Harvard Study: 'Asiaphoria' Foretells Trouble

Tuesday, 19 Nov 2013 05:44 PM

By John Morgan

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Sudden slowdowns in the buoyant economies of China and India appear inevitable, and could pose a major risk to the global economy, according to a research paper by two economists: Larry Summers, the former U.S. Treasury Secretary, and Lant Pritchett, a Harvard professor.

It’s all about recognizing that the odds are overwhelming both countries eventually must come to earth, the duo conclude in a preliminary draft for the Harvard Kennedy School and Center for Global Development.

"India and even more so China are into essentially historically unprecedented episodes of growth. China's super-rapid growth has already lasted three times longer than a typical episode and is the longest ever. The ends of episodes tend to see full regression to the mean, abruptly," they wrote.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

Growth in both countries has moderated in 2013, with China’s GDP slowing to an estimated annual rate of 7.5 percent and India at about 5 percent. Still, both are to be envied by developed world standards.

Summers, who earlier this year withdrew his candidacy to become chairman of the Federal Reserve, and Pritchett estimate that if China and India were to experience a steep economic drop-off — or even just slow down to the global GDP average — it could halve global GDP growth over the next two decades.

"Hitching the cart of the future global economy to the horse of the Asian giants carries substantial risks," they warned.

The inclination of economists to project that other nations in the region, like Vietnam, Thailand and Indonesia, are also destined to experience GDP outperformance in the future, is producing an “Asiaphoria” that is unlikely to become reality, according to Summers and Pritchett.

They wrote that China “already holds the distinction of being the only country, quite possibly in the history of mankind but certainly in [their historical] data, to have sustained an episode of super-rapid growth for more than 32 years.”

The two economists are not predicting when China’s and India’s growth trajectories may reverse. But they said the reversal, when it comes, is likely to be severe, because “in neither country does investor confidence rely on rule of law.”

In such countries, powerful companies tend to either control the government or they are selected by the government to succeed, which leads to corruption and economic volatility, according to Summers’ and Pritchett’s data.

“It is impossible to argue that either China or India have the kinds of ‘quality institutions’ that have been associated with the steady dynamic of growth in (developed) countries. The risks of ‘sudden stops’ are much higher with weak institutions…”

In a new forecast, the Organization for Economic Cooperation and Development (OECD) said Tuesday that a slowdown in emerging economies is a primary source of concern for the global economy, the Associated Press reported.

The OECD lowered its forecast for global growth this year to 2.7 percent and 3.6 percent for next. In May, it had predicted 3.1 percent and 4 percent growth, respectively.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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