The Soviets matched the US only by spending up to 20% of GDP on the military during the Cold War. This article argues that, in stark contrast to this example, China has the potential to match the US in certain military spheres with similar burden on its economy. Using exchange rates comparisons significantly understates the Chinese military spending. A much more realistic assessment is obtained using PPP terms. If both countries spent the same fraction of their GDP on the military, the relative size of China’s military machine would be more than 90% of the US one.
China’s rapid economic growth has led to a spate of comparisons between the sizes of the economies of China and the US. Authors wishing to make China look big use exchange rates adjusted for local prices.
Frankel (2014) argues that GDP converted at market exchange rates is a better measure of economic power since international spending power but not local spending power is what matters. Specifically, comparisons based on market exchange rate are appropriate for measuring the importance of a country in the world economy, such as the national share of world demand, the impact on financial markets, and international voting rights.
As Frankel notes, since the market exchange rate is approximately half the value of the purchasing power parity (PPP) exchange rate, the US remains the world’s largest economic power by a substantial margin.
But another aspect of China’s rise is its rising military strength. Its military budget has grown at double digit rates for 20 years. The wider political economy implications of China’s rise also depend on this military muscle (Mearsheimer 2006, Friedberg 2011, Kaplan 2014). As evidenced by Obama’s ‘pivot to Asia’, this is already changing the balance of power in Asia, and the US foreign policy response (Clinton 2011, The Economist 2012).
But how should we compare this spending in RMB to the US military budget? Will market exchange rates or PPP exchange rates give a more accurate comparison of relative real military spending in each country?
About the Author
Peter E. Robertson is a Professor of Economics at the University of Western Australia. He has previously held positions at The Productivity Commission in Australia and The University of New South Wales. Peter’s research focusses on the interactions between economic growth, economic development and international trade. Particular interests include trade and human capital accumulation, migration and structural change, and the economies of China, India and East and South East Asia.
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