Larry Summers: In China and India, Beware of ‘Asiaphoria’

November 12, 2013, 2:31 PM

Larry Summers: In China and India, Beware of ‘Asiaphoria’

With the top leaders of China’s Communist Party scheduled to release today their economic strategy for the coming decade, they would do well to consider the warning of former U.S. Treasury Secretary Lawrence Summers: Don’t count on fast growth to continue, and don’t get seduced by what he and fellow economist Lant Pritchett dub “Asiaphoria.”Messrs. Summers and Pritchett, both Harvard economists, have long worked together on theories of economic growth. At a recent San Francisco Federal Reserve conference, they warned that rapid growth in India and China could come to a fast, unexpected halt. “Hitching the cart of the future global economy to the horse of the Asian giants carries substantial risks,” they write.

The two economists don’t claim to have found specific roadblocks that will halt either country’s progress. Rather, they argue that the growth patterns of wealthy and developing countries over the last century or so suggest that “episodes of super-rapid growth tend to be of short duration and end in decelerations back to the world average growth rate.” Since China and India are already on extended rolls– though India’s has slowed recently– that would put them in danger of a bad fall.

“The single most robust and striking fact about cross-national growth rates is regression to the mean,” they write – using economist jargon to argue that a couple of decades of fast growth is no guarantee of continued rapid growth. Just the opposite. Such growth is bound to end, as country growth rates fall to near the global average.

Think about a baseball hitter on a hot streak, they say. If his batting average is up 50 points over the last 20 at bats “then we would forecast a return to the average batting average over the next 20 at bats,” they write. The batter and his hitting coach may have no idea why there is such variation. “But mainly, that is just what happens,” the economists say.

They do venture one weakness that could cause either country to stumble: their legal systems. “In neither country does investor confidence rely on rule of law,” they say. A big political dust-up in either nation could shake investor confidence and “easily create processes with non-linear sudden stops.” In other words, an economic recession or crisis.

The authors say the future growth of China and India amounts to a “$42 trillion question.” That’s the difference in GDP gains in 2033 if the two countries see their sizzling growth continue for another 20 years, compared with what the growth would be during those 20 years at roughly the world average.

Chinese policy makers have been grappling with this kind of nightmare scenario for some time, which is sometimes called “the middle-income trap.” Many countries have made it to the level China has, with GDP per-capita of about $6,600, according to the International Monetary Fund. But just a handful of once-poor places – South Korea, Singapore, Taiwan among them – have then made it to the ranks of wealthy nations.

The strategy to be released later Tuesday is aimed at helping China retain rapid growth—although not the double-digit growth of the past decades – well into the future. But it’s not just the legal system that might hobble China. It’s the power of state-owned firms, local governments, party officials and wealthy business leaders who think China is doing just fine and doesn’t need major change.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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