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

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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

Quote:

“A salient recent example is that we are still living in the shadow of the financial crisis in the United States and elsewhere. The depth and severity of the crisis was not predicted by academic economists on the sidelines or in their assessments of the riskiness of classes of assets, nor by raters (Silver 2012), nor by policymakers. * * * This is not because there was ignorance of a housing bubble; some mainstream economists (particularly [2013 Nobel laureate] Robert Shiller among others) pointed out the magnitude of the deviation of housing prices from their long-run trends early (at least by 2005) and often. But what was missed was how this would impact the financial sector and the economy as a whole."  page 44

"super-rapid growth is due in part to a large residual or unexplained component, which we rarely admit as we overexplain the current reality. That is, we concoct reasons ex-post to make it seem as if we understand what happened when we really did not. While perhaps too much can be made of Taleb’s (2007) ‘Black Swan’ arguments that we overpredict reality,conventionally, too little is made of them. Taleb’s obvious and poignant example was that, while Lebanon remained an oasis of multireligious peaceful coexistence and institutional success (believed to be ‘the Switzerland of the Middle East’) there were many powerful theories to suggest that Lebanon’s success was overdetermined by observable factors. And then, after Lebanon was engulfed by the general regional instability [The Lebanese Civil War: 1975–1990], it quickly became equally obvious that Lebanon was doomed to instability."  page 45

"Dramatic changes in perceptions of the Japanese economic system provide another example. During the late 1980s, it was widely believed that Japanese-style industrial policy, Japanese emphasis on corporate linkages through keiretsu 系列, and high levels of investment supported by financial repression [with extremely low interest rates for bank depositors] were keys to rapid growth. A decade later, the conventional wisdom held nearly the opposite views."  Ibid

"At an even broader level, it was widely believed in the early 1960s that the Soviet Union would quite likely outstrip the United States economically based on an extrapolation of its recent growth performance. Justifications were even developed for the apparently rapid growth of central Europe as late as 1979, as illustrated by the famous World Bank Report of that year on the Romanian economic miracle."  Ibid (this statement follows another: "Paul Samuelson’s textbook predicted in 1961 that there was a substantial chance that the USSR would overtake the United States economically by the 1980s."  page 5)

"We believe that in the United States there are no known examples since 1950 when the consensus forecast called for recession one year out, even though recessions have occurred on average every five or six years since then and even though they appear to have a permanent rather than a temporary impact on output."  pages 45-46

"All that said, we suspect that the reasons slowdowns will come in China and India are similar but will manifest themselves differently given the very different politics. That is, in neither country does investor confidence rely on rule of law. In both countries, there are plausible scenarios which may disrupt the current political settlement that provides a climate for ordered deals (Hallward-Driemeier and Pritchett 2011) ['”closed ordered deals” (Hallward-Dreimeier and Pritchett 2011) that areprovided for the favored firms' page 48]. This disruption could easily create processes with nonlinear sudden stops."  page 46

“As North, Wallis, and Weingast (2009) show, the reason for the low growth on average of developing versus developed countries is not the lack of rapid growth—it is the lack of the growth persistence and the very low growth rates during their periods of negative growth [‘disastrous downturns’ in the next sentence]. As we saw with Denmark, the rich industrial countries are rich because they grew at modest rates for very long periods, with little variation and few disastrous downturns—eg,84 percent of years in positive growth, and negative growth only falling to –2.33 percent per year. By contrast, current poor countries have failed to converge [with rich countries in GDP] because they grow much faster when they are growing (eg, 5.39 percent per year for those in the 2,000 to 5,000 range ['per capita income in 2000 (PPP)']) then a third of their time have sizeable negative growth (averaging –4.75 percent for the same grouping).”  pages 46-47

"Table 10: [heading] Developing countries spend more time in negative growth states than the advanced industrial countries”  page 47


Note: The next point of the paper is: Economic forecasting is hard to do, even in developed nations ("First, conditional forecasting of this type is only as good as the forecasts of the conditioning variables" page 43).