Magazine article Foreign Affairs

The Ever-Emerging Markets: Why Economic Forecasts Fail

Magazine article Foreign Affairs

The Ever-Emerging Markets: Why Economic Forecasts Fail

Article excerpt

In the middle of the last decade, the average growth rate in emerging markets hit over seven percent a year for the first time ever, and fore- casters raced to hype the implications. China would soon surpass the United States as an economic power, they said, and India, with its vast population, or Vietnam, with its own spin on authori- tarian capitalism, would be the next China. Searching for the political fallout, pundits predicted that Beijing would soon lead the new and rising bloc of the brics-Brazil, Russia, India, and China-to ultimate supremacy over the fading powers of the West. Suddenly, the race to coin the next hot acronym was on, and civets (Colombia, Indone- sia, Vietnam, Egypt, Turkey, and South Africa) emerged from the mist (Mexico, Indonesia, South Korea, and Turkey).

Today, more than five years after the financial crisis of 2008, much of that euphoria and all those acronyms have come to seem woefully out of date. The average growth rate in the emerging world fell back to four percent in 2013. Meanwhile, the brics are crumbling, each for its own reasons, and while their summits go on, they serve only to under- score how hard it is to forge a meaningful bloc out of authoritarian and democratic regimes with clashing economic interests. As the hype fades, forecasters are left reconsidering the mistakes they made at the peak of the boom.

Their errors were legion. Prognosti- cators stopped looking at emerging markets as individual stories and started lumping them into faceless packs with catchy but mindless acronyms. They listened too closely to political leaders in the emerging world who took credit for the boom and ignored the other global forces, such as easy money coming out of the United States and Europe, that had helped power growth. Forecasters also placed far too much predictive weight on a single factor-strong demographics, say, or globalization-when every shred of research shows that a complex array of forces drive economic growth.

Above all, they made the cardinal error of extrapolation. Forecasters assumed that recent trends would continue indefinitely and that hot economies would stay hot, ignoring the inherently cyclical nature of both political and economic development. Euphoria overcame sound judgment- a process that has doomed economic forecasting for as long as experts have been doing it.

SINGLE-FACTOR SYNDROME

History shows that straight-line extrap- olations are almost always wrong. Yet pundits cannot seem to resist them, lured on by wishful thinking and fear. In the 1960s, the Philippines won the right to host the headquarters of the Asian Development Bank based on the view that its fast growth at the time would make the country a regional star for years to come. That was not to be: by the next decade, growth had stalled thanks to the misguided policies of the dictator Ferdinand Marcos (but the Asian Development Bank stayed put). Yet the taste for extrapolation persisted, and in the 1970s, such thinking led U.S. scholars and intelligence agencies to predict that the future belonged to the Soviet Union, and in the 1980s, that it belonged to Japan. Then came the emerging-market boom of the last decade, and extrapolation hit new heights of irrationality. Forecasters cited the seventeenth-century economic might of China and India as evidence that they would dominate the coming decade, even the coming century.

The boom also highlighted another classic forecasting error: the reliance on single-factor theories. Because China's boom rested in part on the cheap labor provided by a growing young popula- tion, forecasters started looking for the next hot economy in a nation with similar demographics-never mind the challenge of developing a strong manu- facturing sector to get everyone a job. There were the liberals, for whom the key was more transparent institutions that encouraged entrepreneurship- despite the fact that in the postwar era, periods of strong growth have been no more likely under democratic govern- ments than under authoritarian ones. …

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