Asia’s days as engine of growth numbered, warns Harvard duo

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#1
Asia’s days as engine of growth numbered, warns Harvard duo
THE AUSTRALIAN OCTOBER 20, 2014 12:00AM

David Uren

Economics Editor
Canberra
World growth if China, India hit average
World growth if China, India hit average Source: TheAustralian

GROWTH in China and India is much more likely to drop to about 2 per cent than it is to continue at anything close to current rates, while an extended period of recession is probable, according to a new paper by Harvard University’s, Larry Summers.

Summers, who is a former US Treasury secretary and one of the world’s most eminent economists, warns that Asia’s days as the fastest-growing region in the world are numbered, adding this will have profound implications for commodity and energy exporters like Australia.

The paper, which Summers has co-written with fellow Harvard economist Lant Pritchett, extends a study published last year and says the history of countries enjoying rapid growth is that they return to the global average rate, usually very suddenly. This likelihood is greatest in those countries with authoritarian governments. “Regression to the mean is the single most robust finding of the growth literature and the typical degrees of regression to the mean imply substantial slowdowns in China and India relative even to the currently more cautious and less bullish forecasts.

“China’s super-rapid growth has already lasted three times longer than a typical episode and is the longest-ever recorded. The ends of episodes tend to see full regression to the mean, abruptly.”

The paper says that just as with shares, past national growth rates are a poor guide to the future. “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.”

The paper notes the 1961 edition of the famous economic textbook by Paul Samuelson forecast the Soviet Union would overtake the US by 1980. During the 1980s, Japan was also expected to overtake the US. However, productivity which had doubled over the 30 years to 1991 is now 6 per cent lower than it was then, while per capita growth has risen only 0.6 per cent a year. No one in 1980 would have predicted that Brazil, which had just enjoyed 13 years of growth above 5 per cent, would then experience two decades with zero per-capita growth.

Yet forecasts are routinely made that China and India’s extended run of growth will continue indefinitely. Treasury has been susceptible to what the authors term “Asiaphoria”, with forecasts in the former government’s Asia Century white paper envisaging China would average 7 per cent growth out to 2025 and India 6.75 per cent. The World Bank and OECD have projected growth rates for these two nations of 5 to 6 per cent over the next two decades.

Summers and Pritchett take the growth of all nations back to 1950 and show that knowing the growth in any one decade explains only 20 to 30 per cent of the growth in the next decade. “Knowing the current growth rate only modestly improves the prediction of future growth rates over just guessing it will be the world ­average.”

Growth rates of 6 per cent are more than two standard deviations away from the average world growth, which is only 2 per cent. If China and India continued growth of the past decade for another 20 years, China’s GDP would reach $60 trillion, while if it reverted to 2 per cent, it would only reach $14 trillion (about 20 per cent smaller than US is now).

The study looks at the 28 episodes where countries have enjoyed growth rates of more than 6 per cent over at least eight years. China, which has now been growing that fast for 33 years, is the longest-lived expansion, with only Taiwan’s run between 1962 and 1994 coming close. The average is only nine years. Nearly all ended with an abrupt deceleration, with median growth slowing to the world average rate of 2 per cent. Among advanced countries, the past can explain the future precisely because their growth rates do not vary much around the global average. A forecast of Denmark’s per capita output in 2010 made in 1916 based on extrapolating growth since 1890 would be out by only $200. But growth in developing countries is more volatile. The 83 countries with per capita incomes of between $2000 and $10,000 spend between 66 and 75 per cent of the time growing at average rates of more than 5 per cent, but the rest is in recession, with an average annual contraction of between 4.6 and 4.8 per cent. In rich countries by contrast, 84 per cent of years are positive, with average growth of 3.9 per cent, while the rest are in recession, with average contraction of 2.3 per cent.

A key reason for the difference is institutional quality. China’s rapid growth over the past three decades shows that “organised” corruption can be a “veritable greenhouse” for growth. Firms can reach arrangements with the state that deliver high and secure profitability. “As firms either ‘seize the state’, or are the state or are chosen by the state, the official legal and regulatory environment — or more particularly its implementation — are bended to provide great, if super local and specific, conditions for growth.”

But when power shifts, relationships are severed and there are no institutions to fall back on. Growth slows dramatically.

The new paper, published by the US National Bureau of Economic Research, comes just weeks after the IMF endorsed Summers’ analysis last year that large sections of the advanced world may be suffering “secular stagnation”, with even zero interest rates not enough to stimulate investment.

The IMF is sticking to its forecasts that both China and India will keep growth at more than 6 per cent out to at least 2019. But it is increasingly emphasising the risks to that outlook, particularly for China. The fund is concerned about the build-up of corporate debt, which has risen from less than 100 per cent of GDP before the financial crisis to 141 per cent now, with that debt concentrated in weak real estate, construction and state-owned enterprises.

“Although banks appear to be prepared for some pick-up in corporate defaults, the non-bank sector is more directly exposed because of a combination of higher-risk lending (especially to the real estate sector) and thin capital cushions.”

Summers argues that at the very least, forecasters should insert a much wider range of possible outcomes for countries whose growth rates are far from the mean. “Given the sensitivity of commodity demands in particular to growth rates in Asia, this suggests substantial uncertainty about the medium-term path of commodity prices,” he says.
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#2
Reminds me of the EGOIN Theory taught by Prof. Lim Chong Yah.

The Turtle, The Rabbit and the Elephant...
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#3
Very interesting article based on sound historical precedents. If their prediction is right, we'll be in for a very rough ride in Asia indeed! Perhaps in Japan's case, it's because they were unwilling to resort to loose monetary policy until now under Abe's leadership. Germany is in the same category. China is different in that they will resort to more extreme measures to prevent high unemployment. But the argument of low quality institutions and laws is valid as it takes decades to develop, although I would have thought that Japan had pretty good institutions during their decades of stagflation.
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#4
The difference in the comparison is that none of them had a population larger than US. China and India is unprecedented in that sense. And also a reason for the EU to be formed and remain. Yet it is not unprecedented that China was once the largest economy

As Stiglitz infamously coined, growth by perspiration can continue for a long time by urbanisation before productivity needs to be improved. For sure China cannot continue at 7% clip indefinitely but i agree with IMF projection for once. I think Xi's successor will have a much tougher time trying to get growth.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#5
If you look at China stock market like Shanghai composite, you realise they are actually attempting to trough out a 5 year low.

In simple economics theory, China is in the transitional phase moving from export to consumption driven economy. While India is going export driven rather than consumption.. While this transition usually creates uncertainty and choppiness in the market, it does not reflect true curtailment of growth rate afterall their ability to undertake debt for consumption outweighs what US has been living on for many years. While I agree that growth maybe moderated in transition, But I really doubt the intention of this report. While Asia growth maybe slowing down, did EU and US reflect upon their own numbers? EU being in negative and US may sitting on negligible growth rates.

In the long run, I believe China will still have tremenduous growth potential until an internal conflict arises within the government itself. (look into history of china you will know what I mean).
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#6
(20-10-2014, 03:06 PM)DP28 Wrote: In the long run, I believe China will still have tremenduous growth potential until an internal conflict arises within the government itself. (look into history of china you will know what I mean).

The conflict has already risen with the new Chairman Xi having spent the better part of the year rounding up the "corrupt" officials and taking down opposition in the top level, even trying now to get those who have escaped abroad.

More Chinese drama to unfold in the next few months I reckon...
Virtual currencies are worth virtually nothing.
http://thebluefund.blogspot.com
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#7
http://www.businesstimes.com.sg/banking-...about-asia

Blackstone CEO remains bullish about Asia
The company is also buying an 'enormous' amount of real estate in Europe

By
Genevieve Cuagen@sph.com.sg@GencuaBT
BT_20141021_GCBLACK21_1328966.jpg "It's hard for Asian economies to grow at the same historic rate if China doesn't grow at its historic rate . . . But overall it's a great bet long term.' - Mr Schwarzman
21 Oct5:50 AM
Singapore

ASIA remains a "great bet long term'', said Stephen Schwarzman, chairman and chief executive of Blackstone, even as slowing growth in China and the expectation of QE (quantitative easing ) tapering have dampened investor interest.

"Asia is caught up by the same general
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#8
(20-10-2014, 08:26 PM)BlueKelah Wrote:
(20-10-2014, 03:06 PM)DP28 Wrote: In the long run, I believe China will still have tremenduous growth potential until an internal conflict arises within the government itself. (look into history of china you will know what I mean).

The conflict has already risen with the new Chairman Xi having spent the better part of the year rounding up the "corrupt" officials and taking down opposition in the top level, even trying now to get those who have escaped abroad.

More Chinese drama to unfold in the next few months I reckon...

I guess China is still at a very early stage of control and power where 连政 can persist for another 50 years. It also takes time for opposition to build and organise power to overthrow government and truly liberate China's democracy. A 四分五裂 bring us back to 三国时代 (China, Taiwan, Hong kong?) When inviting foreigners to their door, it will be back to opium war.
Thats also another reason why foreigners like mircosoft esp kuai loi find it tough working in China. IMO, China market seems way relatively undervalued compared to US and EU in many ways. Hence, I am bullish on Asia for a long term at least for my lifetime

I may not be right, but thats how I apply my history lesson in high school to my investment philosophy. Disclaimer, Of course I am assuming history repeat itself.
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#9
the more they feel this way, the better it is for Asians to take advantage.
I think we are just seeing the tip of the iceberg in Asia.
Asia is not just China. Although they are where all the activities are currently....
India, Asean are the next 2 biggest market where a booming middle class is in the making.
Even China is not saturated as yet, think 2nd/3rd tier cities. Moreover, they already start to move from FDI/manufacturing to domestic consumption/service industry.
History tends to repeat itself. Asia will likely lead the way again in the future.
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#10
(20-10-2014, 08:26 PM)BlueKelah Wrote:
(20-10-2014, 03:06 PM)DP28 Wrote: In the long run, I believe China will still have tremenduous growth potential until an internal conflict arises within the government itself. (look into history of china you will know what I mean).

The conflict has already risen with the new Chairman Xi having spent the better part of the year rounding up the "corrupt" officials and taking down opposition in the top level, even trying now to get those who have escaped abroad.

More Chinese drama to unfold in the next few months I reckon...

Those issues are very insignificant for the economic of China. It is something supposed to be done. Good for the long run development of China.
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