China Might Still Be Booming

A new method of forecasting economic growth bodes well for China and India.

Ready for takeoff?

Photographer: Brent Lewin/Bloomberg

Where will China and India be in a decade, economically speaking? Judging from the abnormal speed at which they have grown in recent decades, most forecasters think they are due for a slowdown -- and, in the case of China, possibly even a crash.

Looked at another way, though, the two countries' prospects could be much brighter.

QuickTake China's Pain Points

When assessing a country's growth potential, economists typically examine just a handful of indicators, including past growth, debt burden, the flexibility of the labor market and the quality of government. As Lant Pritchett and Lawrence Summers have demonstrated, such measures might not bode well for China or India. History shows that periods of fast growth generally portend reversals back to the world average.

Recently, however, researchers have been developing new ways to forecast economic performance -- methods that employ large quantities of data to touch on the deeper economic realities that actually drive growth. In 2009, for example, Harvard economist Ricardo Hausmann and his physicist colleague Cesar Hidalgo documented a strong correlation between a country's wealth and its ability to produce a wide range of products, as well as specialized things -- think iPhones and advanced rocket boosters -- that few other nations can match. They further found that such capabilities, summarized in a measure they called the economic complexity index, were powerful predictors of future performance. If a country's wealth fell below where the index suggested it should be, it could be expected to catch up.

Now, a group of researchers led by physicist Matthieu Cristelli, using methods drawn from the analysis of weather patterns, has added an important caveat: The link between wealth and capabilities appears to apply only to countries of intermediate to high complexity. The rest wander around in a less predictable way, perhaps reflecting the complicating influences of poor governance or dependence on natural resources. In short, less-developed nations seem to fall into an essentially different regime of economic dynamics than do nations farther up the complexity ladder.

The physicists' insight could have big implications for China and India. The data suggest that the two have been building capabilities in a wide range of new products and skills, and have thus graduated into the group of countries for which complexity does predict growth. As a result, their combined gross domestic product should roughly triple over the next seven years, reaching a total of about 26 trillion dollars. The analysis further suggests that some African nations, such as Senegal, Madagascar, Tanzania, Kenya and Uganda, have stored up enough capabilities over the past 15 years to finally escape the trap of chronic poverty.

To be sure, the new research is highly unconventional, and provides only a taste of what we might be able to learn by tapping big data and going beyond the simple statistical analysis techniques that economists commonly use. That said, by wading into the messy details of actual economic activity, it does offer a promising way to forecast growth -- and grounds for much more optimism about the future of the developing world.

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