Larry Summers at the seminar “The New Normal in Asia: Will Growth Inevitably Slow?”, during the 2015 IMF/World Bank Spring Meetings on April 16 in Washington, D.C. Photo courtesy of IMF.
After a period of rapid growth, Asia should expect much slower economic expansion in the future as the region is likely to revert to levels of average growth, a former U.S. Treasury Secretary told an audience on Thursday at the IMF-World Bank Meetings.
Lawrence H. Summers, President Emeritus of Harvard University, was speaking about the findings of a recent paper coauthored with Lant Pritchett in which the two economists suggest that China’s explosive growth over recent decades did not predict its future.
“There is a tendency, particularly in discussions of China, but also in discussions of Asia, that there is a presumption of continuity. That is, maybe the countries will continue to grow at the abnormally rapid rate that they have,” Summers said.
But in their paper, the two authors reject this assumption, suggesting that countries with long periods of abnormal growth tend to revert to something around 2 percent growth, closer to the long-term global average—or they illustrate “reversion to the mean.”
Summers remarks came as part of a discussion titled “The New Normal in Asia: Will Growth Inevitably Slow?” with Raghuram Rajan, Governor of the Reserve Bank of India, on the outlook for Asian economies.
Asia’s Dependency on Domestic Demand
Raghuram Rajan at the seminar “The New Normal in Asia: Will Growth Inevitably Slow?”, during the 2015 IMF/World Bank Spring Meetings on April 16 in Washington, D.C. Photo courtesy of IMF.
Rajan noted that there had been a marked slowdown in Asian emerging markets and predicted that in the long term that Asia was likely to depend less on demand from advanced economies.
“With the slowdown in industrial countries you have to look inwards for demand, and to the region for demand,” said Rajan. “Domestic demand has to be the way,” he added.
Rajan also pondered the future of the export-led growth model, and pointed to the example of Japan speculating whether the model had “run its course.”
“Because you have an export sector on steroids, a manufacturing sector on steroids, relatively the other sectors have been underdeveloped,” Rajan said.
An Alternative Growth Model?
Summers concurred that export-led growth was “mostly over.” He suggested that technological developments and greater convergence would “lead to domestic, demand-led growth of a kind we haven’t seen before.”
Summers highlighted the benefits of the proliferation of smart phones. The distribution of the devices “is indicative of a degree of connectivity and the ability to achieve convergence the likes of which has never existed before,” he said.
But he speculated: “can we find an alternative growth model, an alternative double-GDP-per-decade growth model, that isn’t centrally about traditional exports?” He added that India would be the “profound test case for this.”
Rajan expressed optimism for India’s near-term future: “I’m hoping we are getting there. I am hoping we have ten years of massive infrastructure spending.”
But the central banker also expressed concern about the plight of India’s many unskilled workers and said that a key question for policymakers in the country will be how to find employment for this sector of the population.
Rajan recognized that there was a need for further investment in higher education, and acknowledged that “we need many routes to lift oneself from poverty.”
Asian Infrastructure Investment Bank
Larry Summers (left), Raghuram Rajan (right) at the seminar “The New Normal in Asia: Will Growth Inevitably Slow?”, during the 2015 IMF/World Bank Spring Meetings on April 16 in Washington, D.C. Photo courtesy of IMF.
Summers acknowledged that the creation of the new China-led Asian Infrastructure Investment Bank was a reflection of the “failure”, after five years, by the U.S. to approve reforms to the IMF’s governance structure, and also the U.S.’s restrictions on development banks “that made it almost impossible to carry out substantial infrastructure projects in ways congenial to borrowing countries in Asia.”
But the former U.S. Treasury Secretary dismissed the “idealistic tendency” of those who wanted equality of power within lending organizations and said that it was natural for there to be some asymmetry of control between lenders and borrowers.
Rajan agreed that there would be differences in levels of control but “I think the concern has been there has been money available in emerging markets, but we don’t have the institutional structures to do that lending, as yet.”
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