July 20, 2011Doug Hadden
Carlos Lipari, FreeBalance Washington
This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.
When analyzing the World investment and economic growth trends, we find something very peculiar. Growth has apparently registered a slight increase over the last 30 years while investment levels seem to have experienced an opposite trend. As we know, in order to increase growth with lower levels of investment, a country has to increase significantly the productivity of its investment which is usually done by improving technology. At the world level, though, another explanation could be given for achieving potentially higher economic growth rates, while at the same time investing a lower percentage of the world GDP.
I would like to analyze one extremely important fact that has been changing over the last 30 years and that might provide us with a good explanation to why we can have World Investment and Growth trends moving slightly in opposite directions.
Investment: Developed vs. Developing Countries
(Source: IMF, results reflect current/nominal values of Investment)
Over the last 20 years, a major shift in the origin of the World investment has occurred. Developed economies used to produce in their economies about 80% of the World investment (measured in current prices), against approximately 20% of the Emerging and Developing Economies. Today these two set of countries are investing about the same amount of money.
Therefore, over the last 20 years, developed nations moved from a position where they were investing four times as much as the rest of the world towards a position where they currently invest approximately the same amount.
Savings: Developed vs. Developing Countries
One might ask if this increase has been done via saving transfers from developed to developing nations but the reality shows us that, in general, the increase in investment in Emerging and Developing economies has been financed with savings generated among these set of countries. In fact, most of the world gross savings are already been produced in Emerging and Developing nations.
This big shift in the World investment distribution might help us understand why we have experienced a shift in the world economic growth from the so called “first world” towards the “third world” but also why we might be experiencing an increase trend of the world economic growth while investment, in percentage of the GDP, appears to have diminished slightly.
Growth: Developed vs. Developing Countries
For this assumption to hold, though, one should expect a higher ratio of growth/capital in developing nations to exist. Is this actually the case?
Analyzing historical data from the IMF allows as to see that by 2007, before the last world crises began, emerging and developing countries were already responsible for about 2/3 of all the World real economic growth (twice as much as the growth generated by the so called Developed world) and they were doing so with just 34.6% of the World volume of investment.
This finding is relevant because it indicates that the Emerging and Developing countries, right before our most recent world economic crises, were being able to grow much faster than developed economies for the each dollar they invested in their economy. This becomes even more relevant when we acknowledge that they are already producing most of the world savings.
With such high saving, developing nations could afford to maintain high investment growth rates during the latest economic crises. In fact, recent stimulus packages to promote growth in China and other developing economies, looking forward to sustain growth while World exports were plummeting during the 2008/2009 crises, might help to explain part of the most recent jump in the World investment quota that less developed experienced. Also, this increase might contribute to a lower gap between the productivity of investment in Developed nations and the rest of the world. In fact, some evidence can be found that this might be happening since 2008 even though Emerging and Developing nations continue to register on average roughly twice as much real economic growth as the one registered by developed economies per each nominal dollar of gross investment.
Shift from “Developed Countries”
In conclusion, the shift in the origin of investment towards Emerging and Developing countries over the last 20 years seems to have allowed the World economy to grow slightly faster even though its investment rate did not followed the same trend. Different reasons could be pointed out for this to happen but any future analysis should always include the impact of profound changes in the global distribution of investment and economic growth. One thing is clear, with or without an increase in its overall economic growth rate the world is living an historical process of rapid reduction the gap between developed nations and the rest of the world. This gap reduction process was intensified over the last 10 years and it seems very likely to continue for many years to come.
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