FLORENCE – The news that China has overtaken Japan as the world’s second largest economy did not come as a surprise. This is the major geo-political outcome of the Great Recession of the early twenty-first century – one that carries both economic hope and political fear.
First, the good news: the economic side of the case.China’s response of to the world economic crisis is the central reason why the financial turbulence that emanated from the US sub-prime debacle did not completely destroy the world economy and lead to a repeat of the 1930’s Great Depression.
In a famous analysis of the Great Depression, the economic historian Charles Kindleberger argued that it arose from a failure of world leadership. Great Britain had been the hegemonic power of the nineteenth century, but its creditor status had been severely eroded by the cost of fighting World War I.
The United States had emerged from the war as the world’s largest creditor, but it had a double vulnerability. Its financial system was unstable and prone to panics, and its political system was immature and prone to populism and nativism.