic of China is the only economy that has the economic potential to possibly challenge the U.S. for economic leadership in the next generation. The question, however, is whether China can actually fulfill that potential. A related issue is whether, in an era of regional economic integration, the United States will become the heart of an even larger economic group than the current North American Free-Trade Area (NAFTA) during this decade. Current trends could well see NAFTA (comprised of the United States, Canada and Mexico) expanding to encompass most of the Americas (the Free-Trade Area of the Americas--FTAA). An even grander, but still very plausible, scenario could see the Americas plus most of Europe (perhaps to be called the Free-Trade Area of the Atlantic--FTAAT), unite into a massive free trade area.

That economic integration, coupled with the economic dynamics resulting from that process, would likely maintain the American economic predominance. This process could integrate as many as fifty to sixty Western-Civilization countries and create the world's largest market by 2020. It would have even more consumers than China and include almost half of the world's gross national product in 2020.

This development could lead to a continuation of the long dominance by Western Civilization but it could also lead to a "clash of civilizations" between east and west. Much will depend upon the country that will possibly be the dominant Asian country in the first third of the 21st Century: China. By 2020, China could be either at its economic peak and a serious challenge to American economic hegemony, or in political transition, characterized by some degree of chaos. But only China could possibly be able to challenge the U.S.--due to its determination, massive population, large economy and military potential. Furthermore, Russia and China together as "Euro-Asia" are capable of starting World War III (Clover, 1999). In December 1999, during a trip to China, a sick Boris Yeltsin reminded the West that "Russia is (still) a nuclear superpower." This admonition was reinforced by Russia's test of a new generation of intercontinental missiles in the same period.

THE WORLD'S LARGEST MARKET

The world's largest market is currently NAFTA (TABLE 1, Column 2), which has 26 percent of the world's GNP (Column 4), followed by the European Union (22 percent), China (11 percent) and Japan (8 percent). The remaining 187 countries, including the Asian Tigers, India and Brazil, have only a 33 percent share of the world market.

Noteworthy is the vast disparity in the annual rates of economic growth (Column 3). China's rate of growth far exceeds that of any other. China's economy (Column 2) is already the second largest in the world, although, its GNP/capita is only one-seventh the size of that of Japan or Germany or most of the other EU economies.

THE CHINA CHALLENGE

From 1949-1979 China practiced a planned economy in which the country became a state mono-corporation where quantity rather than quality or profit became the guiding strategy. This period was punctuated by two calamitous periods: The Great Leap Forward from 1958-62, and the infamous Cultural Revolution from 1966-76. In 1978 Deng Xiao Ping declared major economic reforms under his so-called "Open Door" policy. This meant a gradual reversal of Mao Tse Tung's isolationist, anti-capitalist, autocratic economic ideology of nearly three decades. The new Chinese leader declared that "To get rich is glorious!"

In 1979, the Chinese government passed a law permitting foreigners to enter into joint ventures with Chinese companies. As a consequence of this open Chinese stance towards joint ventures, thousands of non-Chinese firms started operations in China, usually with a state-run company as a partner. In 1992, the concept of the "socialist market" economy was incorporated into the Chinese constitution. This continued the long march towards a market economy by encouraging more autonomy for state-owned enterprises, which were given increased responsibility for planning and control, purchase and supply, price-setting, investment decisions, and financing. Since then, the government intervention has been greatly reduced. The state is now perceived as an investor in the enterprise and manages only the macro-economy rather than both the macro and micro-economies. 10,000s of government companies have been privatized and now almost 50 percent of the Chinese economy is in the private sector.

The foreign direct investment (FDI) strategy was introduced as a necessary engine for China's growth and modernization. In the 1980s, foreign direct investors injected $20 billion into the Chinese economy. In the 1990s, more than $200 billion was invested in joint ventures. Firms with foreign investors are now responsible for over 13 percent of the country's national tax revenues and more than two-fifths of its exports (1)!

From 1981-1990, China's official GNP growth rate averaged about 10.3 percent annually (in some years even reported at 12 percent or higher), up from 4.4 percent in the two decades before reform (2). As shall be shown later, all of these numbers are suspect. They are rather inflated and not fully comparable with western estimates. However, there is no doubt that the Chinese growth has been very impressive--even unprecedented, for such a large country. China's emergence as the world's fastest-growing economy has both raised hopes that East Asia's giant can join the ranks of modernizing nations and that can fuel the fragile equilibrium of global markets and institutions. As noted above, many experts predict that if China's economy continues to grow at even a somewhat slower rate for the foreseeable future, China is well on the way to becoming the world's largest economy within the next 15 to 20 years. Simple extrapolation supports those predictions, however many developments could, and very likely will, upset the significance of such projections.

How soon the Chinese economy becomes number one depends first upon whether, or for how long, it can keep up its extraordinary growth. For example, if one could accept the 10 percent figure, China's GNP in 2010 would exceed of $12 trillion and in 2025 exceed $39 billion (both in 1998 terms). This means that China could be the world's largest market as early as 2010 and very dominant by 2020. But to assume a steady annual growth of 10 percent throughout the next 10 to 25 years is closer to fantasy than to a political and economic reality. However, even assuming a growth rate of only half that rate (5 percent), China's economy will be larger than the current NAFTA's combined economies by the year 2015!

Like earlier assumptions involving Japan, this projection assumes that the rest of the world will be static. It also assumes the domestic Chinese economic and political progressions to be linear. As will be discussed below, neither is likely. The world's economy has seldom been less static. One of the probable changes is very likely to be a much broader integration in the Western Hemisphere, perhaps joining with Europe. As will be discussed later, China is unlikely to share comparable integration with neighboring countries.

Of course, not all observers are as euphoric about the outlook for China. For example, Gerald Segal rejects this argument completely. He argues that China is a second-rank middle power that has mastered the art of diplomatic theater." In fact, he maintains that, economically, China is of little importance, particularly outside Asia. In 1997, it accounted for only three percent of world trade--less than the Netherlands' share! Even total Asian trade is only 11 percent of total world trade. Of U.S. exports, less than two percent go to China--about a third less than to Taiwan. "Only when we finally understand how little China matters," he says, "will we be able to craft a sensible policy toward it" (Segal, 1999).

On the whole, at the beginning of 21st century, China remains a poor, developing country, with very low per capita income (in 1998, only one-eighth that of the United States). Cities, such as Beijing, Shanghai or Shenzhen have grown impressively in the last five years alone, but they are not in the same class as New York, Chicago, Atlanta, Tokyo or London.

The Chinese economy has grown very rapidly as a supplier to the industrialized countries and as a result of loosening the fetters upon its domestic economy. As was seen above, underdeveloped countries have often been able to attain high growth rates: Playing economic "catch-up" with the economically--developed world, by adopting existing products, technology and methodology. However, there are limits to how long this hyper-growth process can continue: Economic, social and political constraints are all likely to interfere in the coming years.

The growth of the Chinese economy in the 21st century depends upon the development of domestic politics as it marches reluctantly towards a market economy. While China is entering a period of hope for entrepreneurs and freedom fighters, it is also experiencing insecurity for the communistic apparatchiks and leaders. Imbalance between economic and political freedoms has never proven to be sustainable over the long run in other countries. It is unlikely to be any more sustainable in China.

It has been estimated that as many as 30 million workers could be fired from the remaining 350,000 state-owned enterprises (SOE), which employ over 70 million workers (Wong, Maher, Jenner, Appel, Herbert, 1999, Henderson, 1999). Also, millions migrate annually from rural to urban areas. These economic and social tensions will severely test the government and domestic stability of the P.R.C. How far and how fast China will progress upon its economic growth will depend upon the future path of China's journey. In the sections that follow, we will be examining four feasible scenarios of political developments:

* Continuation of the current system of "undemocratic capitalism"

* Military expansionism

* Bureaucratic corruption

* Democratic capitalism

Most of the optimistic projections assume the former path. The other three offer very different economic outlooks.

THE FUTURE OF UNDEMOCRATIC CAPITALISM IN CHINA

As the 21st Century begins, China is continuing to experiment with its unique blend of communistic dictatorship and economic freedom. This evolution in the development of communism was the Chinese response to the lesson learned from the plight of the Soviet Bloc. China has been very successful thus far in this experiment. The question is whether the process can continue--and, if it does, whether China can maintain its pace of economic development. As will be shown below, there are alternative scenarios.

The development of undemocratic capitalism has proven to be an unstable marriage in other countries. Whether the undemocratic government is communist or military, economic success tends to lead to the development of a middle class which produces labor unrest and demands for political freedom. In South Korea and Poland in the 1980s, and in Chile in the 1990s, the increase to relatively high-income thresholds (in excess of $5500 per capita) triggered a transformation of political systems. In both Chile and South Korea, undemocratic capitalism under a military dictatorship was changed into a democratic capitalism. In Poland, after 1989, a centrally-planned economy with increasingly-liberalized markets was also transformed into democratic capitalism; The hard-pressed Polish working class, facing unemployment, spontaneously organized, steered by the independent Solidarity Labor Union. Thus, in Europe, Latin America and in Asia, similar levels of economic development to where China is likely to be within the decade have triggered major reform.

In his book Democracy and the Market: Political and Economic Reform in Eastern Europe and Latin America, Adam Przeworski (1991) insists that a crucial prerequisite for a significant move away from dictatorship is a reform group within the regime willing and able to act. In China, diverse groups of reformers emerged from different corners of its political life. Students showed their will in 1989 in Tiananmen Square. Then within the Chinese Communist Party (CCP), a reforming wing was led in the 1980s by Party Secretary Hu Yaobang. Further, in 1997, a former government official, Fang Jue, circulated a report on a "Democratic Faction" when he expressed the frustration of both middle-level and high-level officials, which was caused by the repression of the 1989 Democracy movement and the lack of meaningful political change (Jue 1998). Even Prime Minister Zhu Rongji expressed reformist sympathies in his speech to the national parliament in March 1999 when he stated that "the government should avoid brutal measures when confronted with popular dissatisfaction" (Kwan, 1999).

Another source of unrest could come from the multi-million member meditative movement, Falun Gong, whose members sat in protest in Tiananmen Square in 1999, resulting in mass arrests.

Despite the fact that Chinese political leaders control the process of reforming the economic and political systems, a democratic transformation may still take place. But, it will be more difficult than in Poland, Chile, and Korea. President Jiang Zemin recently sent a clear message that he is against any sort of "Western Democracy" for China and also approved the 1999 crack down against the attempt to create a formal opposition party. However, regardless of the top-down control, the bottom-up social unrest may escape from that control. The latter is, in fact, a democratic revolution against the power apparatus of the Chinese Communist Party.

Because of the progress in the economy, an improved communication and information infrastructure, an increasing awareness by the Chinese people, and the existence of reform groups, the current regime will transform or be transformed--sooner or later. The status quo is untenable. However, the key question is whether the outcome will be a more liberal state or a more repressive one. Other important questions are when and how the inevitable change will occur. To answer these questions, it is necessary to calculate the lead time when the income threshold level will eventually trigger, from the bottom up, a full transformation of the economy and then of the political system.

In 2001, China's GNP per capita (ppp) was at the level of $3,800--not yet at the level of the Korean/Polish/Chilean cases. Even accepting the World Bank's somewhat conservative estimates that real GNP per capita will grow annually by 6.6 percent in the next decade (3), the income that triggers the regime transformation may reach its threshold by 2010. China will be on the brink of and will enter a period of uncertainty. Any of the following four scenarios may occur: * Scenario A: Undemocratic capitalism may continue; * Scenario B: Military ascendancy may occur, leading to

significant political tensions in the region; * Scenario C: Bureaucratic corruption may prevail, as in Russia,

leading to economic chaos, stagnation and political

instability; * Scenario D: Democratic capitalism may begin.

Scenario A--Survival of undemocratic capitalism. Social unrest by the year 2010 may overwhelm the opposition groups and the Chinese Communist Party (CCP) and its government may again crack down against reformers in the Tiananmen-Square style. Leaders of the CCP learned from Russia's experiment (after 1985-91) that "communist democracy" leads to rapid failure and the removal of communistic leaders from power. Undemocratic capitalism could be continued, but with slowed-down political and economic reforms which should not collide with the belief in the "superiority of socialism." The communist leadership realizes that economic reforms cannot proceed without some political reforms but, in order to keep the communists in power, economic or political reforms are likely to be minimal--more cosmetic and rhetorical than real. This is the only scenario that is likely to sustain the continuous growth of the Chinese economy after 2010!

Scenario B--Military ascendancy. An alternative scenario after 2010 involves the re-ascendancy of the People's Liberation Army's (PLA), either via dominance over the CCP or by seizing control of the government. This could precipitate civil war or could produce military expansionism leading to the establishment of an even larger China. The military, although in the background in recent years, remains a major force in China. "While most nations are reducing defense expenditures in the post-Cold War era, China is one of the few doing the opposite" (Lilley and Ford, 1999). China is spending about $50 billion per year on the development of all kinds of weapons, including ballistic missiles, the neutron bomb, and stealth technology.

China's goal is to control its neighbors and diminish the American influence in Asia. The former may lead sooner or later to the invasion of Taiwan. It may also try to expand into other countries which it considers to be in its traditional political sphere of influence, such as Vietnam, Laos, and Cambodia. Such an invasion would be the beginning of the rise of "Grand China," which also might then aggressively look at Singapore and Malaysia. After military expansion, Grand China could enter the stage of strong nationalism, isolation, and belligerence (Robinson, 1994).

An alternative military scenario would be internal, rather than external, with a reversion to traditional Chinese "warlordism" and civil war. Either scenario would likely stop Chinese expansion in international trade and also trigger the negative growth of a militarized economy.

Scenario C--Bureaucratic corruption. The business environment will not yet be fully privatized by 2010. Major sectors of the economy will remain controlled by corrupt bureaucrats: A semi-private managerial class, which does not support democracy and democratic capitalism, controls the country. Undemocratic capitalism continues, but with economic power resting largely with party apparatchiks and government bureaucrats. David Zweig calls such a situation "a rent-seeking society," where he defines "rent" as "the difference between free-market prices and higher prices that exist because regulations limit competitors from entering the market" (Zweig, 1999). Those rents encourage corruption as apparatchiks and bureaucrats charge rent (fees) for providing licenses and permission to conduct business.

Under this scenario, undemocratic capitalism will retreat from reforms and development. Joint-ventures will be less popular, foreign direct investment will decline, and trade will be curtailed by the "closed-door policy" for foreign products and services. This will happen because bureaucracy likes the status quo and boycotts reforms which they fear might threaten political order. Corruption will proliferate, despite the positive economic growth of coastal areas, because inadequate investment in infrastructures will keep the rural areas from sharing in the bounty. One could also imagine under this scenario, as well, that China might fragment domestically organizing itself around warlords, the classic Chinese pattern that existed during the early twentieth century. It will lead to political instability, regional rivalry, and perhaps a civil war (Gladstone, 1995.). As a result, China would likely enter a period of negative growth, similar to that of Russia after 1991.

Scenario D--Democratic capitalism. As mentioned above, the imbalance between economic and political freedoms is not likely to be sustainable over the long run. Hence, revolutionary change may be triggered by a social revolution or a new charismatic leader such as Mikhail Gorbachev or Boris Yeltsin, who could lead a revolution. Another incentive to the conversion to democratic capitalism could be caused by the capitalists from Hong Kong, the new business teachers of the mainlanders who are accustomed to an entrepreneurial strategy as well as political freedoms in developing businesses. Such a step would mean the departure from Deng's political status quo strategy and the entry to wide-ranging, democratic, political reforms--along with the risk of instability (Dickson, 1997).

Sooner or later the mobilized elite and the middle-class bourgeoisie will try to remove the communists from power. However, due to 50 years of communistic dictatorship, the process of change from undemocratic to democratic capitalism will be arduous. It will require the transformation of institutions and behavioral patterns of workers and managers, including the shift in educational programs, which up until now have been based on communistic and nationalistic ideology. This transformation will probably go along the Russian path rather than the Polish one, since the communistic brainwashing in China was even stronger than in Poland. Poland was the freest state of the Soviet Bloc, with frequent social unrest (1945-47, 1956, 1970, 1975, 1980, 1981, and 1989) coupled with the strong influence of the Roman Catholic Church upon the citizens.

Under this scenario, although the evolution toward economic freedoms would continue along with the political revolution, change will be disruptive. The economy will likely suffer.

The four scenarios yield very diverse scenarios after 2010. Of those four, only Scenario A, (the continuation of undemocratic capitalism), is likely to support a strongly-growing economy through the years 2010-2020. Even under that scenario, we estimate this growth to be about half that of the previous years from 1998-2010, a level of perhaps 3.5 percent per year or less (FIGURE 1).

[FIGURE 1 OMITTED]

THE WORLD'S LARGEST MARKET IN 2010

China has often reported economic growth rates of 8 percent and even 10 percent and higher. However, even for China, this is unrealistic: Only the way in which the Chinese government measures GNP makes this possible. The Chinese accounting system is based upon the old Soviet method, which relies upon total-output reporting rather than upon the added value, as is done in market economies. The Soviet method is unsound and cannot provide data for comparison with the performance of the capitalistic economies.

Independent estimates, such as those of the World Bank and OECD, are much more realistic. They assume that the Chinese economy will grow annually about 7.6 percent in 1998-2010. (4) However, even this may be a very optimistic assumption since signs of disturbances in China's economy have already surfaced. The Asian financial crisis of 1997-98 was a factor. So also, has been the past 2000 world economic slowdown. But, domestic troubles are also appearing. For example, joint ventures, the engine of the economy, seem to be losing their appeal in China. The government severely restricts foreign ventures, keeping them out of some of the most attractive markets (e.g.: financial services, telecommunications) and often requiring them to export actively before they can sell to the Chinese. The late 1999 agreement between the U.S. and China to get U.S. support for China's admission to the World Trade Organization and China's entrance to the WTO should loosen some of those strictures, but severe restrictions still exist in many key areas of the economy.

Many joint ventures sustained major losses because the western partners were unfamiliar with China's weak infrastructure, corrupt business practices, government obstruction and unique form of networking. It has been estimated that three-fourths of all joint ventures in China lose money! This is especially true of foreign investments which hoped to reach China's 1.2 billion people. Some foreign investors, disillusioned, have withdrawn. When its joint venture with state-owned Guangzhou Automobile Manufacturing turned sour in early 1997, Peugeot decided to withdraw after several years of losses (Wong, Maher, Jenner, Appel, Herbert, 1999).

TABLE 2 illustrates that the projected ranking of the world's largest market will remain unchanged. NAFTA will remain the world's largest market followed by the E.U. The Chinese economy will grow more than 100 percent.

It will have sharply increased its lead over Japan as the world's largest economy (two and a half times as large) and will approaching the size of the European Union. Moreover, in respect to market share, only China will increase its world share--from 11 percent in 1988 to 17 percent in 2010.

THE WORLD'S LARGEST MARKET IN 2020?

The momentum upon which the projections for 2010 are based is well developed. Of course, disruptions may well occur. However, even a major regional disruption, such as the Asian financial crisis of 1997-99, has had only a moderate impact upon China. There is an excellent chance that the economic projections through 2010 will occur. What happens after 2010 is much more difficult to foresee. An economic forecast of the world market's dynamics in 2010-2020 is illustrated in TABLE 3.

The prediction for the world's largest market in 2020 is based upon the following assumptions:

* NAFTA will likely expand its reach to most of Latin America after 2010, if not sooner. Signs of this can be perceived even today: Mexico already has a free-trade agreement with Chile and the United States has an agreement with El Salvador. Unfortunately, there is opposition to any NAFTA expansion in the isolationist wing of the Republican Party. However, if the United States persists in excluding the rest of Latin America from the benefits of participation in regional trade blocs, the region will turn elsewhere in its own self interest.

Mexico has already signed a free-trade agreement with the E.U. And MERCOSUR, the free-trade area of the "southern cone" of South America, has accepted a European Union invitation to explore a free-trade area. Despite the opposition in Congress, the U.S. has signed a protocol and is giving at least verbal support to the creation of a Free-Trade Area of the Americas (FTAA). The FTAA would clearly be dominated by the massive U.S. economy, with its moderate rate of economic growth. Nevertheless, a growth rate of 4 percent per year for the entire group would be plausible and conservative:

(1) Experience has shown that the opening up of regulated markets leads to accelerated economic growth. Integration would likely stimulate much more rapid economic growth among the Latin members, such as has already been seen in Chile and Mexico in recent years.

(2) Most of Latin America would be rebounding from very slow recent growth.

(3) The principal reason why countries, such as Japan, Korea, China and Chile have been able to grow at such high rates is that they are playing catch-up--rapidly absorbing the technology and techniques of the industrialized countries.

(4) There is likely to continue to be very significant inflows of FDI, such as has been seen in telecommunications. Of course this projection assumes that the U.S economy returns to a dynamic period of growth after the post 2000 world recession. Under such stimuli, a growth rate of 4 perecent is very feasible.

* The European Union will also very likely embrace ten to fifteen more countries from Southern and Eastern Europe. In addition to Poland, Hungary and the Czech Republic, Slovenia, Croatia, Serbia, Bosnia and Herzegovina, Macedonia, Bulgaria, Romania, Estonia, Latvia, Lithuania, the Slovak Republic, Malta, Cyprus and perhaps Turkey, as well as Norway and Switzerland, are possible members. However, the expansion of the E.U. is likely to be more awkward and less economically dynamic than in Latin America. The countries are older, wealthier and, very significantly, most are weighed down by the legacy of communism. The process of integrating them into the western-style democratic capitalist societies will encounter problems, similar to the problems of integrating East Germany with West Germany. Therefore, an economic growth rate of 2 percent annually may be all the region can realistically expect.

* Perhaps Japan's economy will enter a phase of very modest recovery. However, even an optimistic projection, sees Japan growing at no more than 1.5 percentage annually after 2010. As was seen above, some very responsible Japanese estimates place the growth much lower than that. Even the Japanese government's International Trade and Industry (MITI) estimates the maximum potential economic growth through 2010 to be no more than 1.8 percent and only 0.8 percent thereafter.

* The most optimistic economic outlook for China would be Scenario A: The only scenario of the four that is likely to support solid, even if not spectacular, economic growth. However, it is very probable that some aspects of the other three scenarios will also occur. China's economy is not likely to grow at the rate of more than 3.5 percent annually, even under the most favorable scenario in the 2010-2020 decade.

* The rest of the world will grow faster than in the first decade of the new century. Due to the expansions of NAFTA and the E.U., as many as 40-50 countries will join either FTAA or the E.U. The remaining 140-150 countries will be strongly stimulated by the four larger markets. There will also be benefits as more and more of these countries open their economies to world markets and capitalism. Therefore, economic growth of close to 4 percent per year is reasonable. And there are some potentially very strong countries in that group in addition to the "tigers and dragons," India, South Africa, Australia and the oil producers. All have favorable potential. India might very well compete with China as the most dynamic of all of the major developing countries. Also, the possible success of other integrated regional markets, such as ASEAN, or any group involving India, should be considered.

In the 2010-2020 period, the anticipated dynamics of world markets suggest that FTAA's share should increase from NAFTA's 23 percent in 2010 to 32 percent in 2020. FTAA would be the largest market on the planet. Despite the slowdown of the Chinese economy and the enlargement of the EU, China will close the gap between the two. The Japanese economy will continue to lose market share. The rest of the world, despite the solid growth, will also yield market share due to the loss about 25 countries to either FTAA or the expanded E.U.

The projection of China's advance into the second position depends upon our assumption that Scenario A, a continuation of undemocratic capitalism, will prevail after 2010. If scenarios B, C or D should occur, then China's economy will likely decline, certainly relatively and possibly absolutely, as well.

BEYOND 2020: THE TRIUMPH OF GLOBALISM

It has been said that "economics controls politics." The successful integration of the rapidly-growing American market and simultaneous slow growth of the European market may lead towards the further integration of the two components of Western Civilization. As a result, the Americas may integrate with Europe into the FTA of the North Atlantic (FTAAT), with at least fifty Western-Civilization countries forming the world's largest market.

Several factors will propel Europeans in that direction: Both areas already trade much more with each other than with Asia. Furthermore, Great Britain trades twice as much with NAFTA as it does with its E.U. partner and would prefer to have its own currency and political identity as a member of FTAAT rather than as a member of a political union (Black, 1999). Also, Italy and Central Europe have strong ethnic ties with the United States as a result of massive migration from Europe to the U.S. These are only some of the influences that may lead to the emergence of FTAAT.

FTAAT could have half of the world's market and 1.5 billion consumers--more than in China. TABLE 4 illustrates this new division of the world market. Assuming a continuation of Scenario A for China, the most optimistic scenario, by 2020 China will approach a GNP level of $10,000 per capita. It will be another of China's "Great Leaps": Within 22 years its citizen's GNP/capita will have almost tripled. However by 2020, even assuming Scenario A, China may be at its economic peak.

THE MYTHS AND THE REALITIES OF THE WORLD MARKET (5)

There is no question that NAFTA will be the world's largest market in 2010. And, FTAA, if it develops as suggested here, will have the same position in 2020. If a free-trade area of the Atlantic evolved, it would increase this trend even further. Indeed, beyond 2020, FTAAT will even have the most consumers.

China will not be the largest economy, as many predicted at the end of 20th century. It is very possible that after 2020, or even earlier, China will enter a period of chaos, either pursuing military expansion or transforming to democratic capitalism.

Japan will remain among the richest countries in the world, but its economy will grow slowly while its population not only ages but shrinks.

The globalization strategy will be better accepted in 2010-2020 and beyond than it is today since it works very well for the poor economies. Emotional attacks upon the World Trade Organization, the International Monetary Fund and the World Bank cannot obscure the fact that freer trade raises standards of living. And, it is the poorest countries that have the most to gain from freer trade! The strong economies have no choice but to seek more markets for their high-performing economic engines. The wealthier countries will continue to grow, but the developing countries will have the opportunity to grow much faster as they adapt the economic model of the industrialized world. Not only China, but Japan, Turkey, Chile, the Asian tigers and others have shown how poor countries can develop at rates far beyond what the traditional industrial countries were ever able to accomplish. It is a long-term positive outlook which offers hope to the world's masses.

The world market in 2020 will not be saturated. The 162 countries comprising the "rest of the world" will be markets for FTAA and FTAAT, China, and Japan. The economic prospects for the world look good. In the next 20 years, the world economy will grow 100 percent and GNP/capita will also grow rapidly--especially in the developing countries.

However, there are potential "flies in the ointment." These predictions assume a world without major wars (either between countries or ideologies) or economic disasters. However, the strong economic performance, coupled with continued increase of the world population (an increase of 1.7 billion--almost 30 percent!), will cause continued deterioration of the environment. And the development of the global economy will pass through crises such as was experienced in east Asia in the late 1990s, or even worse.

The proliferation of internet access will open intriguing scenarios. On the one hand, windows of opportunity will be offered for developing markets (e.g., India and Brazil already have booming software-development industries). Also, ready access to the communication and information opportunities provided by the Internet may help stimulate education, improve health, and encourage entrepreneurs--thereby improving living standards and stimulating the economies. On the other hand, the dissemination of information, together with the ready access to free worldwide communication can abet terrorist groups such as has been seen with al Qaeda. Also, as widespread cyber attacks have showed, the Internet is open to abuse--from anywhere in the world.

CONCLUSION

The coming generation will be a period of great change--political as well as economic. The evolution toward multi-country economic integration will continue--especially in the Atlantic region. Today's economic powers will continue to dominate in the coming years. China may well become the world's largest individual economy. However, the United States, which is very likely to integrate with larger groups of countries into a massive free-trade area, will continue to be the dominant world economic force.

As China's wealth growth, it will become a more diverse economy. It will eventually become the massive consumer market of which western marketers have long dreamed. Its entry into the World Trade Organization and advancement up the economic-development scale will greatly increase its role in international trade and investment. As the development progresses, China will also become an important competitor in world markets to NAFTA, Europe, and Japan. Now China is more complementary to these markets than competitive. Its success is now primarily that of supplier. However, it is already learning rapidly and advancing technologically. More and more it is copying modern products and methods. In coming years, as Japan did so successfully before it, China will begin innovating. Then, our relationship will be competitive, rather than complementary.

China will evolve into an industrial power. Its economic strength will give it the potential for much greater political influence in the world. The extent to which these developments occur, however, will depend upon which of the four scenarios dominates in the coming years. In any event, China will continue to grow as an economic force. In coming years, it will likely develop very strong heavy industries and strong automotive and electronic industries. Given its size, its impact might be much greater than even was Japan's, even in its heyday. TABLE 1 The Largest Markets Of The World (1998; ppp--purchasing power parity *)

(1) (2) (3) (4) MARKETS POPULATION GNP GNP ANNUAL MARKET

IN MILLIONS MEASURED AT GROWTH RATE SHARE

(1998) PPP/COUNTRY (1990-98) (1998)

($ BILLIONS;

1998) NAFTA(USA, 397 $9,500 2.5% 26% Canada, Mexico) European Union ** 434 $8,000 1.6% 22% China 1,239 $4,000 11.1% 11% Japan 126 $2,900 1.3% 8% Rest of World 3,701 $12,100 3.3% 33% (187 countries) World 5,897 $36,500 2.4% 100% (210 countries) Source of generic data: Entering The 21st Century, World Development Report 1999/2000: Washington DC, 1999, p.230-23; 1997 World Development Indicators, Washington DC, The World Bank. * Purchasing-power parity (ppp): domestic purchasing power of all countries or groups expressed in the equivalent purchasing value in U.S. dollars ** including Poland, Hungary & the Czech Republic. Since these three countries appear to be near to membership in the EU, we are including theme here. TABLE 2 The World's Largest Market in 2010 (1998 US$; purchasing power parity)

(1) (2) (3)

POPULA- GNP GNP MARKETS TION MEASURED AT ANNUAL

(MILLIONS; PPP/COUN-TRY GROWTH

(2010) IN $ BILLIONS; (1998-2010; %)

(1998) VS.1990-1998) NAFTA 444 $9,000 3.0%

(2.5%) European 519 $8,000 2.5% Union (X) (1.6%) China 6.3% (Scenario A) 1,335 $4,000 (11.1%) Japan 1%

(1.1%) Rest of World 3.7% (187 countries) 4,265 $12,100 (3.3%) World 3.3% (210 countries) 6,688 $36,500 (2.4%)

(4) (5)

GNP MARKET MARKETS MEASURED AT SHARE

PPP/COUNTRY (2010; %)

IN $ BILLIONS (VS. 1998)

(2010) NAFTA $12,800 23%

(26%) European $10,700 19% Union (X) (22%) China $8,300 17% (Scenario A) (11%) Japan $3,300 6%

(8%) Rest of World $18,700 35% (187 countries) (33%) World $53,800 100% (210 countries) Source: columns 1, 2, 3 adapted from: Global Economic Prospects And The Developing Countries, Washington, DC: The World Bank, 1997, p.92., Entering The 21st Century, World Development Report 1999/2000, Washington, DC: The World Bank, 1999, p.250., other computations by the authors. In 1998 dollars. (X) The current fifteen EU member plus Poland, Hungary, and the Czech Republic. TABLE 3 The World's Largest Market in 2020 (purchasing power parity; 1998 U.S.$) MARKETS (1) (2) (3) (4) (5)

POPULA- GNP GNP GNP MARKET

TION IN MEASURED ANNUAL MEASURED SHARE

MILLIONS AT PPP/ GROWTH AT (2020

(2020) COUNTRY (2010-25) PPP/COUNT- VS.

IN $ RY ($ 2010)

BILLIONS BILLIONS;

(2010) (2020) FTAA 1,004 $16,500 4.0% $24,400 32%

--NAFTA $12,800 (23%)

--15 others $3,700 Europe 519 $11,300 2.0% $13,800 18%

--EU 18 $10,700 (19%)

--10 others $600 China 1,413 $8,300 3.5% $11,700 16% (Scenario A) (17%) Japan 124 $3,300 1.4% $3,800 5%

(6%) Rest of World 4,543 $14,300 3.9% $21,000 29% (162 countries) (35%) World 7,600 $53,800 3.3% $74,700 100% (210 countries) Sources: the population: The Wall Street Journal Almanac (1998, pp. 501-503). Column 2: Table 2. TABLE 4 The World Market After The Integration of The Western Economies--2020+ (1998 U.S.$)

(1) (2) (3) (4)

MARKET POPULATION GNP MEASURED MARKET GNP

MILLIONS AT PPP/ SHARE MEASURED AT

(2020) COUNTRY In % PPP/CAPITA

BILLIONS (2020+) (2020+)

(2020) FTAAT 1,523 $38,200 51% $25,000 (FTAA + Europe) China 1,413 $11,700 16% $8,200 Japan 124 $3,800 5% $30,600 Rest of World 4,543 $21,000 29% $4,600 Total 7,600 $74,700 100% $9,800 Source: The authors' calculations.

(1) Finance and Economics: China's Private Surprise," Economist, vol.351, no. 8124, June 1999, pp.69-70.

(2) Asian Development Outlook, 1996 and 1997, Asian Development Bank, Oxford University Press, 1997, p.242.

(3) World Bank op. cit., p.95

(4) World Bank, op. cit.

(5) (Henderson 1999).

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