Opposed Systems Design

Just came across a fascinating article by Michael Pettis.  He argues that most of the economic forecasts being done for China assume that its existing growth model will continue.  Thus, while inputs to the model do create different predicted levels of output (like the 7.5-8.5% predicted growth rates cited in the Goldman Sachs study), they cannot accommodate a fundamental change in the development model.  The issue, Pettis argues, comes down to China's need to rebalance:

Because [the rebalancing process] is path dependent, and usually subject to important political constraints, it is hard to predict exactly when the old growth model will be replaced by a new growth model (for example I did not believe that China’s rebalancing would begin until 2013, after the new leadership took power, but it may actually have begun in 2012). It is also hard to predict short-term consequences, although it is, perhaps paradoxically, much easier to predict the medium and long-term implications.

Why? Because it is almost axiomatic that unsustainable imbalances must reverse themselves one way or another, and the only interesting question is how. The reversal of major imbalances is almost always very difficult, but the process itself can occur either in a quick and “catastrophic” way, via a kind of sudden financing stop that may lead to a financial crisis and negative growth, or in a slow, more controlled grinding away of the imbalances. There are few other ways in which the rebalancing can occur once the imbalances have gone far enough.

Readers with experience with complexity science and systems analysis - hell, anyone with experience in modeling - will recognize the issue at work here.  If there is a fundamental change in the governing dynamics of a system, then the model used to describe that system will very likely need to change.  If the existing model was built based upon observed correlations, then it definitely will have to change.  As Pettis puts it:

With a change in the growth model comes a radical change in the relationship between underlying variables and their impacts on growth. It makes no sense to use the earlier data series, adjusting them according to new conditions, and to project new data series, because when a country is forced into reversing the imbalances, by definition all the correlations between relative inputs and outputs must fall apart, and the more extreme the imbalances that need to be reversed, the more untrustworthy the previous relationships.

Stimulating material.  Gotta add Pettis to my must-read list.