As Lawrence Summers makes a splash with a new research report about China and India, I'm reminded of a chat we had in Japan in May 2007.
We were in Kyoto, where the Asian Development Bank was holding its annual meeting. I moderated a panel discussion, and Summers was asked to join us for the last 30 minutes to offer his take on the next wave of Asian tiger economies. Summers isn't known for subtlety, and he bluntly questioned whether it was wise for rich nations to be shored up financially by developing ones in Asia that could crash at any time. The crowd was aghast. It was as if he'd belched into the microphone.
Noticing how flat his views had fallen, Summers asked what I thought as a long-time Asia resident. I told him I harboured similar doubts that China and India could grow 7 per cent or 10 per cent forever. To buttress the point, and to lighten the mood, I told Summers of a recent report by Bank of America's Joseph Quinlan titled "China's Role as America's Financial Sugar Daddy." I recall us having a good laugh.
Based on the findings of a November 5 report the former US Treasury secretary penned with fellow Harvard economist Lant Pritchett, Summers is still asking this question. Only now, it's become a $42 trillion query. That represents the difference in gross domestic product between a scenario where China and India continue heady growth until 2033 (at which point their combined output would be $56 trillion), and one where they experience a "regression to the mean" - slower growth at roughly the world average. (Their combined output would then come to somewhere between $12 trillion and $15.5 trillion.) With that $42 trillion variance, you could buy the entire US economy 2.7 times over.
Summers and Pritchett call the blind belief that Asia's biggest economies can't lose "Asiaphoria." And reading through their 34-page report, it seems to me they're asking another question that's as tantalising as it is unscientific: Are economies subject to the laws of gravity? Is it inevitable that what goes up very fast, GDP-wise, must come down? This, essentially, is the worry about China and India: the fear that every industrialising nation crashes at some point, no matter what kind of government is at the helm or how skilled it is.
"We are not arguing that one can predict with any degree of accuracy or confidence a slowdown but certainly policy makers need to be prepared for a wider range of extended slow-growth outcomes in these Asian giants than those that currently dominate the discourse," Summers and Pritchett write. "Hitching the cart of the future global economy to the horse of the Asian giants carries substantial risks."
Many will quibble with the merits of any academic exercise that supposes significant similarities between China and India. In the last five days, Xi Jinping seems to have gone from staid Communist Party apparatchik to China's Joseph Schumpeter, lord of creative destruction. India's economy, by stark comparison, is struggling to rid itself of the giant ball-and-chain its political system has become these past 10 years.
Yet history tells us that no one beats the system forever. No economy can prevent its excesses or weaknesses - or both - from derailing growth at some point. No emerging nation has ever escaped a disaster that sends growth reeling, markets plunging, governments into a tizzy and economists back to the drawing board to wonder how, oh how, they missed signs of the coming crash.
The things China and India do have in common may prove toxic once investors begin panicking: weak institutions and legal systems that undermine investor confidence and will be out of their depth during a market meltdown; a huge gap between rich and poor that could foment social instability; ambitious local government officials and vast and deeply entrenched vested interests that will meddle in the financial rescue process; and a dismal world economy that offers little room for the Asian giants to export their way back to health.
Sure, investors haven't made a lot of money betting against China lately. But history is no guide for Xi and his economic team in Beijing. They face challenges their predecessors didn't, and are making things up as they go along.
"India and even more so China are into essentially historically unprecedented episodes of growth," Summers and Pritchett conclude. "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."
If I could travel back in time to Kyoto, circa May 2007 and tell Summers that 16 months later Lehman Brothers would fail and almost bankrupt Wall Street, he'd think I was nuts. The same could be true of those currently in the throes of Asiaphoria. Never say never.