On Friday evening, at our favorite restaurant, my husband and I had an excellent meal—so good that we returned the next evening only to be disappointed. The food was fine but just not as good.
Through a story from Thinking Fast and Slow, Nobel laureate Daniel Kahneman explained why.
Teaching Israeli flight instructors about effective training, Kahneman was surprised that they preferred punishment rather than rewards. The instructors explained that screaming at pilots for their mistakes resulted in better results the next day. Compliments for good performance, on the other hand, had the opposite impact.
Kahneman soon realized that the instructors were right and wrong. Yes, quality did indeed go up after a bad day and down when all went well. However, the reason was not the instructor. It was a regression to the mean.
And that takes us to China.
A Multi-Trillion Dollar Question
According to economists Larry Summers and Lant Pritchett, tracing Asia’s economic rise, we would see an unfinished story. It starts with Japan, continues onward to South Korea and the “Asian Tigers,” and now focuses on India and China. Describing that fourth chapter, the consensus expects China to maintain a seven percent real growth rate because of their past record.
However, in “Asiaphoria Meets Regression to the Mean,” Summers and Pritchett predict that the fourth chapter of the story will not necessarily involve China’s super-charged growth. Their reason is that same regression to the mean that Dr. Kahneman used for his Israeli pilot instructors. Over time, looking “less like themselves,” most countries revert to the world’s average growth rate. Consequently, predicting China’s growth rate, we should ignore the following graph.
Indeed, to predict China’s GDP growth rate, we need no opinion of China’s leadership nor knowledge of their resources or population. We just need to know that the world’s mean real GDP growth rate is close to 3.9 percent. (The Summers/Pritchett paper has more detail.) If China reverts to the mean, she will contribute as much as $20 trillion less to the world’s GDP in 2033 than most of us expect.
Our Bottom Line and GDP Forecasts
Discovered and named by Sir Francis Galton (Charles Darwin’s half cousin) during the late 19th century, the regression to the mean explains my restaurant experience, the Israeli pilots’ performance and the most feasible growth rate prediction for China.
If Drs. Summers and Pritchett are right, China will not become the world’s economic growth engine.