Consensus forecasts speak of continued growth in the Asia-Pacific’s share of global GDP in the coming years. The United Nations’ short-term forecasts expect 5.8% annual growth in 2015 (5.6% in 2014), faster than the 2.8% and 1.7% predicted for the United States and the European Union, respectively. Looking longer-term, the Asian Development Bank forecasts that, driven by China, India and smaller states Vietnam, Indonesia and Thailand, the region will account for 52% of GDP by 2050, compared with 32% currently.
A recent paper by renowned economists Lawrence Summers and Lant Pritchett urges caution when forecasting Asia’s continued growth and its future dominance of the global economy. In their paper, they cite previous episodes of ‘Asiaphoria’ around the Japanese economic miracle of 1960-1990 and the rise of South Korea, Taiwan, Thailand, Malaysia and Indonesia - episodes of growth which were followed by either financial crises or stagnation.
Underlying their view they make the following points:
Economists are almost always too optimistic about future growth prospects: looking at historical data of 32 different economies, there are few examples of persistent high growth. Also, economists make the mistake of using current growth rates to extrapolate into the future. According to their calculations, current growth rates have little or no predictive power for future outcomes.
Extended periods of growth are rare and often followed by periods of recession, stagnation or much slower growth: the paper cites 70 episodes of rapid growth of more than 4% with a median length of 9 years and in 66 cases, these periods were met with a deceleration of economic growth, or outright recession.
Growth almost always regresses to the world mean: in light of the above statistical analysis, economic growth in countries across the world very rarely outperforms the mean world growth rate, meaning that out performers very rarely do so for long.
This note of caution is a welcome antidote to views about the ‘Asian Century’ and focuses attention on the very real challenges that the Asia-Pacific region faces in the future.
Sure, periods of fast growth have occurred but, commonly, governments in the region have not taken steps to pursue reforms and sensible economic policy while the good times have prevailed. Episodes of recession and crisis after growth spurts are testament to that fact.
For corporates, there are reasons to be optimistic about the Asia-Pacific region, it has both a huge potential market and an attractive industrial base. However, this optimism must be tempered by the findings of Summers and Pritchett and the very real necessity for governments in the region to show investors that they are pursuing and implementing reforms whilst articulating a clear, forward-looking economic strategy, something which Singapore is doing successfully, whilst Japan, China and India are not.