In March 2011, economists Barry Eichengreen, Donghyun Park, and Kwanho Shin released a working paper titled “When Fast Growing Economies Slow Down: International Evidence and Implications for China.” The paper focused on the rapid growth of large emerging markets in the late 20th and early 21st centuries, and in particular, the double-digit growth coming out of China. Then it asked: When might China’s economic engine slow down? Here’s what they found:
The evidence suggests that rapidly growing economies slow down significantly, in the sense that the growth rate downshifts by at least 2 percentage points, when their per capita incomes reach around $17,000 US in year-2005 constant international prices, a level that China should achieve by or soon after 2015.
That’s from the abstract of the paper, which was tweeted out over the weekend by Wonkblog’s Matt O’Brien. And after the past few weeks of China’s currency devaluation, bad economic data, and stock market turbulence, it’s looking more and more prescient. In their paper, the economists looked at historical instances of slowdowns from around the world. They found that slowdowns were most strongly associated with a drop in total factor productivity growth from 3-plus percent to nearly zero. Slowdowns, they wrote, “coincide with the point in the growth process where it is no longer possible to boost productivity by shifting additional workers from agriculture to industry and where the gains from importing foreign technology diminish.” As noted in the paper’s abstract, slowdowns also tended to occur when per capita incomes (in 2005 prices) climbed to around $17,000 and when manufacturing accounted for around 23 percent of total employment. Countries with greater dependency on aging populations and with “dramatically undervalued currencies” were also more likely to experience slowdowns.
Earlier this week, I called up Eichengreen to see whether he thought the forecasts made in his 2011 paper held. “They fit the China we’re seeing today,” he told me. “I think we are seeing two separate things. The growth of the economy has slowed from 10 percent a few years ago to somewhere in the 6 to 7 percent range, and that’s what we talk about in the paper. And then there’s a second, largely separate phenomenon where the stock market more than doubled since between last December and the beginning of the summer, and now it’s given back about half of what it gained, and you know all kinds of people are nonplussed, all kinds of small investors and local investors and others took steps on the stock market. They were encouraged to do so by authorities to juice the economy a bit. But now those efforts have unraveled.”
In their paper, Eichengreen and his colleagues predict that China’s economy will grow by 6.1 to 7.0 percent annually in the current decade, and then by 5 to 6.2 percent in the following. While those projections largely tracked with previous research, some 2010 work from the Conference Board was grimmer—suggesting China’s growth could decelerate to 6.1 percent and then to 3.9 percent by 2020. As core segments of the Chinese economy like consumer spending, construction, and financial services have swooned recently, worries about what kind of sluggishness the government’s official numbers might be hiding have increased dramatically. China’s decision to devalue its currency exacerbated this, triggering concern that authorities had forsaken efforts to rebalance the economy and were falling back on exports.
Are those fears unfounded? Nicholas Lardy, senior fellow at the Peterson Institute for International Economics, thinks yes. “Rather than a financial and economic meltdown, China is experiencing an overdue correction in its equity market,” he writes in a Wednesday op-ed in the New York Times. Eichengreen has a similar stance. “We haven't seen anything that should worry us yet,” he tells me, referring to China’s currency devaluation. “But people reacted negatively, the markets reacted negatively, because they think a first 3 percent could be followed by a second 3 percent, and a third 3 percent.” So far, though, that hasn’t happened. As for the broader economic slowdown in China, which has seemed to catch investors off guard and spark so much chaos in global markets? At least three economists saw it coming years ago.