Pritchett and Summers wrote that “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 slow-downs in China and India relative even to the currently more cautious and less bullish forecasts.”
Some thoughts/takeaways:
- Our understanding on economic growth & development remains poor: “super-rapid growth is due in part to a large residual or unexplained component.”
- Japan, Korea, and Taiwan fit the regression to the mean story, but that doesn’t mean they fail to transit to higher income economies.
- Economists are bad at forecasting growth (near or long term) and often miss major turning points. Most forecasts are based to a large extent on recent growth figures.
- The regression to the mean is a long-term argument so we shouldn’t use it to forecast growth in the near or even medium term (it would probably draw the same conclusion every year over the past decade). Similarly, perhaps we shouldn’t be too bearish on countries that seem to be making lots of poor decisions (e.g. Brazil, Russia, Argentina) if our horizon is long enough.
- In the country specific section, the authors resort to “institutional quality” to argue why emerging market growth tends to be less persistent than developed market growth (which tends to grow at mean rate). So the bottom line seems to be whether China succeeds in its reform plans (reduce corruption, improve the rule of law, etc.). Given predicting politics is difficult even in the short term, let alone decades, today’s growth tells us little about future growth in places where institutional reforms are needed.
- My guess is that Singapore’s political system is the model China wants to move towards. Whether it can manage the transition well is an open question, and I think prolonged political instability is the biggest risk to its long-term growth outlook. On the positive side, China is taking reforms more seriously than most other emerging markets, so on net I’m optimistic that China will become a high-income country someday.
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