Some of the most important sentences in economics

This is from Larry Summers and Lant Pritchett:

…knowing the current growth rate only modestly improves the prediction of future growth rates over just guessing it will be the (future realized) world average.  The R-squared of decade-ahead predictions of decade growth varies from 0.056 (for the most recent decade) to 0.13.  Past growth is just not that informative about future growth and its predictive ability is generally lower over longer horizons.

The main point of this paper is to argue that Chinese growth rates will become much lower, perhaps in the near future, here is a summary of that point from Quartz:

Summer and Pritchett’s calculations, using global historical trends, suggest China will grow an average of only 3.9% a year for the next two decades. And though it’s certainly possible China will defy historical trends, they argue that looming changes to its  authoritarian system increase the likelihood of an even sharper slowdown.

The piece, “Asiaphoria Meets Regression Toward the Mean,” is one of the best and most important economics papers I have seen all year.  There is an ungated version here (pdf).  I liked this sentence from the piece:

Table 5 shows that whether or not China and India will maintain their current growth or be subject to regression to the global mean growth rate is a $42 trillion dollar question.

And don’t forget this:

…nearly every country that experienced a large democratic transition after a period of above-average growth…experienced a sharp deceleration in growth in the 10 years following the democratizing transition.

As Arnold Kling would say, have a nice day.


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