Former U.S. Treasury Secretary Lawrence Summers has become a doomsayer on global growth.
His warnings of stagnation in the U.S. and other advanced economies last year have given way to his sounding the alarm on the outlook for China, the world’s second-largest economy.
In a paper released last month by the National Bureau of Economic Research, Summers and fellow Harvard University professor Lant Pritchett wrote how historically most fast-paced economies at some point revert toward the global average and China may ultimately do the same.
With average trend growth at 2 percent globally, that would undermine the bet of some economists that China can keep motoring along not far from the double digits of recent years. It may not slide as far as 2 percent, but current predictions suggest it could dip to an average 5 percent over the next decade, and maintaining its recent clip over the long term would be “extraordinary,” said Pritchett and Summers.
“History teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth,” they wrote. “Salient characteristics of China — high levels of state control and corruption along with high measures of authoritarian rule — make a discontinuous decline in growth even more likely than general experience would suggest.”
Not all are as worried. Justin Lin, like Summers a former chief economist at the World Bank, has repeatedly said China can average 8 percent growth for the next two decades, writing last year that the country remains immature enough to adapt foreign technologies and access new markets.
As recently as September, Lin said the nation has the potential to meet that forecast if all circumstances are favorable, though he said China should set its 2015 expansion goal at 7 percent.
To Royal Bank of Scotland Group Plc economist Louis Kuijs, who previously worked at the World Bank and International Monetary Fund, China’s outlook lies somewhere between the views of Summers and Lin.
While China’s trend growth will decline amid weaker labor accumulation, productivity and need for capital, he told clients in an Oct. 30 report that it will still be about 6.5 percent in 2020 and 5 percent in 2030.
That implies an average expansion of about 7.3 percent per year from 2014 to 2020, lower than before yet not too shabby.
His reason for greater optimism than Summers is the analysis that China’s growth trajectory is more likely to resemble those of other East Asian countries such as Japan and South Korea at similar stages of development, rather than developing nations in general.
With gross domestic product per capita just 13 percent of the U.S.’s level last year, China’s economy is “still in a relatively early, easier phase of catch-up,” Kuijs, RBS’s chief Greater China economist in Hong Kong, said in the report written with colleague Tiffany Qiu.
Where RBS and Summers agree is in the importance for investors, businesses and policy makers of estimating China’s trend correctly.
“China’s growth record in the past 35 years has been remarkable, and nothing in our analysis suggests that a sharp slowdown is inevitable,” Pritchett and Summers wrote. “Still, our analysis suggests that forecasters and planners looking at China would do well to contemplate a much wider range of outcomes than are typically considered.”
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