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On Nov. 2, Federal Reserve Chairman Ben Bernanke confidently predicted that in 2012, the U.S. economy will grow at a rate of 2.5 percent to 2.9 percent. A few months earlier Bernanke predicted that the economy would expand 3.3 percent to 3.7 percent next year. A few months before that, the Fed projected growth in 2012 to be somewhere between 3.5 percent and 4.2 percent.
These shifting forecasts tell us two things: The U.S. continues to experience excruciatingly slow growth, and economists continue to have little success predicting it.
Understanding the drivers of economic growth is crucial to planning investment strategies, fending off recessions, and working out a country’s debt sustainability, among other things. If we knew how to raise long-term growth rates, it would be far easier to deal with Europe’s debt problems, tackle global poverty, and improve the quality of life for everyone on the planet. So it is no surprise that, every year, thousands of papers are published in economic journals and online, employing sophisticated models to explain past and predict future GDP performance of countries everywhere.
You would think that, armed with so much learning, their powerful models, and reams of data, economists would have anticipated that the recovery in the U.S. and Europe would stall, that growth in such places as China, India, and Brazil would accelerate, and that poverty rates would plummet in Africa. You’d be wrong. In fact, the myriad consultants and institutions purporting to understand the root causes of fast and slow growth resemble those stockpickers who offer a sure-fire return, but who are regularly outperformed by someone selecting a portfolio by throwing darts at a board. Anyone who says he knows the secret to growth is lying.
A few years ago, Prakash Loungani of the IMF looked at the accuracy of short-term economic growth forecasts by industry experts across a range of countries. Sixty recessions occurred in the countries he studied during the period covered by the forecasts. A grand total of two of those 60 were predicted by forecasters a year before they happened—which means the other 58 took economists by surprise. Two-thirds of all recessions remained unpredicted by April of the year in which they occurred. “The record of failure to predict recessions is virtually unblemished,” Loungani concluded.
So don’t put too much credence in predictions either of a double-dip recession or of an economic recovery in the U.S. over the next 18 months. We just don’t know. Pretty much the only safe bet is that something will happen.
Loungani’s study was relatively limited in scope: It looked at economists’ attempts to predict economic shifts a year or two out in a set of largely advanced countries. Imagine the much larger challenge of predicting longer-term growth outcomes in a wider range of countries—not just rich ones, but also the Nigerias and Vietnams of the world. In fact, there’s no need to imagine: We are awful at it.
In their 1997 paper trying to explain “Africa’s Growth Tragedy,” former World Bank staffers Bill Easterly and Ross Levine noted that in the 1960s, Africa was expected to grow faster than East Asia over the next 30 years by many, if not most, development economists. In the same decade, the economic model in the Soviet bloc was widely touted as a harsh but highly successful approach to escape poverty—not least because the Soviet Union had an immensely high investment rate. We know now, of course, that Africa stagnated and Eastern Europe collapsed, while East Asia boomed.
And so predicting future growth in developing countries is pretty much a fool’s errand. But economists are not much better at simply explaining why growth happened where and when it did in the past.
©2011 Bloomberg L.P. All Rights Reserved.
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