25th
Sep 2013
GDP growth is taken as a
measure of a country`s prosperity as well as an indication of the economy.
However, GDP growth rate alone cannot be an indicator for a country`s future
growth potential. We have seen the BRICS nations, which were the toast of the
world, a few years back slowing down. It’s said that
for tomorrow`s fruits you need to sow the seeds today. Hence one parameter
which can be looked upon one of the seeds is Gross Capital Formation (GCF).
Economists look for capital
formation as a necessary recipe to grow the countries’ economies. Obviously, more assets creation leads to more
and better avenues for output creation which if used efficiently and optimally
leads to increased output which is reflected in higher GDP growth. Generally speaking, developing countries often devote a
higher % of GDP to investment. Countries with rapid rates of economic growth
are heavily investing in more fixed assets to enable rapid economic growth.
The world bank data for
1990-2012 indicates that the countries which have had the highest average
annual GCF`s, in absolute numbers, are USA,
Japan, China and Germany which put together have accounted for more than
50% of the average GCF`s in this period. The World
Bank data also shows that the countries with the highest average GCF (as a % of
GDP) in the period 1990-2012 are Equatorial
Guinea, Bhutan, Cape Verde and China which account for 0.02%, 0.002%,
0.003% and 11.47% of the global economies.
China`s
story is explainable as everybody knows about the massive investment in the
physical infrastructure that has occurred, which has turbo charged the economy over
the past 2 decades. India`s story is different. It ranks amongst the top
growing economies but only in the top 25 in terms of average GCF as a % of GDP.
For comparison purposes China`s average GCF in 1990-2012 is 41.1% while India`s
figure is 28.9%. However India has improved its position to the top 10 in GCF
in 2000-12 with a GCF figure of 33.7%.
Analysing
the growth stories of USA, Japan, Germany, China and Singapore with India, with
respect to GCF throws some interesting facts. To make the analysis sharper the
GCF figures during the peak growth period post 1960 were looked into. Countries
like USA and Germany, which had embarked on the path of development well before
1960 and already had a good capital base, averaged 19% and 22.7%. Japan which
embarked on a manufacturing led development since the 1960`s averaged 31.7%
while the tiny nation Singapore, which also saw a major development post 1960,
had close to 34%. This indicates that countries on a development mode need a
GCF of at least 30% to develop their economies.
China of course is way ahead with a GCF of more than 40%. After the 2008 slowdown China`s capital investment has increased with GCF at around 47%. India too has made strides and increased its GCF to close to 36%. However, the other countries like USA, Germany and Japan have seen a decrease in their GCF`s.
What
should India and China do? There has been a lot of debate and answers are
obvious. China needs to reform its banking sector, free up interest rates and
focus on domestic consumption. India, needs to speedup reforms and mainly build
up confidence in the private sector. Easier said than done but there needs to be a political will. China certainly has but India? The experience of last 3 years says otherwise!
a) Is China in a better position to grow once the global economy picks up thanks to its huge capital base?
b) On the other side,is the capital investment in China a bubble which can burst?
c) What are the governance norms (or rather the lack of it) that controls the capital investment strategies in developing countries?
