Growth and Investment
The biggest
story of the next fifty years will be the tremendous
growth of Asia. What has happened in the last twenty-five
is a mere prelude. The four largest Asian nations,
China, Indonesia, India, and Pakistan, have all
reached levels of income that approximate where
the US was about 1920. Indonesia and China are 30%
ahead of where India and Pakistan are, but in overall
terms they are all just getting started. By 2050,
each of these countries will have achieved living
standards roughly comparable to present-day Western
Europe or the United States.
So who will be the winner of the race? Will all
be equally wealthy in 2050, or will some countries
have done much better than others? It is rather
hard to predict, but even slight differences in
annual growth rates can make huge differences in
outcomes after 50 years. Just a 1.5% difference
in annual growth rate over 50 years will lead to
the faster country ending up with twice the per
capita income of the slower.
In the long run, having an economy that grows 7.5%
per year versus 6% per year is of monumental significance.
Of all the Asian economies, the country that has
done the best in the last ten years has been China.
It has been growing at the phenomenal rate of over
9% per year since the early 90’s. Back then,
China and India had the same living standard, but
by now the 3% edge that China has enjoyed for over
10 years has created a large gap. India’s
growth rate after the reforms of the early 90’s
has accelerated but only up to the 6% level on average.
Pakistan’s long-term growth has been a bit
above 5% per year since independence. This has been
sufficient to catch up to India’s head start
at partition, and by the late 1980’s Pakistanis
were clearly doing significantly better than Indians.
In the 90’s, growth slowed in Pakistan, while
it surged in India, and the gap closed, but Pakistan
still has a small statistical edge. At current market
exchange rates, Pakistan’s GDP per capita
is about 10% higher than India.
Where are future trends heading? Who will be ahead
in 50 years? That far down the line it is very hard
to predict, but clearly the country with the most
efficient economic system will be able to sustain
the highest growth rates in the long run. China’s
9% rate is unsustainable, and will eventually slow
down.
The key to understanding who is best positioned
is to look at investment levels, and more importantly,
the efficiency of that investment. The purpose of
investment is to build new plant and equipment,
and to improve human and capital resources so that
companies produce more goods and services. This
increased production is what is being measured when
we look at “growth”.
When we look at the various economies, we find something
very interesting. China is currently investing 45%
of its GDP, while India invests 25% of GDP, and
Pakistan is investing 20% of GDP. There is a huge
gap in how much each economy is investing. But when
we look at the return on that investment, by looking
at actual growth that is generated, we find that
China is growing at 9%, India at 6.5%, and Pakistan
at 7.5%.
China invests massively more than the other two
nations, but gets little extra growth. This is due
to “diminishing returns” as much of
the investment is wasted. It is the end result of
the communist system of state run enterprises that
misuses much of China’s investment. If we
divide the amount invested by the growth return,
we get a measure of the efficiency of investment
in each economy. In China one needs to invest 5
dollars to get 1 dollar of growth, India needs 3.85
dollars invested for one dollar of growth, and Pakistan
needs only 2.67 dollars invested for one dollar
of growth. The US invests about 20% of GDP and generates
growth of 3-4% per year for that, which seems rather
inefficient, but that is due to the high investment
demands for achieving growth in leading edge economies.
Pakistan has a more open and efficient economy which
allows investment to be effectively deployed. The
person to thank for that is Shaukat Aziz, whose
free market policies have made Pakistan a much more
vibrant economy. Aziz plans to raise economic growth
rate to 8% next year and keep it there for the next
decade. This can be done by raising Pakistan’s
investment rate to 25% of GDP, which is a realistic
figure.
For India and China, the issue is not how to find
investors. There is plenty of investment flowing
into both economies, and in China one could certainly
argue that it is excessive and beyond the absorptive
capacity of China’s economy. What the efficiency
numbers are saying is that both nations need to
reform their economic systems if they want to sustain
high growth.
Comments can reach the author at Nali@socal.rr.com
