A few years ago, my daughter’s school switched from Spanish once a week to Mandarin Chinese. Having studied both languages, I was very much opposed to the move, but the decision was made with little input. And so my 9-year-old is studying the language everyone says is our future.
Except Larry Summers.
Earlier this month, the former U.S. Treasury Secretary, and Harvard economist Lant Pritchett, warned the San Francisco Federal Reserve that “Asiaphoria”—as they dub it—can’t last. Now the text of that paper is out, complete with the charts and analysis that form their argument.
It’s 35 pages of riveting reading, especially when you consider everything these days, from office expansions to investment decisions to foreign-language instruction, is based on the idea of continued growth from China and India. The economists conclude: “Hitching the cart of the future global economy to the horse of the Asian giants carries substantial risks.”
Other notable takeaways (my paraphrases in bold):
It can’t last
“… China already holds the distinction of being the only country, quite possibly in the history of mankind but certainly in the data, to have sustained an episode of super-rapid growth for more than 32 years.”
There are many unknowns
“We have lived through a series of major events in our lifetime none of which were widely predicted by experts in the appropriate domain. Not just the obvious example of the financial crisis or perhaps idiosyncratic individual events like the attacks of 9/11 but major geopolitical shifts like the collapse of the Soviet Union and the Arab Spring (and its seasonal sequalae) have not been anticipated.”
Especially in these places
“All that said, we suspect that the reason for slowdown that will come in China and India is for a similar reason but which will manifest differerntly [sic] given the very different politics. That is, in neither country does investor confidence rely on rule of law. In both countries there are plausible scenarios in which disrptions [sic] of the current ‘political settlement’ that is providing a climate for ‘ordered deals’ … will be disrupted. This disruption of the arrangements that provide settled expectations of investors can easily create processes with non-linear sudden stops.”
Beware, for fast growth comes to a grinding halt
“India and even more so China are into essentially historically unprecedented episodes of growth. China’s super-rapid growth has already lasted three times longer than a typical episode and is the longest ever. The ends of episodes tend to see full regression to the mean, abruptly.”
China and India have weak institutions
“It is impossible to argue that either China or India have the kinds of ‘quality institutions’ that have been associated with the steady dynamic of growth in the currently high productivity countries. The risks of ‘sudden stops’ are much higher with weak institutions and organizations for policy implementation. China and India have very different modalities of this risk, but both have tricky paths to continued prosperity.”
Indeed, my opposition to mandatory Mandarin stemmed not from the difficulty of the language but also from economics—and a sinking feeling I had seen this before. In the early 2000s, I was a reporter covering education in a wealthy suburb of Washington, D.C. Decades earlier, the schools there had adopted Japanese instruction in droves, thinking it was necessary for Americans to stay competitive. “What are our kids supposed to do?” vice president Walter F. Mondale infamously asked. “Sweep up around the Japanese computers?”
But by the 21st century, there were new players, new makers of hardware and software, new languages to learn. Students started to drop Japanese and schools could no longer fill the classes they had added. This report shows that the teaching of Japanese and Russian in U.S. schools has fallen steadily, while Chinese and Arabic is on the increase.
Who would have known? Summers and Pritchett:
While there were some concerns raised about a bubble in Japanese real estate, we remember almost no one predicting in 1991 that Japan’s real GDP per capita would be only 12 percent higher in 2011 than 20 years earlier …
In recent months, Summers has been in the spotlight not so much for his economic prowess as his political; he was an unsuccessful contender for the Fed chairman job. Last week, as Janet Yellen began Senate confirmation hearings for the job, Quartz contributor and economist Miles Kimball (also a former student of Summers’s) wrote that it would be a mistake to discount Summers’s continued relevance as an economist. This latest paper only confirms that point of view—and emboldens mine that my daughter’s school should have stuck to Spanish.