Growth dynamics change fast, but nothing suggests sharp slowdown inevitable

Economic growth in China is likely to decline even "more than general experience would suggest", despite it being the only country in history to have such sustained economic development in the last three decades, said a new research paper conducted by Harvard economists Lawrence Summers and Lant Pritchett.

There is nothing in the analysis that suggests "a sharp slowdown is inevitable" in China, Summers and Pritchett said, adding that forecasters should widen the range of expected outcomes with regard to the second-largest economy in the world.

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Consensus forecasts for the global economy over the medium and long-term predict the world's economic gravity will substantially shift toward Asia and especially toward China and India, they said. "While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated. Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth."

The two economists said in their paper for the National Bureau of Economic Research that though China's growth cannot be compared with that of other countries, it will still "slow substantially".

This is because episodes of super-rapid growth-which is higher than 6 percent tend to be extremely short lived. The median duration of a super-rapid growth episode is nine years, only one year longer than its possible minimum, the economists said in their paper released on Oct 14.

China's experience in the years between 1977 and 2010"already holds the distinction of being the only instance, quite possibly in the history of mankind, but certainly in the data "with a sustained period of super-rapid growth for more than 32 years.

But following the super-rapid growth "is nearly always a growth deceleration", and the bullish views of growth from China watchers have already softened considerably, Summers and Pritchett said.

They said that China's growth dynamics are not driven by the "middle-income trap"-in which a country reaching a certain income level gets stuck at that level with no further growth-but a scenario where rapid growth is coupled with rapid deceleration. "China's super-rapid growth has already lasted three times longer than a typical episode and is the longest ever recorded. The end of episodes tends to see full regression to the mean, abruptly," they said.

Patrick Chovanec, former business professor at Tsing-hua University, said that he agrees with the authors in saying that China watchers should be looking at broader ranges of outcomes for China, but that "there are a lot more specific and compelling reasons to expect China's economy to continue slowing in the near future than 'regression to the mean'". The authors said that history will show China's slow is a "little too agnostic", he said.

Ryan Rutkowski, China research analyst at the Washington-based Peterson Institute for International Economics, said that despite agreeing that China is unlikely to maintain 7 percent growth for the next two decades, "there is some reason to think Chinese growth could continue to be exceptional and perhaps average higher than 4 percent over the next two decades".

China still has the opportunity for significant gains from additional market reforms, said Rutkowski.

Ann Lee, professor of economics at New York University, said that China's discretion with businesses can either have a "positive or negative effect depending on which policies they choose to implement. Democracies such as the US also exercise discretion with businesses by giving some businesses loopholes or creating laws to help or hurt certain players".