Is the era of high Chinese economic growth coming to an end?

The ups and downs in the stock market yesterday were triggered in part by concerns about the fortunes of global economic growth. The collection of economies that use the euro as their currency, the Eurozone, looks like its sliding toward a triple-dip recession. Newly released data from the United States indicating perhaps weaker economic growth ahead also fueled concerns. And yes, stock analysts and economists also are trying to discern the often opaque short-term data flowing out of China are contributing to market jitters.

But these short-term trends, while concerning, take on an altogether different complexion if a new working paper on China’s future economic growth is correct.

The National Bureau of Economic Research earlier this week released a new paper by Lant Pritchett and Larry Summers, both of Harvard University. In short, the authors argue that China’s economy is very susceptible to a quick and sudden decrease in its growth rate. China has been growing so quickly for so long that forecasts would have us believe that the economic future of the world lies in Asia. Pritchett and Summers call this belief “Asiaphoria.” They argue that previous periods of Asiaphoria—during the rapid growth of Japan in the 1980s and then Southeast Asian countries such as Thailand in the 1990s—failed to live up to expectations.

The authors point out that the best way to evaluate the growth prospects of an economy isn’t to look at its past but rather at economies in similar situations. Pritchett and Summers act on this insight by focusing on a key finding from economic growth research: reversion to the mean. In other words, high-flying growth will eventually fall back to the overall average. Just like a middling basketball shooter can go on a hot streak for a while before his shooting percentage falls back to earth over the long run, Chinese growth is likely to decrease, and sharply.

Pritchett and Summers argue that China is more likely to have an even more swift decline in economic growth than other similar countries in the past. The reason: China’s corrupt and authoritarian political system. This system means there is very little rule of law in China. And the authors even go so far as to say that there are “plausible scenarios which may disrupt the current political settlement” (translation: political instability) that could sharply reduce growth rates.

There are other reasons to be concerned about Chinese growth, though on a longer time frame. A recent article in The Economist flagged concerning research about the growth in Chinese productivity. The rate of growth in total factor productivity, or how efficiently an economy uses labor and capital, seems to be declining. One potential reason for the decline is the financial sector, dominated by state-owned banks, which isn’t delivering funds to highly productive firms. Total factor growth is the basis for long-run economic growth, so this trend is worrying for China’s economic future.

Of course, these fears may all be overblown. Pritchett and Summers are clear that the growth decline they identify in recent research on dynamics of economic growth isn’t destiny. The decline in Chinese total factor productivity growth isn’t a well-established fact yet. And predictions, especially those about the future, are notoriously difficult. But the possibility of a sudden and sharp decrease in Chinese growth or an even slowing economic malaise is high enough that we all need to think about how the economy might handle such an event.