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Chinese Lessons: Singapore’s Epic Regression to the Mean

Danny Quah's picture

Across all recorded history, 99% of humanity has never invented a single thing. Yet, it is a truth universally acknowledged that long-run sustained progress in economic well-being arises from human creativity and innovativeness. In this regard, the average human and indeed the great majority of humanity over the last seven million years provide a completely misleading guide to what is possible.

Misapplied, the Law of Averages misinforms.
 

This is why, seemingly against all odds, every nation exhorts its people to be creative and innovative. It is why, apparently against all common sense, every country wants to claim Nobel Prizes for its citizens. Now and then a place as unlikely as Cyprus triumphs. For human success the average is not at all informative as an indicator of what is possible. Otherwise, humanity would still be where it was 7 million years ago.

Yet, when we contemplate the economic success of nations we are easily tempted to fall back on what we know about the average of nations: China cannot keep growing at better than 6% a year because no other country has for as long.

For at least two reasons, we should resist that seductive appeal. First, success is, as just-described, necessarily different from the norm. The average or even the great mass of the distribution of people or of nations simply isn’t revealing as a guide to what can happen. Second, perhaps even the typically-regarded growth decelerations and crashes in the data samples we do consider aren’t really failures after all.

Singapore, in one of the most spectacular of economic accelerations, saw its per capita GDP grow at over 6% per annum for over a decade.

But Lant Pritchett and Larry Summers (Asiaphoria Meets Regression to the Mean, 2014) document how after 1980 Singapore’s growth rate plummeted to a figure 4 percentage points lower than during that period of success. They note that Taipei,China and the Republic of Korea displayed similar trajectories. All these economies saw a growth spurt. Then they all crashed.

The theme that Singapore's growth trajectory is fraught with imminent failure is of course long-standing. Twenty years ago this year, soon after the collapse of the Soviet Union, Singapore was the target when the world's most influential economist wrote:

"From the perspective of year 2010, current projections of Asian supremacy extrapolated from recent trends may well look almost as silly as 1960s-vintage forecasts of Soviet industrial supremacy did from the perspective of the Brezhnev years."

Pritchett and Summers use these examples to draw a salutary lesson on how China's economy to date has already massively defied the statistical odds. It cannot continue to do so. The harsh reality of statistics alone tells us China will almost surely crash as well.

But if China were to go the same way, would that be so awful?  What has actually been achieved by the abortive runs of economic over-heating in Singapore and other East Asian false miracles?

In the first half of the 1960s Singapore's per capita GDP amounted to 16% of the US's; Taipei,China, 13% of the US; Korea, 7%. The graph shows what unfolded in the PWT8.0 data typically used to study cross-country statistical regression to the mean. By 2007-2011 the US economy was, obviously, seeing dramatic slowdown from the Global Financial Crisis. But then so were all other economies. Indeed, throughout this period pretty much all economies rose, fell, grew fast, and slowed dramatically in turn.

Fluctuations are a fact of economic life. What happened by the end? Averaged over the last 5 years of the sample Singapore's per capita GDP had grown to 116% that of the US; that of Taipei,China, to 65% of the US; Korea, 62% of the US. Even before the 2008 Global Financial Crisis, Singapore had already overtaken the US.
 

Per capita GDP is measured in thousands of PPP-adjusted dollars. Singapore’s per capita GDP, by the end of the sample, exceeded the US’s; those for Taipei,China and Korea exceeded 60% that of the US. Data from PWT8.0; R code by the author.

Given the impression that these are economies that had crashed and burned, Singapore, Taipei,China and Korea have not done badly at all. Indeed, today Singapore is more a first-world country than is the US.

Perhaps looking at growth accelerations and sudden slowdowns isn't informative for the economic question that really matters:
How have varying patterns of economic growth advanced a nation's well-being longer-term? Statistically-defined growth decelerations certainly featured in the growth trajectories of Singapore and other East Asian economies. But does that mean those economies have failed?  No.

This is not to under-estimate the significant political and social problems now emerging in the fabric of Singapore society. Inequality is high. The historical social compact between the population and the ruling party badly needs updating. But all that textured variety of economic and political life is not the principal contention here. Interest lies simply in the statistical behaviour of measured per capita GDP.

Today China's population is 4.3 times that of the US. Even if that ratio declines to 4 and China grows only as Korea has done, China's economy will within decades be 2.5 times that of the US. If China grows as Singapore, its economy will be 4.5 times the US's.

China might of course do even better than all these others in the future.  But to succeed perhaps all that China really needs to do is to fail as spectacularly as Singapore.
 

Comments

Submitted by Ray Lopez on

China manipulates their statistics, both on population and GDP. Adjusting for this, you find their GDP is about the same as Japan's, roughly $5T, and their population is aging almost as fast.

Submitted by Danny on

I'm not sure what you mean by "adjusting for this" manipulation. The data are from the Penn World Table http://www.rug.nl/research/ggdc/data/penn-world-table not China's statistical agencies.

Submitted by Tom on

Yes it's absolutely fine that China will slow down, as long as it doesn't completely stall out. It has a very long way to go to catch where Taiwan or Korea are now, though, let alone catch wherever they or the US will be in another 20 years.

Singapore is a city state and thus comparable to major US metropolitan areas, which generally have GDPs per capita in the 70s.

You've got wrong data, or something other than GDP per capita. The US was in the 47-50 range in 07-11, Singapore 39-53 (and behind by 5-year average), Korea 18-24, Taiwan 16-20.

Submitted by Danny on

I might well have wrong data, as you say, but it's the same wrong data as Pritchett-Summers, Eichengreen et al, and many others. It's just the Penn World Table.

Submitted by Tina on

Some readers had raised questions about the graph. We have added a caption at the bottom of the graph which should make things more clear.

Submitted by Danny on

A lot of attention worldwide is currently intensely focused on China's statistics; I'm not sure what gain there would be to their (or anyone's) willful manipulation of those. And, if only from a Chinese state perspective, I can see incentives in both directions - making the statistics look good as well as making them look bad. Either way, however, the statistics I used are from the Penn World Tables - and are the same data used by Pritchett and Summers (and Eichengreen et al, and many, many others). If I were to apply completely different data to overturn the PS reasoning, there'd always be the worry that the difference in opinion is due merely to different data. This way, it is clear the difference comes down instead to reasoning, rather than merely data.

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