Summers (+1) predicts a long winter

Thanks to the Sinocism newsletter, two-three days ago, I stumbled on the paper by Lant Pritchett and Lawrence Summers on the inevitability of a substantial growth slowdown in China and in India too, in the years ahead. I am curious to know the rationale for the paper and the rationale for the timing of the paper. That apart, there is nothing very profound about its conclusions. Countries that experience a long period of high growth inevitably run into a long period of slowdown. How long is that ‘long’ and when does it arrive? No one knows. But, it does, apparently. When they talk of mean reversion, no one knows what exactly is the mean and who fixes that ‘mean’ level of growth.

That said, none of the economic models would have or had predicted a 34-year period of an economic growth rate of 9.8% per annum (at constant prices) in China. This is the annual average growth rate of constant prices GDP in local currency in China from 1979 – the year, the economic transformation of China started.  In India, the annual average real economic growth rate since 1990 (until 2013) is 6.4%. So, when they make their model-based predictions of a substantial growth slowdown in these countries, they need to be humble and honest about what their models did not predict.

To be sure, one can question the quality of growth in China to a large extent and in India to some extent. Nonetheless, the economic transformation in the former is rather impressive and in the latter, somewhat less so, but equally impressive. Further, in India’s case, the political change since May 2014 heralds a new beginning and the previous government had left a lot of low-hanging fruits for the government to pluck and rejuvenate economic growth. India’s big risk is complacency and hubris something that the previous government was afflicted with, after few years of growth which had nothing to do with the then government.

No matter how pervasive and universal their evidence is, the fact remains that there is no other country in their sample that has a population of 1 billion people and some. So, there is something unique about these countries. They will go through their slowdowns and severe contractions. That does not necessarily mean that they are doomed.

The United States of America, at the beginning of the 20th century, was not considered an economic winner. It turned out to be one, despite six recessions (am I under-counting) and one economic depression. Now, it has reached a state of moral and ethical decline more than an economic decline and that is what makes its continuation at the top of the global league tables a hard act to keep up with. Whether that has anything to do with this ‘talking down’ of the prospects of China and India is anyone’s guess.

That apart, the real issue I have with them and especially with Mr. Summers is this. If India and China have to inevitably slow, what about the global economies and the economies in the West, in particular?

Take a look at the chart on this blog post that appeared in ‘The Economist’ in 2011. Much of the global growth since 1 AD has occurred in the 20th century. It is not hard that for us to further infer that much of it would have happened after 1950 and that too, after 1980. Put that together with the global rise in bank assets and indebtedness in general since the Eighties and you have the phenomenon of a surge in global growth and the big portion of the explanation behind it. Even ‘worse’ was the surge in global growth in the first decade of the 21st century. 23% of all global output since 1 AD happened just in these ten years as banks in the West created money at will.

Isn’t it logical that this would inevitably have to slow? If so, then what is the point in trying to prolong it with Quantitative Easing and Zero interest rates? Notice how Pritchett and Summers feel that they do not need to offer any explanation for their prediction of a substantial growth slowdown in both India and China, because they feel that the evidence is overwhelming and pervasive in their data. Then, what is not inevitable about the global growth slowdown (and particularly in the West) and what is the point in trying to stimulate it? Isn’t that pushing on a string with the risk that the costs of such a policy outweigh the benefits? I would like to hear what Pritchett and Summers have to say on that.

There is a paragraph in the paper towards the end:

It is impossible to argue that either China or India has the quality institutions that have been associated with the steady dynamic of growth in the currently high productivity countries. The risks of sudden stops are much higher with weak institutions and organizations for policy implementation. China and India have very different modalities of this risk, but both have tricky paths to continued prosperity.

We will concede them this point, for the sake of argument. But, institutions do evolve over time. Did America have quality institutions at the beginning of the 20th century? It did build them and now they are declining. That augurs rather poorly for future growth there. All the more reason that stimulus policies will achieve counter-productive results with declining and deteriorating institutions.

In the final analysis, if the broader point is that there is no room for complacency either in China (more so, given its too extraordinary growth spell and its extraordinarily high level of debt) or in India, that point is well heeded.

But, one has doubts over their predictions of both the inevitability of and lower growth and the duration of such low growth.


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