Handicapping China’s--and India’s--Economic Futures (I)

choi

China’s future growth | Even Dragons Tire; A new study asks how long the Chinese economy can defy the odds. Economist, Oct 25, 2014
www.economist.com/news/finance-a ... s-even-dragons-tire

Quote:

“Forecasters often extrapolate from recent growth rates, the authors note. The IMF, for instance, projects that Chinese growth will slow almost imperceptibly over the next five years, from about 7.4% this year to 6.3% by the end of the decade. Yet Messrs Pritchett and Summers point out that if it is possible to infer anything from past patterns of growth around the world, it is that economies suffer from ‘regression to the mean’: growth rates in countries that have been growing fast tend to drop, often sharply, toward the long-run global average (of about 2% growth per year in real GDP per person).

“China bulls may ask what it is that will hobble China’s growth, but the authors reckon the question should be reversed: the onus is on the bulls to explain why China should continue to defy history. * * * A slowdown is not a sign of failure, they say; rather, persistent rapid growth suggests unusually good fortune or policy.

“Richer countries are almost uniformly much more democratic than China. * * * For China to maintain its current rate of growth, in other words, it would have to beat long odds on multiple bets.

Note: tire (vi): "to become weary"
www.merriam-webster.com/dictionary/tire

choi

The Economist article is based on

Lant Pritchett and Larry Summers, Asiaphoria Meets Regression to the Mean. National Bureau of Economic Research, October 2014 (NBER Working Paper No 20573)
www.nber.org/papers/w20573
(abstract by authors: “Indeed, regression to the mean is the empirically most salient feature of economic growth. It is far more robust in the data than, say, the much-discussed middle-income trap. * * * We suggest that salient characteristics of China—high levels of state control and corruption along with high measures of authoritarian rule—make a discontinuous decline in growth even more likely than general experience would suggest”)

Quote:

"given the regression to the mean present in the cross-national data, where historically the distribution of growth has been an average of 2 percent with a standard deviation of 2 percent” page 5

“Many of the great economic forecasting errors of the past half century came from excessive extrapolation of performance in the recent past and treating a country’s growth rate as a permanent characteristic rather than a transient condition. * * * Or in the opposite direction [performance better than expected], consider the pervasive pessimism of even a decade ago regarding Africa. Since then, African countries emerged as a majority of the world’s most rapidly growing nations.”  Ibid

"in addressing the current question of whether Asia—and necessarily China and India as part of that—will be an engine of global growth over the future (not the short run of one to three years but the longer run of
five to twenty years) our guess is that growth will slow, substantially, in those countries. Why will growth slow? Mainly, because that is what rapid growth does. Our confidence in the prediction that growth will slow is much larger than our confidence in being able to specify why or how or when exactly it will slow. But this is like all other regression to the mean phenomena. If a hitter has a hot streak with a batting average up 50 points over the past 20 at bats, then we would forecast a return to the average batting average over the next 20 at bats (perhaps not exactly to the mean, but substantial regression). If pressed to say why the batting average would be lower one could speculate about why it currently is so high and predict those factors will diminish or predict future events will causally explain the lowering, but mainly, that is just what happens.”  page 19

"One argument against the predictability of long-run growth is that it has in fact been possible to predict the per capita level of GDP far ahead. Suppose all you knew was that Denmark’s GDPPC [GDP per capital] measured in 1990 Geary-Khanis dollars was in 1910 GK$3,891 and that its per capita annual rate of growth during the pre-World War I period of 1890-1916 was 1.90 percent and someone asked you to forecast GDPPC in Denmark almost 100 years ahead to 2010 using only pre-World War I information. While this might seem pointless, you could venture a guess that it was the simple extrapolation of exponential growth at GK$23,212.  Turns out, you would be right, exactly right. Actual GDPPC was GK$23,513. The 94-year-ahead forecast of GDPPC was off by about $300—less than 1 percent. The long-run stability of growth in OECD countries is well-known9 to all economists, so well-known that it may cause misleading habits of thought. The leading countries have very stable growth rates (averaged over long periods) for a very long time.10  However, the apparently reliable prediction of the future is an artifact of growing near the mean growth rate so that extrapolations into the future and regression to the mean give similar answers. But in extrapolating growth rates, regression to the mean almost always wins."  pages 21-22 (footnotes 9 and 10 are reproduced in Note (c) below)

"3.2. Does economy or country size matter for persistence? * * * This empirical question is difficult to address"  page 27

"3.3. Asymmetry of persistence: Do booms last while busts revert? * * * [generally speaking for all economies, not just China or India] On average for the period 1980–2011 the persistence coefficient was 0.442 for growth above the mean and 0.065 when country growth was below the mean. This suggests that busts were even less persistent than booms”  page 28

Note:
(a) What is Asiaphoria?  The authors coin the term, which does not appear in any dictionary.

This is what the paper says at 3-4: "In purchasing power parity data (PPP) * * * the three largest economies in the world in 2011 are the United States, China, and India. * * * an Asiaphoria, the view that the global economy will increasingly be shaped and lifted by the trajectory of the Giants [China and India]."
(i) Except this sentence, the GDP in this working paper is that according to exchange rate, not adjusted by PPP. See page 13, n 7.
(ii) -phoria (noun combining form): “bearing : state : tendency <euphoria>”
www.merriam-webster.com/medical/-phoria
(iii) phoro-, phor-, -phora, -phorous, -phoresis, -phore, -phori, -phoria:
"Greek > Latin: bearer, to bear, carrying; producing, transmission; directing, turning; originally to carry or to bear children"
wordinfo.info/unit/1645/page:7


(b) Footnotes "9  A figure showing the long-run stability of growth for the United States has been the cover of Charles Jones’s textbook on economic growth.

"10  Of course, as also known at least since DeLong’s critique of Baumol’s assertions of convergence, the argument is somewhat circular that what it means to be a leading country [an OECD country] is that it maintained a high growth rate. Argentina’s GDPPC in 1890 was about the same as Austria, France, or Germany and much higher than Italy, Norway, Sweden, or Spain.

(i) Charles I Jones, Macroeconomics. 1st ed. Norton, 2008.
www.amazon.com/Macroeconomics-Charles-I-Jones/dp/0393926389
(ii) Charles I Jones, Macroeconomics. 2nd ed. Norton, 2011.
www.amazon.com/By-Charles-I-Jones-Macroeconomics/dp/B004WGK1MU
(iii) Charles I Jones is a professor of economics in Stanford University.

(d) My discussion of Pritchett-Summers paper to be continued.

* The Welsh surname Pritchett is Anglicized form of Welsh ap Rhisiart ‘son of Richard.’