A few years ago, my daughter’s schoolswitched from Spanish once a week to Mandarin Chinese. Having studied bothlanguages, I was very much opposed to the move, but the decision was made withlittle input. And so my 9-year-old is studying the language everyone says isour future.
Except Larry Summers
Earlier this month, the former U.S.Treasury Secretary, and Harvard economist Lant Pritchett, warned the SanFrancisco Federal Reserve that “Asiaphoria”—as they dub it—can’t last. Nowthe textof that paper is out, complete with the charts and analysis that formtheir argument.
It’s 35 pages of riveting reading,especially when you consider everything these days, from office expansions toinvestment decisions to foreign-language instruction, is based on the idea ofcontinued growth from Chinaand India.The economists conclude: “Hitching the cart of the future global economy to thehorse of the Asian giants carries substantial risks.”
Other notable takeaways (my paraphrases inbold):
It can’t last
“… China alreadyholds the distinction of being the only country, quite possibly in the historyof mankind but certainly in the data, to have sustained an episode ofsuper-rapid growth for more than 32 years.”
There are many unknowns
“We have lived through a series of majorevents in our lifetime none of which were widely predicted by experts in theappropriate domain. Not just the obvious example of the financial crisis orperhaps idiosyncratic individual events like the attacks of 9/11 but majorgeopolitical shifts like the collapse of the Soviet Unionand the Arab Spring (and its seasonal sequalae) have not been anticipated.”
Especially in these places
“All that said, we suspect that the reasonfor slowdown that will come in Chinaand Indiais for a similar reason but which will manifest differerntly [sic] given thevery different politics. That is, in neither country does investor confidencerely on rule of law. In both countries there are plausible scenarios in whichdisrptions [sic] of the current ‘political settlement’ that is providing aclimate for ‘ordered deals’ … will be disrupted. This disruption of thearrangements that provide settled expectations of investors can easily createprocesses with non-linear sudden stops.”
Beware, for fast growth comes to a grindinghalt
“Indiaand even more so Chinaare into essentially historically unprecedented episodes of growth. China’ssuper-rapid growth has already lasted three times longer than a typical episodeand is the longest ever. The ends of episodes tend to see full regression tothe mean, abruptly.”