As Lawrence Summers makes a splash with a new research report about China and India, I’m reminded of a chat we had in Japan in May 2007. We were in Kyoto, where the ADB was holding its annual meeting. I moderated a discussion, and Summers was asked to join us to offer his take on the next wave of Asian tiger economies.
Summers questioned whether it was wise for rich nations to be shored up financially by developing ones in Asia that could crash at any time. The crowd was aghast. Noticing how flat his views had fallen, Summers asked what I thought as a long-time Asia resident.
I said I harboured similar doubts that China and India could grow 7% or 10% forever. To buttress the point, and to lighten the mood, I told Summers of a report by Bank of America’s Joseph Quinlan titled “China’s Role as America’s Financial Sugar Daddy.” I recall us having a good laugh.
The $42 Trillion Query
Based on the findings of a November 5 report the former US Treasury secretary penned with fellow Harvard economist Lant Pritchett, Summers is still asking this question. Only now, it’s become a $42 trillion query. That represents the difference in GDP between a scenario where China and India continue heady growth until 2033 (at which point their combined output would be $56 trillion), and one where they experience a “regression to the mean” — slower growth at roughly the world average. (Their combined output would then come to somewhere between $12 trillion and $15.5 trillion.) With that $42 trillion variance, you could buy the entire US economy 2.7 times over.
Summers and Pritchett call the blind belief that Asia’s biggest economies can’t lose “Asiaphoria”. And reading through their 34-page report, it seems to me they’re asking another question that’s as tantalising as it is unscientific: are economies subject to the laws of gravity? Is it inevitable that what goes up very fast, GDP-wise, must come down?
This, essentially, is the worry about China and India: the fear that every industrialising nation crashes at some point, no matter what kind of government is at the helm or how skilled it is. “We are not arguing that one can predict with any degree of accuracy or confidence a slowdown but certainly policy makers need to be prepared for a wider range of extended slow-growth outcomes in these Asian giants than those that currently dominate the discourse,” Summers and Pritchett write. “Hitching the cart of the future global economy to the horse of Asian giants carries substantial risks.”
Many will quibble with the merits of any academic exercise that supposes significant similarities between China and India. In the last five days, Xi Jinping seems to have gone from staid Communist Party apparatchik to China’s Joseph Schumpeter, lord of creative destruction. India’s economy, by stark comparison, is struggling to rid itself of the giant ball-andchain its political system has become these past 10 years.
Yet history tells us that no one beats the system forever. No economy can prevent its excesses or weaknesses — or both — from derailing growth at some point. The things China and India do have in common may prove toxic once investors begin panicking: weak institutions and legal systems that undermine investor confidence and will be out of their depth during a market meltdown; a huge gap between rich and poor that could foment social instability; ambitious local government officials and deeply entrenched vested interests that will meddle in the financial rescue process; and a dismal world economy that offers little room for the Asian giants to export their way back to health.
Sure, investors haven’t made a lot of money betting against China lately. But history is no guide for Xi and his economic team in Beijing. They face challenges their predecessors didn’t, and are making things up as they go along. “India and even more so China are into essentially historically unprecedented episodes of growth,” Summers and Pritchett conclude. “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.”
If I could travel back in time to Kyoto and tell Summers that 16 months later Lehman Brothers would fail, he’d think I was nuts. The same could be true of those now in the throes of Asiaphoria. Never say never. Bloomber