A recently issued AP story hit the wires stating that China eclipsed Japan as the world’s second biggest economy in the 2nd quarter of 2010.  Japan has endured two decades of stagnant economic growth, while China has been expanding at a blistering pace.

Japan’s rise and subsequent decline has been a fairly short-term phenomenon, as they became the world’s second largest economy in the 1970s.  The “Japan, Inc.” model of state-directed insider capitalism was viewed as a major threat to Western-style capitalism in the late 1980s.  The view that a small group of government planners could outthink the free markets gained favor but was ultimately proven wrong.

China was the world’s largest economy throughout the 18th and 19th centuries, before the United States took over the top spot at the start of the 20th century.  After dropping in the world rankings China has burst back on the scene in the last three decades, and continues to grow at a rate that far exceeds the growth rate of the US economy.  Many are predicting that the total output of China could exceed the United States in the next 10 to 20 years.

China will certainly face difficulty in the future.  The country’s largely state-run banks have been criticized for aggressive lending practices, and their currency policy has caused concern among the European Union and the United States.  Human rights abuses and a wide disparity between the rich and poor could prove to be China’s undoing.  Maintaining rapid growth is often harder than creating it, as Japan found out in the 1990s.  But there is no disputing that China and other developing economies are fueling worldwide growth while the developed countries recover from the global recession.