China Growth not Reverting to Global Mean

Nikkei

19 November 2014

Larry Summers, the former U.S. treasury secretary, and fellow economist Lant Pritchett have joined an increasingly heated debate on China’s growth prospects. They are clearly on the side of the pessimists.

Their work gives no support for simple extrapolations: They argue China’s gross domestic product will not continue to grow quickly just because it grew spectacularly for three decades. Moreover, they say that China is likely to “revert to the global mean,” which is how economists describe the process of slowing down to the mediocre pace of average global growth (2.2% in 2013, according to the World Bank).

As Pritchett and Summers put it in a paper* for the U.S. National Bureau of Economic Research: “The single most robust and striking fact about cross-national growth rates is regression to the mean. There is very little persistence in country growth rates over time and hence current growth has very little predictive power for future growth. Hence, while it might be the case that China continues for another two decades at 9% per capita growth, given the regression to the mean present in the cross-national data this would be [an] anomaly.”

…Stephen Grenville, a former deputy governor and board member of the Reserve Bank of Australia, is a visiting fellow at the Lowy Institute for International Policy in Sydney and a consultant on financial issues in East Asia. He is currently visiting professor at the S. Rajaratnam School for International Studies, Singapore.

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Last updated on 19/11/2014