Projections, predictions, oracles

Written by Julen Madariaga on December 1st, 2008

Yesterday I read the World Bank’s Quarterly Update on China. It is the report where they forecast the 7.5% annual growth for 2009.

First of all, I should thank chinalawblog for showing me the way to it, and also the World Bank itself for doing a very useful report that can be understood by dummies. This makes sense too, since we are paying for it through our taxes.

There has been some discussion on the net about the last 7.5% forecast given by the World Bank. The subject is so hot, and China is so overpopulated by pundits that any kind of statement about the economy can easily get you in trouble.

That was the case of China Herald publishing an 8.94% forecast. It was obviously a joke, but in the heat of the moment it was misunderstood by some readers. The actual message was simple: after many years seeing many crisis forecasted for China, Fons has learnt to be skeptical. Experience makes as good a prediction as anything these days, so at CYR the point is well noted.

Now, back to the WB report. This might sound obvious to many people, but it is just as well to say it: to issue a deterministic prediction of economic developments in China 1 year ahead is only second in difficulty to predicting next’s year weather. Just to give a little insight, the forecast for 2009 is based on dozens of graphs like the one below, where particular aspects of the economy are projected into the future. A single one of these factors that deviates from the projection can completely change the whole picture.

But the comment above could apply to any economic forecast. For the China report in particular we can add the following important points:

  • It assumes that the Chinese government will continue to make good choices in fiscal and monetary policy, as it has done up to now.
  • It assumes that Chinese authorities are transparent, and that they do what they announce. For example, implement the mysterious land reform announced last October, or the famous list of 10 points for the stimulus plan.
  • It assumes no big change in non-economic variables, such as social and political impact of the crisis, i.e. unemployment, social unrest, rise of nationalism and protectionism,  etc.

In the end, a 7.5% or even a 6% during 2009 is only a little break in the race, and in itself is not at all catastrophic. In fact it can be positive for China to allow her to implement the much needed “rebalancing” policies, as David Dollar explains here.

But the question that remains is not whether the growth will be 6, 8 or 9. The question is whether China’s government is clever and flexible enough to adapt to the new situations that will arise, and whether the delicate social and political balance that has been working in China for the last 30 years will resist the impact of a global crisis. Or, as I like to say and link in all my posts, whether the Wall will resist.

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