Will China’s Economy Continue Defying The Odds?

A recent report conducted by Lant Pritchett and Larry Summers of Harvard University suggests that growth of the Chinese economy is likely to slow in the future, The Economist website reports.

Despite the rapid pace at which the country’s economy has grown in the past few decades, it was announced this week that the economy had grown by around 7.3% in the third quarter year-on-year – well below its average 10% growth rate since 1980.

In fact, since 1977 economic growth in China has improved by more than 6% per year – which the authors of the paper call the longest growth period “quite possibly in the history of mankind, but certainly in the data.”

The International Monetary Fund (IMF) predicts that the Chinese growth rate will slow from 7.3% this year to 6.3% by 2020. However, Pritchett and Summers suggest that by looking at previous global patterns of growth, it is evident that economies suffer from “regression to the mean,” meaning that rapid growth rates often drop to a global average of about 2% per year.

Experience shows that fast growth tends to end in a sharp slowdown, with an average drop in growth rate of 4.7%. This can occur even in the face of promising forecasts; such as Brazil in 1980 and then Japan in 1991, whose economies both saw rapid improvement, but then achieved little growth in the subsequent twenty years.

In light of this, the researchers suggest that rapid growth could be an indicator of ‘good fortune or policy’ – therefore eventual slowdown should not necessarily be viewed as ‘a sign of failure.’

The paper concludes that the odds are against China continuing to maintain its current growth, as history would imply that in twenty years from now, its economy will still probably be smaller than America’s.

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