Q.1 What is the central argument of the Asiaphoria by Lant Pritchett and Larry Summers?
Ans: Pritchett (2013) argue that the growth of developing countries like China and India, over the last century has more volatile because of lack of rule of law and corruption disrupting business confidence. They feel that previous periods of Asiaphoria—during the Japan’s rapid growth in the 1980s and then Southeast Asian countries such as Thailand in the 1990s—failed to stand up to expectations. They also say that growth in China and India, Asia’s population “giants”, is slowing down at the rate of 2 percent per capita that challenges optimistic forecasts of global economic dominance which lead fast and unexpected halt in the growth.. It is also noticed that dispersion in the per capita income at which slowdowns occur . The authors show that to evaluate the growth prospects of an economy not on the basis of past but in similar economic situations.
Pritchett (2013) also says that a super rapid growth of a couple of decades cannot guarantee of continued rapid growth. Such growth will end when country growth rates fall near the global average growth rate . The ends of episodes show the full regression to the mean. Actually, their argument is based on the uncertainty. The truth is no one can predict the future. Continuity of economic growth isn’t destiny. If there is a continuous growth, then there will be the end of that rapid growing episode. The authors say while economic forecasts invariably extrapolate recent growth rate, then the rapid growth is determined.
They point out three factors for their argument. These are:
• China and India do not have robust institutions for providing long-run stability of investor expectations. Investors rely on the rules and regulation opted by the country which safeguards the return on investment.
• The growth rates of these two countries are strongly episodic and make large shifts in change which result in a large slowdown.
• The above two in together make a sharp and sustained periods of slow growth.
Q.2 Do you agree with the argument of Pritchett and Summers? Is it compatible with the BRICs thesis?
Ans: Yes, I agree with the argument of Pritchett (2013) but it is true that I do not think it is compatible with the BRICs thesis is given by Goldman Sachs. BRICS is a grouping acronym of Brazil, Russia, India, China which are all in a similar position of advanced economic development (Pritchett, 2012). The BRIC thesis recognizes that Brazil, Russia, India, and China have changed their political systems to embrace global capitalism. The founder of BRIC thesis Goldman Sachs predicts that China and India will become the most powerful global suppliers of manufactured goods and services respectively while Brazil and Russia will become the dominant as suppliers of raw materials similarly.
The confliction between the argument on Asiaphoria by Pritchett (2013) and prediction of the BRIC thesis arises here. The BRIC thesis only shows the power and dominance of China and India on the global market, where Pritchett (2013) show the after effect of the bloom period of China and India which will meet the regression to the average of global growth rate .
According to Goldman Sachs reports, the economy of India is now bigger than Brazil and Russia . India can grow at an annual average rate of 8% until 2020. On the other hand, Pritchett (2013) says that India is slowing down at the rate of 2 percent yearly. According to a 2010 report from Goldman Sachs, China would dominate the United States in the terms of equity market capitalization by 2030 and become the largest equity market in the global economy but Pritchett (2013) say that China is more likely to have an even faster decline in economic growth than other similar countries in the past . So it is clear that the points of view of Pritchett (2013) and Goldman Sachs Global Economics (O’Neil, 2001) are not same. The Asiaphoria and the BRIC thesis cannot walk side by side.
Q.3 Assuming it is true, what are the implications of the Asiaphoria argument for multinationals based in Western Europe? How should they adjust their strategies in light of the arguments of Pritchett and Summers?
Ans: The Western European multinationals are mainly dependent on China and Indian market for low-cost labor, growing economy, fewer institutions to follow and the good source of manufacturing products and services at low cost. So, when the rays of this argument of Asiaphoria will fall in the European market, to adjust the slowdown the multinationals will set their strategies in this way.
• If the growth of China or India slows substantially, it will reveal the policy failure of the countries. It is a rule that the regression to the mean will happen once in a decade, there is no exception. So the multinationals will adjust themselves with this scenario and will grow with the country’s rapid growth and be silent at the time of recession.
• When the current growth rates of the countries are far from the mean then the global economy should permit a vast confidence timeshare with respect to growth for those countries with slowdown problem. The sensitiveness of commodity demands in particular to growth rates in China and India suggests the uncertainty in the price of the commodity which results in fluctuation. There is also another issue like a possibility of discontinuities in Asia. So the multinationals should adjust their strategies in that way to avoid the out of stock position and the discontinuities.
• According to the past rising power of China, where china has the record of fastest and longest economic growth , the geopolitical analysis is very important. The international and domestic political implications in case of china are very complex because of high levels of state control and corruption along with low measures of authoritarian rule, and other political disturbance. So the multinationals should plan carefully to avoid the problem.
• The period of China’s and India’s episodes of rapid growth would last and what would be the result after those episodes and another discussion on the future growth is also motivated and informative to design the business strategies. The western European multinationals should focus on this information.
References
Drysdale, P. (2014). the arithmatics of Asia's future growth. East Asia forum .
Eichengreen, B. D. (2013). Growth Slowdowns Redux: New Evidence on the Middle-Income Trap. the national bureau of economic research.
Fensom, A. (2014). US Economists Warn on China, India Growth Slowdown. The Diplomat .
Fummers, L. (2015). The global economy is in serious danger. Washington: Washington Post.
Morgan, J. (2013). Harvard Study: 'Asiaphoria' Foretells Trouble. NewsMaxFinance .
O'Neil. (2010). The BRICs thesis Goldman Sachs. Goldman Sachs.
O'Niel, J. (2001). Building Better Global Economic BRICS. Goldman Sachs Global Economics.
Pritchett, L. K. (2012). Promoting Millennium Development Ideals: The Risks of Defining Development Down. Facuty Research Working Paper Series.
Pritchett, L. S. (2013). Asiaphoria Meet Regression to the Mean. Harvard University.
Summers, L. (2013). In china and India, beware of Asiaphoria. the wall street journal .
