CRF Blog

Have we hit Peak America?

by Bill Hayes

In Have we hit Peak America? for Foreign Policy magazine, Elbridge Colby and Paul Lettow look at the state of American power and offer a path to renewal.

For the first time in 200 years, most growth is occurring in the developing world, and the speed with which that shift — a function of globalization — has occurred is hard to fathom. Whereas in 1990 just 14 percent of cross-border flows of goods, services, and finances originated in emerging economies, today nearly 40 percent do. As recently as 2000, the GDP of China was one-tenth that of the United States; just 14 years later, the two economies are equal (at least in terms of purchasing power parity).

This shift reorders what was, in some sense, a historical anomaly: the transatlantic dominance of the past 150 years. As illustrated by the map below, it wasn’t until the Industrial Revolution took hold in the 19th century that the world’s “economic center of gravity” decisively moved toward Europe and the United States, which have since been the primary engines of growth. Today, however, the economic center of gravity is headed back toward Asia, and it is doing so with unique historical speed.

This trend will persist even though emerging economies are hitting roadblocks to growth, such as pervasive corruption in India and demographic challenges and serious distortions in the banking system in China. For instance, according to the asset-management firm BlackRock and the Organization for Economic Cooperation and Development (OECD), consumption in emerging markets has already eclipsed that in the United States, and spending by the middle classes in Asia-Pacific nations is on track to exceed middle-class spending in North America by a factor of nearly six by 2030.

U.S. wealth is not shrinking in absolute terms — and it continues to benefit from economic globalization — but the United States and its allies are losing might compared with potential rivals. Although Europe and Japan have been responsible for much of the developed world’s lost relative economic power, the U.S. economy has also slowed from its traditional rates of expansion over the past several decades. Worsening productivity growth has played a particularly large role in the U.S. slowdown, dropping to around 0.5 percent annually, which the Financial Times has referred to as a “productivity crisis.” A range of factors are responsible, including a decline in the skill level of the American workforce and a drop in resources allocated to research and development.

Overall, the U.S. economy has become less competitive. The McKinsey Global Institute, for instance, has measured the relative attractiveness of the United States across a range of metrics, such as national spending on research and development and foreign direct investment as a percentage of GDP. It found that U.S. business attractiveness relative to that of competitors fell across 14 of 20 key metrics from 2000 to 2010 — and improved in none. [more]