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China’s investment surge aids its own and the world economy

The publication of data for April paints a graphic picture of the present interplay of forces within China’s economy. They also show, so far, the broad correctness of the policies undertaken by China’s government in meeting the international financial crisis and, simultaneously, illuminate the very serious errors of writers such as Martin Wolf, chief economics commentator of the Financial Times, who advocated an entirely different course.

Externally China’s economy continues to be struck with great force by the current collapse in world trade produced by the international financial crisis. China’s April exports were down 22.6% compared to a year earlier. This is a lesser fall than for most countries but necessarily applies severe contractionary pressure to China’s economy.

Internally the Chinese government’s stimulus programme has led to a 30.5% rise in investment in fixed assets in the first four months of 2009 – an increase from the 28.6% year on year increase in the first quarter. Simultaneously China's retail sales in the year to April grew by 14.8%.

The result of the contradictory impact of the negative pressure from the decline in export, and the positive one from internal economic expansion, was the 7.3% year on year increase in industrial output to April. This is relatively low by China’s recent standards but stellar by those of almost all other countries which are suffering major declines in industrial production.

As China’s investment is rising more rapidly than consumption the share of investment in China’s GDP is necessarily rising. While precise quantitative data on the composition of GDP will not be available for some time nevertheless it is possible to judge orders of magnitude.

If it is assumed that China’s overall consumption rises at the same rate as retail sales (which is probably on the high side but no alternative objective measure is available at present),and that retail sales and investment continue to rise for the rest of the year at the same rate as in the first four months, while it is simultaneously assumed the balance of payments surplus declines by 30%, then this implies fixed investment would rise from 43% of China’s GDP in 2007 to approximately 46% in 2009. Evidently there are a considerable number of assumptions in such an estimate regarding trends in the rest of the year but it gives a rough yardstick.

Calculations done by Jing Ulrich, chairwoman of China equities at JP Morgan in Beijing, give a slightly lower estimate - that at present rates of growth investment will account for 45% of China’s GDP this year. Whatever the exact final outcome, therefore, it is clear that the share of investment in China’s GDP is rising.

In the present circumstances this has necessary consequences for China’s balance of payments surplus – given that such a surplus is necessarily equal to the surplus of domestic savings over domestic investment.

It is wholly unlikely that China's total savings level is rising at present given that the state budget is projected to move from balance to a 3% deficit this year, and company profits, the main source of China’s high savings level, are falling as a proportion of GDP under the impact of the financial crisis. China this year will at best have the same savings level as last year, or more probably its savings rate will decline somewhat.

As China’s savings rate is static or falling, and investment is rising, this implies a fall in China’s balance of payments surplus during 2009. China’s broader balance of payments figures will not be available for some time but balance of trade figures are available to April - and the trade balance dominates China’s overall balance of payments position.

The trade figures indicate that China’s monthly trade surplus fell from a peak of $40.1 billion in December to $13.1 billion in April. This figure, however, does not take into account seasonal fluctuations and a comparison with April last year shows a smaller reduction from $16.7 billion to $13.1 billion. The trend in the balance of payments surplus at present, however, is downwards. China’s balance of payments surplus, in short, is likely to fall as domestic investment rises.

This development may be sharply contrasted to the course advocated by Martin Wolf, and others, that China should close the gap between its savings and investment levels primarily by cutting its savings level rather than increasing its investment rate. As has been frequently pointed out on this blog there is a clear factual, as well as theoretical, positive correlation between a high rate of investment and a high rate of growth. China’s economy would slow if it were to reduce its investment rate – something which is not merely undesirable from the point of view of China but, particularly given the present international financial circumstances, is also highly undesirable from the point of view of the world economy. The present course of the Chinese government, which is increasing China’s investment rate, is therefore far preferable to the course advocated by Wolf not only from the point of view of China but from the point of view of the world economy.

Regarding China’s balance of payments surplus itself, while China requires a high rate of investment for a high rate of economic growth there is no reason to be found in economic theory, nor is there any evidence to suggest, that a high balance of payments surplus is any sense a precondition for rapid economic growth. Indeed, as a balance of payment surplus necessarily means that resources are not being productively invested in China, but are being invested in US Treasury bonds, it would be preferable, and secure a higher rate of return, for China to productively use a larger proportion of its assets within China – or put in other terms, the preferable way for China to use its high savings rate would be to increase its domestic investment rate from its previous level.

The argument that has appeared in sections of the foreign language media that China should not increase investment because this will increase ‘overcapacity’ is entirely fallacious theoretically. A high level of investment does not consist in creating more production capacity of the same type at the same levels of technology, efficiency, or productivity – the proposal that China should create more low value added production capacity is evidently false. The issue is high investment to upgrade China’s economy technologically and in terms of productivity and efficiency. Moreover, factually, China is at the beginning of this upgrading of its investment capacity. Capital stock per US worker or per West European worker is very much higher than per Chinese employee. To overcome this lag requires that the investment stock per Chinese worker rise more rapidly than in the US or Europe for a prolonged period.

In addition to direct investment in the workplace the efficiency of any economy, its level of productivity, does not rely only on extra machinery but on the efficiency of a country’s entire productive system including transport, communications, education etc. China has many decades of rapid investment to go through not only in machinery but in infrastructure before its level of capital stock, and therefore overall economic efficiency, even remotely approaches that of the US or Europe. This is merely another way of stating that, in order to achieve the technological and productivity level of the US and Europe, China must go through many decades in which its rate of growth of investment must exceed that of the US and Europe.

Nor, contrary to what is sometimes argued, is a high rate of investment contrary to the environmental needs of China – the exact opposite is true. Environmentally protective policies, for example low carbon emission power generation, is likely to be more expensive than environmentally damaging technology in the short term - although not necessarily in the longer one. To maintain a high level of economic growth in an environmentally protective fashion will therefore require a higher level of investment in China to maintain the same rate of growth – although such investment, of course, will not be in the same technologies as at present.

Increasing its level of investment, therefore, means the technological and productivity upgrading of China – both in terms of immediate productive capacity and the other indirect forms of investment supporting it, and not a merely quantitative expansion of existing technological and productivity levels. In short the argument that extra investment is wrong because it will create ‘overcapacity’ is entirely economically fallacious.

Purely abstractly, from a financial point of view, the highest possible utilisation of China’s savings for a still higher investment within China itself is desirable – which of course, as a by-product, would eliminate the balance of payments surplus. However such abstract financial considerations are subordinate to more practical constraints.

First, in the medium and long run the population of China will gain most from a high rate of economic growth, which requires a high level of investment. That is, the gain in sustainable consumption, both individual and social, which flows from a high growth rate and high investment level exceeds that which would be gained from increasing the share of consumption in GDP. Nevertheless such medium and short term gains must be balanced against short term consumption – with the key criteria being the welfare of the population and therefore its support for the economic system which has brought such success.

Second the rate of investment must be used to upgrade environmentally protective technologies and to replace, not expand, environmentally damaging ones.

Third handling very large investment programmes is not merely a question of allocation of finance but involves material organisation of the economy. As the author is aware of not only from theory but from experience of dealing with large infrastructure projects in London it is considerably easier to make allocations of finance than it is to ensure the efficient delivery of very large scale investment programmes. Whether China possesses the capacity to achieve the latter on any specified scale is a concrete issue that only those in the centre of the relevant economic decisions making have the information to take. Furthermore social, as well as strategic economic growth decisions, must be taken into account.

From an overall financial point of view under the conditions that prevailed in the first half of 2008 prior to the financial crisis, when the Chinese economy faced over- heating and rising inflation, it would, of course, have been dangerous and irresponsible to increase investment further. But now China’s economy is faced not with overheating but an international economic downturn and a potential, if not yet extremely serious, threat of domestic deflation rather than inflation – China’s consumer price index fell by 1.5% in the year to April and its producer price index fell by 6.6% in the same period. Under those circumstances an increase in the rate of investment does not pose the threat of overheating.

China’s investment surge is therefore not only good for its own economy but good for the world economy. Those, such as Martin Wolf, who proposed an alternative course that China should reduce its savings and investment rates were dangerously wrong.

Investment, Savings and Growth - International Experience in Relation to Some Current Economic Issues Facing China

The following study on the international relation of investment, savings and economic growth is based on a paper produced by the author, John Ross, for Antai College of Economics and Management, Jiao Tong University Shanghai.

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Introduction

This is the first of two papers devoted to the evidence on the relation between investment, savings and growth with particular regard to present economic issues facing China in relation to the international financial crisis. The two papers, although interrelated, are produced separately for the following reasons.

The first paper is an historical and comparative examination of the factual relation between investment rates and economic growth rates. The economic evidence it produces is clear. A very high rate of investment is required for rapid economic growth of the 8% a year level China requires. It is a high level of investment, not a high level of consumption, which is indispensable for rapid economic growth rates – there are no examples of countries with low rates of investment and very high economic growth. Those who argue that China, to maintain its level of economic growth, must increase its consumption level and reduce its rate of investment must produce evidence to justify that claim – and will be unable to do so.

However, from an underlying strategic economic issue such as the above, it is not possible in a one to one mechanical way to derive immediate policy conclusions – something the present author is acutely aware of from both theoretical considerations and practical experience. In order to judge a specific immediate policy it is necessary to have not only an overall framework but also detailed knowledge of concrete economic circumstances. The issues dealt with here affect economic strategy and other concrete factors must be taken into account in framing short term economic policy responses.

Investment and savings

In relation to the international financial crisis significant discussion has taken place regarding the US and China’s savings rate. However, from the point of view of China’s economic growth rate, the issue with the most direct effect is China’s rate of investment. The savings’ rate’s effect on growth is indirect.

This distinction may be easily illustrated by noting that while savings are necessarily required to finance investment it is both theoretically and practically possible, for example, for a country to have a high savings rate but to have relatively low or moderate investment and economic growth rates – Saudi Arabia and Libya are examples. In such cases a high savings rate is not used to maintain a high rate of domestic investment, with an associated high rate of economic growth, but instead foreign assets or exchange reserves are accumulated.

It is therefore investment which directly affects the rate of national economic growth. For that reason, regarding the potential for strategic economic growth, analysis should commence with the investment rate.

Confusion of domestic demand and domestic consumption

This strategic issue relates to a further, more immediate, economic question. In sections of the media stimulation of ‘domestic demand’ is sometimes treated as though it were the same issue as the stimulation of ‘domestic consumption’. This is self-evidently theoretically false. Domestic demand consists of two components, investment and consumption. Stimulation of domestic investment is just as much stimulation of domestic demand as is stimulation of domestic consumption.

The consequences of different allocations of GDP resources to investment and consumption are, however, extremely different from the point of view of China’s economic growth. As will be seen in detail below a very high level of fixed investment in GDP is a precondition for a high economic growth rate in any country - including China. Lowering the proportion of China’s investment in GDP, that is raising the proportion of consumption in GDP, will lead to a much slower rate of growth of China’s GDP. From this more immediate angle also the first key macro-economic issue that should be examined is the investment rate.

This paper, therefore, examines the relation of the rate of investment and the rate of economic growth both from a fundamental historical perspective and from the point of view of the recent international experience of high growth rate economies.

The tendency of the proportion of the economy devoted to fixed investment to rise

Considering first the investment rate from a long term historical perspective, one of the most factually well established historical trends of economics is that the proportion of the economy devoted to fixed investment historically rises with time - and that this rise is correlated with increasingly rapid rates of economic growth.

This process can be clearly measured over a three hundred year period, and can also be seen to operate dramatically in the period since World War II. All major economies that have grown rapidly have a high level of fixed investment. There are no examples of major economies which have grown rapidly with a low rate of investment.

These facts have evident conclusions for the discussion of the model of economic growth and for China’s investment level.

After considering this from the point of view of a long timescale, setting out the factual data, it will be examined from the point of view of the experience of high growth economies since World War II.

The historical trend of the proportion of investment in GDP

Figure 1 shows the percentage of fixed investment (gross fixed capital formation) in GDP for a series of major countries over the longest periods of time for which data is available.[1]

Figure 1

The pattern is evidently clear and striking. By far the strongest trend is for the proportion of GDP devoted to fixed investment (gross domestic fixed capital formation) to rise with time. This in turn, as will be shown, is associated with progressively rising rates of economic growth.

The historical correlation of increasing proportions of GDP devoted to investment with rising rates of GDP growth

Considering this historical trend in more detail, and analysing countries in the chronological order in which a new peak in the proportion of GDP devoted to gross fixed domestic capital formation appeared, the following is the historical pattern.

- Commencing with the period immediately antedating the industrial revolution, the proportion of GDP devoted to fixed investment in England and Wales, at the end of the 17th century, was 5-7 per cent. [2] This rose slightly, although current estimates are that it did not rise greatly, during the 19th century - peaking at over ten percent of UK GDP prior to World War I.

This level of investment was sufficient to launch the first industrialisation of any country but at a rate of growth which, while unprecedented at the time, was extremely slow by contemporary international standards - about two per cent a year.

- Turning to the latter part of the 19th century, the proportion of US GDP devoted to fixed investment had risen to considerably exceed that for the UK – reaching a level of 18-20 per cent of GDP by the last decades of the century.

A sharp fall in the proportion of the US economy devoted to fixed investment commenced in the late 19th century, and was particularly pronounced during the period between World War I and World War II – being associated with the great depression of the inter-war period. After World War II the US resumed its pattern of 18-20 per cent of GDP being devoted to gross fixed capital formation. This generated an average growth rate of 3.5 per cent a year. With such a growth rate an economy doubles in size every 20 years and quadruples in size every 40 years. It was on the basis of this historical level of investment, and growth rate, that the US overtook Britain to become the world’s greatest economic power.

- In the period following World War II Germany achieved a level of fixed investment exceeding 25 per cent of GDP – peaking at 26.6 per cent in 1964. This period 1951-64 was that of the post-war German ‘economic miracle’ with average growth of 6.8 per cent a year - with such a growth rate an economy doubles in size every 11 years and quadruples in 22 years.

- Starting at the beginning of the 1960s Japan achieved a level of gross domestic fixed capital formation of more than 30 per cent of GDP. This reached a peak in the early 1970s, at 35 per cent of GDP, before later sharply falling. During the period of a high and rising rate of investment in GDP the average annual rate of growth of the Japanese economy was 8.6 per cent.

- From the 1970s onwards, South Korea similarly achieved a level of fixed investment of 30 per cent of GDP. During the 1980s this rose above 35 per cent of GDP. The other East Asian ‘Tiger’ economies – Singapore, Hong Kong and Taiwan – showed a similar pattern. South Korea’s economy confirmed the relation between fixed investment and economic growth illustrated by Japan by growing in this period by an average 8.3 per cent a year.

Such growth rates in Asia showed that something unprecedented in human history was now possible – that it was possible to industrialise an economy, and achieve a ‘first world’ level of development, in a single generation.

- From the early 1990s onwards China achieved sustained rates of fixed investment of 35 per cent of GDP with, from the beginning of the 21st century, this rising to more than 40 per cent of GDP – a level never before witnessed in human history. The result was average 9.8 per cent a year economic growth over a sustained period – also the most rapid sustained economic growth ever seen in human history.

- To complete the chronological picture, the proportion of GDP devoted to fixed investment for two countries recently undergoing rapid economic growth, India and Vietnam, is shown. The proportion of Indian GDP devoted to fixed investment has not reached the Chinese level but has become high – reaching 33.7% of GDP in 2007 and 37.6% of GDP by the second quarter of 2008. On this basis, in the last five years, India has achieved an average growth rate of 8.8 per cent a year.

In Vietnam the proportion of GDP devoted to fixed investment rose from 13 per cent in 1990 to 25 per cent in 1995 and then to 37 per cent in 2007. Economic growth has accelerated rapidly, rising to an average of 7.9 per cent a year in the five years up to 2007.

Considering these trends, such a high level of investment is a necessary condition for rapid economic growth. No substantial country without comparable high levels of fixed investment has achieved such rapid rates of growth on a sustained basis. But while such a high level of investment is a necessary condition for rapid economic growth it is not a sufficient condition. Other elements which must accompany a very high rate of investment in GDP to produce rapid economic growth are considered below.

Recent experience of countries with high rates of economic growth

Turning to analysing post-World War II examples of sustained high economic growth, only 21 countries have achieved 8% growth a year sustained over a 20 year period since World War II. Leaving aside two extremely small states, Botswana (population 1.6 million) and Swaziland (population 1.1 million), which have economies dominated by individual projects, these countries that have undergone at least an 8% growth rate over a twenty year period fall into only two categories.

The first are eight Asian economies which have experienced prolonged periods of rapid growth - China, Japan, Singapore, South Korea, North Korea, Taiwan, Thailand, and Hong Kong. These form the primary focus of this study as their economies are not dominated by direct and indirect effects of the single commodity oil.

The second group are oil producers, or states adjacent to oil producers, in which rapid economic growth has been due to the direct and indirect effects of producing this commodity.[3] Growth rates based on oil are evidently not available to countries that do not have oil reserves and therefore do not form a generalisable model of development or are not immediately adjacent to countries which are large oil producers – for this reason the growth pattern of economies dominated by oil production are not considered in detail here.

Investment levels in the high growth Asian economies

To illustrate the decisive role played by high investment rates in sustaining high growth rates the percentage of Gross Fixed Capital Formation (fixed investment) in GDP for six of the eight high growth Asian economies is shown in Figure 2 - comparable IMF data for North Korea and Taiwan is not available. India has been added to this comparison due to the size of its economy and its recent rapid growth.

The evident feature of these economies countries is that all have had, during their periods of rapid growth, very high percentages of Gross Domestic Fixed Capital Formation in GDP. Taking the peak years for each country, Gross Domestic Fixed Capital Formation reached 35.6% of GDP in Hong Kong, 36.4% of GDP in Japan, 39.1% of GDP in South Korea, 41.6% of GDP in Thailand, 42.7% of GDP in China and 47.4% of GDP in Singapore.

Figure 2

It may be seen that no cases at all of rapid sustained economic growth without such a high rate of investment are to be found in such high growth economies. It is therefore evident that the economic evidence demonstrates that a high percentage of gross domestic fixed capital formation is a precondition for rapid economic growth. It is a high proportion of investment in GDP, not a high proportion of consumption, that forms the precondition for rapid economic growth.

Furthermore detailed examination makes clear that in those countries in which investment declined as a proportion of GDP – Japan, Hong Kong, South Korea and Singapore – this led to a marked decline in economic growth. On the contrary in those economies in which investment rose as a percentage of GDP, China and India, economic growth accelerated. The correlation between a high rate of growth and a high rate of investment is therefore evident.

In the data below the annual rate of growth is stated as the average over a five year period - in order to smooth out purely short term fluctuations in business cycles.

Japan

Measured in PPP terms Japan is Asia’s second largest economy. Japan’s rate of Gross Domestic Fixed Capital Formation peaked at 36.4% of GDP in 1973 but then fell to 23.3% of GDP by 2007.

Over the same period of time Japan’s annual rate of GDP declined from the 8.4% per cent rate in 1973 to only 2.1% (see Figures 3 and 4).

Figure 3

Figure 4

South Korea

South Korea is the Asia’s 4th largest economy - after China, Japan and India. South Korea’s level of Gross Domestic Fixed Capital Formation in GDP peaked at 39.1% in 1991, although the 1996 level of 37.5% was only marginally lower.

Thereafter South Korea’s level of Gross Fixed Capital Formation declined sharply to 28.8% of GDP in 2007. South Korea’s annual rate of GDP growth fell in parallel from 9.4% in 1991, and 7.3% in 1996, to 4.4% in 2007 (see Figures 5 and 6).

Figure 5

Figure 6

Thailand

Thailand’s percentage of Gross Domestic Fixed Capital Formation peaked at 41.6% of GDP in 1990 and 41.1% of GDP in 1995. It then fell to 26.8% of GDP in 2007.

Thailand’s annual rate of GDP growth over the same period fell from 10.9% in 1991, and 8.6% in 1995, to 5.6% in 2007 (see Figures 7 and 8).

Figure 7

Figure 8

Singapore

Singapore saw one of the most sustained high levels of investment in GDP in any country in world history with more than 30% of GDP devoted to fixed investment for 30 years from 1970-2000. Singapore’s Gross Domestic Fixed Capital Formation peaked at 47.4% of GDP in 1984, remained at 38.7% of GDP in 1997 and fell to 24.9% of GDP in 2007.

Singapore’s annual rate of GDP growth over the same period fell from 8.5% a year in 1984, and 9.7% a year in 1997, to 7.1% a year in 2007 (see Figures 9 and 10).

Figure 9

Figure 10

Hong Kong

The percentage of Hong Kong’s GDP devoted to Gross Domestic Fixed Capital Formation, amid significant fluctuations, fell from 35.6% in 1964 to 35.6% and to 20.3% in 2007.

Hong Kong’s annual average growth rate fell from 10.5% in 1964 to 6.4% in 2007 (see Figures 11 and 12).

Figure 11

Figure 12

China and India

India and China show a clear contrast to Japan, South Korea, Singapore and Hong Kong.

Whereas in Japan, South Korea, Singapore and Hong Kong there was a decline in the proportion of the economy devoted to investment and a decline in the rate of economic growth, both India and China India have systematically increased the share of investment in their GDP and have seen an acceleration of their growth rates. Because this pattern in India and China is so strikingly different to Japan, South Korea, Singapore and Hong Kong it is worth looking at in some detail.

India’s Gross Domestic fixed Capital Formation increased from 17.9% of GDP in 1977 to 22.7% of GDP in 2000 and to 33.9% of GDP in 2007. By the third quarter of 2008, before the onset of the international financial crisis, India’s Gross Domestic Capital Formation reached 37.6% of GDP. Over the same period India’s annual GDP growth rate accelerated from 4.5% in 1977 to 6.0% in 2000 and to 8.8% in 2007.

Unlike those who advocate a reduction in investment and savings rates, Manmohan Singh, who is not only India Prime Minister but an excellently trained economist, has constantly stressed the need to raise India’s savings and investment rates and has made this a foundation of his economic policy – with considerable success, as has been seen, in terms of sustaining high growth rates.

Manmohan Singh considered China’s high savings and investment rates as the foundation of superior economic performance. For example in 2003 when asked, ‘is it legitimate to compare India and Chinese economies?,’ he replied: ‘There is nothing wrong in the comparison. It is good to try and achieve the growth rate of China. But we must remember that the Chinese savings rate is 42 per cent of the Gross Domestic Product, whereas savings in India is hovering at 24 per cent.’

Before he became Prime Minister in May 2004 Singh set out clearly the investment rate without which India’s target growth rate could not be achieved: ‘at a Delhi seminar, Dr Manmohan Singh spoke out regarding the targeted eight per cent growth rate in the Tenth Plan... he opined that an eight per cent growth rate would require a 30 per cent ratio of savings to income and a substantial rise in the tax-GDP ratio.’

Therefore in 2006, after assuming office, Prime Minister Singh noted with satisfaction the increase in India’s savings rate and set the goal of increasing it further together with a concomitant rise in the the investment rate: ‘Our statisticians now tell me that our savings rate has shot up in the last couple of years to about 27 to 28 percent of our GDP… we are a country where the proportion of young people to total population is increasing. All demographers tell me that if we can find productive jobs for this young labour force, that itself should bring about a significant increase in India's savings rate in the next five to ten years. If our savings rate goes up, let us say, in the next ten years, by 5 percent of GDP, we would have generated the resources for investment in the management of this new urban infrastructure that we need in order to make a success of our attempt at modernization and growth.’

By 2007 Prime Minister Singh therefore welcomed the further increase in India’s savings and investment rates. According to India’s premier financial paper, the Economic Times: ‘The investment and saving rate is as high as 35 percent of national economic output, Singh said at a meeting of his Congress party in this southern Indian city, the hub of a 50-billion-dollar IT industry at the vanguard of the country's economic resurgence.’

Similarly, India’s finance minister, P Chidambaram , called in February 2007 for a further increase in India’s savings and investment rates: ‘India’s savings and investment rate as percentage of GDP have gone up by 2 per cent each. But to sustain the revised growth rate of 9 per cent in the 11th Plan, he [ P Chidambaram] said: “Both savings and investment as proportion of GDP must be raised further.”

By February 2008 Prime Minister Singh noted the continued advance of the savings rate and the new high reached in India’s investment rate: ‘Highlighting the strong fundamentals of the economy, Dr. Singh said that the savings rate in the country has touched almost 35 per cent of Gross Domestic Product (GDP) and the investment rate is at an all time peak of over 36 per cent of the GDP.’

The orientation of India to very high savings and investment rates, and the relation of this to rapid economic growth, is therefore clear (see Figures 13 and 14)

Considering China its fixed investment increased from 27.8% of GDP in 1978 to 34.3% of GDP in 2000 and to 42.7 % of GDP in 2007 42.7%. In the same period China’s rate of GDP growth accelerated from 4.9% in 1978 to 8.6% in 2000 and to 10.8% in 2007.

Figure 13

Figure 14

Conclusion

The conclusion from economic evidence is therefore clear.

A high percentage of fixed investment in GDP is an indispensible precondition for a rapid rate of growth – there are no examples of countries with rapid rates of GDP growth and low proportions of the GDP devoted to fixed investment. It is a high level of investment in GDP, not a high rate of consumption, that is necessary for rapid GDP growth.

In those countries in which the rate of investment in GDP fell – Japan, South Korea, Singpore and Hong Kong – the rate of economic growth also fell substantially. In those countries – India and China – in which the percentage of GDP devoted to investment rose the rate of economic growth also increased.

In short all evidence establishes clearly that it is the high rate of investment which is decisive for rapid GDP growth.

This overwhelming factual evidence, of course, supports what is evident from a theoretical point of view. Consumption, by definition, does not add to productivity potential or production capacity and therefore increasing the rate of consumption does not raise GDP growth. If China lowers its proportion of the economy devoted to investment its economic growth rate will also fall - as is confirmed by the international experience noted above.

* * *

The paper draws on earlier material which appeared in 'Why Asia will continue to grow more rapidly than the US and Europe - a historical perspective' on the blog Key Trends in Globalisation.

References

[1] The figure for England for 1688 is that in Angus Maddison, The World Economy, OECD Paris 2006 p395. UK figures after 1688 and up to 1947 are calculated from One Hundred Years of Economic Statistics, The Economist, London 1989 p74. Figures from 1948 are calculated from International Monetary Fund, International Financial Statistics (August 2008) Minor adjustments have been made to chain the earlier statistics to be consistent with the IMF data – in no case does this make any significant difference to the pattern shown. The data for fixed investment for the earlier period used by The Economist One Hundred Years of Economic Statistics are based on calculations in C H Feinstein and Pollard Studies in Capital Formation in the United Kingdon 1750-1820, Oxford University Press, Oxford 1988. Other commentators have suggested that Feinstein and Pollard's figures are somewhat too high - see for example. N F R Crafts British Economic Growth during the Industrial Revolution, Clarendon, Oxford 1986 p73. None of these revisions and differences however is of sufficient magnitude to alter the fundamental pattern shown here.
US figures prior to 1948 are calculated from One Hundred Years of Economic Statistics, The Economist, London 1989 p74. Figures from 1948 are calculated from International Monetary Fund, International Financial Statistics (August 2008) Data for the earlier period give only private fixed capital formation whereas that after 1948 is for total fixed capital formation – i.e. including government fixed capital formation. There are no reliable estimates of government fixed capital formation in the earlier period and therefore data for the earlier period have been adjusted upward by the difference between the two in 1948 – which is slightly over two per cent of GDP. This has the effect of revising upwards slightly the percentage of GDP allocated to fixed investment in the earlier period but the difference is too small to affect the overall pattern.
Figures for Germany prior to 1960 are calculated from One Hundred Years of Economic Statistics, The Economist, London 1989 p202. Figures from 1960 are calculated from International Monetary Fund, International Financial Statistics(August 2008). There is however no significant statistical difference between the two.
Figures for Japan, South Korea, China, India and Vietnam calculated from International Monetary Fund, International Financial Statistics.

[2] Phyllis Deane and W A Cole in British Economic Growth 1688-1959, Cambridge University Press, Cambridge 1980 p2 being closer to the lower figure while further studies have tended to revise the figure upwards slightly. The higher estimates for the earlier period have been taken here so as to avoid any suggestion of exaggerating the degree to which the proportion of GDP devoted to Gross Domestic Fixed Capital Formation has risen. The precise figure used here is that calculated by Maddison in Angus Maddison, The World Economy, OECD Paris 2006 p395. The higher figure, as can be seen, makes no difference to the overall trend.

[3] These countries are Iran, Iraq, Equatorial Guinea, Kuwait, Israel, Jordan, Oman, Qatar, Saudi Arabia, Libya, Gabon, Equatorial Guinea, and the United Arab Emirates.

痉挛中的世界贸易

我在本博客之前的一些文章里曾经分析过目前的金融市场包括股价已经历经了17个月的持续下滑，其下滑的速度之快可以和史上记载的最严重的一次金融危机（发生在1929年后）相提并论。从图表一看，虽然从3月9日－11日的交易日里华尔街的股价有所上升，但这不能打破整个下降的趋势。到目前的股价的小幅上升只是使其下降率向自2007年10月开始的下降趋势平均线靠拢。可以看到2007年10月之后的数周内道琼斯工业指数的下降率都高于平均下降水平。

图表一

从图表二可以看到，自2007年10月开始的道琼斯工业指数下降率已经接近1929年的下降速度，并且其下降速度已经远远超过20世纪以来除1929年外的其他几次主要的下跌期。

图表二

就像本人在这个月初的一篇文章里所指出的那样，如果考虑经济下滑和生产性经济之间的关系，主要的工业经济国家数据都显示折合年率的2008年最后三个月出口下降率事实上已经超过了1929年。

经济合作与发展组织（OECD）发布了截至到2008年世界贸易的最新统计数据。从其中一些国家最近几个月的数据来看可以断定这种急速下降的趋势呈现一种普遍的态势。

我们用三个指标来计算和衡量目前出口快速下滑的状况：2008年12月份同比下降率、自去年每个国家或地区相较其最高峰与2008年12月的出口率之间的变化值以及折合年率的最后三个月出口下降率。

为了能跟美国历史上出现过同等规模出口下降的情况进行比较，我们列举了以下出口下降率，1929-30年的22.5%、1930-1931年的32.7%、1932-1933年的4%，之后部分出口开始得以恢复。据资料记载美国出口下降最快的时期是20世纪30年代的大萧条时期, 1930-31年的出口下降率为32.7%，到1933年美国的出口下跌了66.2%，已经低于其1929年的水平。

如表格一所示，我们先把OECD区域看作是一个整体，再单独把欧洲分离出来进行比较。首先我们看到整个OECD区域的出口自2008年4月的最高峰以来出现了大概30%的下降。折合年率到截至去年12月的最后三个月出口下降率达到了惊人的64%。

另外其他主要的G7经济体的下降相对较缓些，自2008年6月最高峰以来出现26.9%的下滑，折合年率到去年最后三个月出口下降率也达到了57.8%。

在欧洲范围内，其折合年率截至到去年12月的最后三个月出口下降率达到了50.4%, 而如果把一些东欧国家也计算进去的话，OECD欧洲区域的年下降率为67.0%.

由此可见，在贸易领域和相关的金融市场，目前的下降速度完全可以和30年代初爆发的大萧条时期的衰退相提并论。两者之间的差别并不是他们下跌的速度有所不同，而是其下跌持续期。1929年后的出口下降持续了4年，而目前所发生的出口下滑才发生了一年。

表一

让我们再来看看每个国家的具体情况。表2显示了经济合作发展组织内最大七个国家-G7在2008年12月的出口情况，可以看到出口水平从去年最高水平下降了大约25%，而折合年率截至去年12月的最后三个月出口下降率都超过了50%。

总之，世界贸易正以30年代大衰退的下降速度在快速下滑，这种贸易急剧下滑不仅发生在小国家甚至已经完全影响到了世界大国。

表二

表三显示了非G7的经济合作发展组织内其他欧洲国家的出口下降率。可以看到表内的两个较小经济体国家-卢森堡和爱尔兰的跌幅要明显小于其他国家。其他国家的出口率与去年最高水平相比下降了至少25%，折合年率的出口下降率超过50%。

其中西班牙折合年率截至到08年12月的最后三个月出口下降率更是达到令人难以置信的99%，这或许可能是统计上有点失真。但是瑞典、波兰、挪威的出口下降也同样的严重，分别是79.1%、82.8%、83.1%。这样的下降率表明至少在短期内的出口不只是在下降而是濒临崩溃。

表三

让我们转而来看看非欧洲经济体国家的情况，如果不考虑其中两个小的经济体国家-新西兰和冰岛。如图四所示，中国2008年最后三个月折合年率的出口下降率为53.3%，这看起来比其他国家要稍缓和一些。墨西哥和韩国的同比出口下降率大概在30%左右.南非和土耳其已经与其顶峰水平相比下降了40％左右。其他几个国家如韩国、巴西、印尼、南美和土耳其的折合年率的出口下降率分别是70.7%、72.4%、78.2%、82.1%、90.1%，可以看到这样的出口下降率是灾难性的。

表四

表五所示，OECD关于今年1月的出口统计数据依然显示这样大幅下降的趋势正在延续。其主要的区别是1月的实际出口下滑相比与2008年下降率显得更加糟糕。

2009年1月出口数据跟各自的出口最高月数据相比，表内显示五个国家的出口下降变化率分别是瑞士（29.8%）、南非（41.1%）、瑞典（41.4%）、挪威（46.3%）、土耳其（47.5%）。没有任何的迹象表明目前这种出口快速下滑的趋势将有所改善。

表五

总结上面的数据，在列出的三十四个国家里有十四个国家的年出口下降跌幅超过70％，另外20个国家的下降率也超过了60％。有关去年最后三个月的出口下降率的公开报告显示日本的下降率为51.9%,中国为53％，美国为54％，这跟其他多数国家大幅下降的出口情况相比确实要缓和些。

然而如此糟糕的年出口下降率说明世界贸易已经遭受了严重的打击。去年最后三个月的数据显示目前的情况已经相当严重并且这样快速的下降显然已经成为一种趋势。同样令人担忧的是有七个国家的出口率与去年最高峰水平相比下降超过了40％，另外十九个国家超过了30％。

这里有必要指出当今的世界贸易在世界经济中扮演了极其重要的角色，其重要性已经远远超过了它在1929年的那次金融危机中所处的地位。现在美国的出口占美国GDP的12％，而其在1929年只占7％。而这个比例在大多数国家可能更高。即使在其他同等的条件下，单凭如此快速的持续贸易下降率已经足够说明现在的情况比1929年更加严重。

这中从金融业向生产性经济转移的机制在上述的下降趋势中表露无疑。就像先前提到的那样，目前金融市场的衰落程度几乎与1929年的金融危机相同，而金融市场跟生产性经济之间衰退并不完全一致。生产性经济虽然也遭受严重的创伤，但其受下降的程度并不完全与金融市场相当。但是这不能表明目前下降到底部的金融市场会复苏。同时，虽然生产性经济的下降趋势和统计数据落后于金融市场，但其也将向金融市场的下降趋势靠拢。

所有主要经济体的最近数据显示世界出口下降达到令人咋舌的程度。爆发在金融市场的危机正通过贸易萎缩开始影响到生产性经济。现在可以这么说在世界两大经济领域－金融市场和贸易中，两者的下降率都已经完全可以和1929年那次金融危机的规模相比。我们必须要仔细的研究这种从国际经济危机到国内经济危机转移的机制有多强大。同时，这种危机持续的时间也是至关重要的。到目前为止最严重的一次危机发生在1929年，这不仅是因为其快速的下降速度还在于它持续时间之长。20世纪30年代美国贸易和GDP持续下滑了长达四年，而目前金融市场的下滑已经持续了十七个月，贸易下滑还不足一年，GDP的下滑大概是六个月。

相当充分的数据表明世界贸易在2008年最后三个月内正处于痉挛的状态。和金融市场的急剧下滑一样，世界贸易也正快速的下滑，这使我们断定目前的世界贸易的急剧下跌标志着这场危机的严重程度不仅远甚于二战以后的几次衰退，也几乎赶上了1929年的那次金融危机。

表格注释－2008出口最高峰月

1. 2008年1月
2. 2008年3月
3. 2008年4月
4. 2008年5月
5. 2008年6月
6. 2008年7月
7. 2008年8月
8. 2008年9月

The convulsion in world trade

This blog has analysed on several occasions that the current decline in financial markets, including share prices, has continued for 17 months to match in rapidity that after 1929 – i.e. the most severe recorded.

As may be seen from Figure 1 the rise in share prices on Wall Street in the trading week 9-13 March week did not break out of this declining trend. The shift so far has simply moved the rate of descent closer to the declining trendline that has been operating since October 2007 following several weeks of more precipitate than average falls.

Figure 1

As may be seen from the comparison in Figure 2 the rate of descent of the Dow Jones Industrial Average since October 2007 continues to be as rapid as in 1929 - i.e. it greatly exceeds in speed any other major share decline, apart from 1929, seen since the beginning of the 20th century.

Figure 2

Considering the relation between the financial decline and the productive economy, an article on this blog earlier this month also noted that, for the major industrialised economies, the annualised rate of decline in exports in the last three months has actually been more rapid than in 1929.

The latest statistical data released by the Organisation for Economic Co-operation and Development (OECD) for world trade up to December 2008, with data for more recent months in a few cases, allows the calculation of a picture for a wider range of countries that confirms this trend in striking fashion.

Due to the extremely rapid shift in the situation three indicators have been calculated for exports – the actual year on year decline to December 2008, the actual decline in exports since the peak month for each country or area last year, and the change during the three months to December 2008 on an annualised basis.

In order to give a historical scale of comparison the decline of US exports, in current prices, was 22.5% in 1929-30, 32.7% in 1930-31, 32.4% in 1931-32 and 4.0% in 1932-33 after which partial export recovery commenced - i.e. the most rapid annual rate of decline of US exports in the Great Depression, and the most rapid on record to date, was 32.7% in 1930-31. By 1933 US exports had fallen 66.2% below their 1929 level.

Considering first the OECD area as a whole, and the situation in the European region, the data is set out in Table 1. As can be seen for the OECD region as a whole exports have already declined by over 30% since their peak in April 2008 - essentially equaling the rates of decline of the worst year of the 1930s. The annualised rate of decline in three months up to December 2008 was an astonishing 64%.

For the major G7 economies the decline was only slightly less severe - with a decline of 26.9% since the peak in July and an annualised rate of decline of 57.8% in the three months to December 2008.

Within the Euro area the annualised rate of decline for the three months to December 2008 was 50.4% and for the OECD European region, which includes some East European states, the annualised rate of decline was 67.0%.

It may therefore be clearly said that in the field of trade, as in that of financial markets, the current decline is full comparable in speed of descent to the onset of the Great Depression. The difference, so far, is not in the speed of fall but in its duration. The decline in exports after 1929 continued for four years whereas so far the current decline has been occurring for a year.

Table 1

Turning to individual countries, Table 2 shows the figures for the largest OECD economies - the G7. As may be seen all have seen declines in exports of over 25% since their peak levels last year and in the three months to December 2008 all witnessed annualised rates of decline of more than 50%.

In short, the precipitate decline in world trade, at 1930s rates of descent, is not confined to smaller economies but fully affects the largest ones.

Table 2

Table 3 shows the rates of decline of exports for the non-G7 European OECD states. As may be seen with the exception of two small economies, Luxemburg and Ireland, which have done better than others, all OECD European countries have seen actual export declines of at least 25% and annualised rates of decline of 50% or more.

It is possible that the rate of decline for Spain, an incredible 99.7% annualised rate in the three months to December 2008, is a statistical freak or error but the annualised rates of decline for Sweden, Poland, and Norway are almost as severe - respectively, 79.1%, 82,8%, and 83.1%. Such rates may rightly be characterised not as decline but of collapse of exports in at least the short term.

Table 3

Turning to non-European economies, the data is set out in Table 4. Again, with the exception of the small economies of Iceland and New Zealand, the highly publicised decline of Chinese exports by 22.3% since their peak last year year, and at an annualised rate of 53.0% in the three months to December, are themselves actually significantly smaller than for other countries. Mexico and South Korea have already seen actual declines of exports of over 30% and South Africa and Turkey have seen falls of over 40%. The annualised rates of decline of exports for South Korea, Brazil, Indonesia, South Africa, and Turkey - at 70.7%, 72.4%, 78.2%, 82.1%, and 90.1% respectively - are clearly catastrophic.

Table 4

Countries for which OECD data is available for January confirm continuation of the same trend – as shown in Table 5. The chief difference is that with the extra month the actual declines in exports, as opposed to only the annualised rates of fall, have become more serious.

The actual falls recorded from the maximum levels of exports are 29.8% for Switzerland, 41.1% for South Africa, 41.4% for Sweden, 46.3% for Norway and 47.5% for Turkey. There is nothing in this pattern which indicates results for other countries are likely to show an improved tendency.

Table 5

Summarising the above data, of the 34 countries studied 14 had annualised rates of decline of exports of more than 70% and 20 had rates of decline of more than 60%. The widely publicised reports of declines of exports in the last three months of last year such as the annualised 51.9% for Japan, 53.0% for China, or 54.0% for the US, which attracted much publicity, are actually modest compared to the falls in most countries.

While the annualised rates of decline show the extremely striking implosion of world trade during the last three months of 2008 an annualised rate, naturally, indicates an, in this case extremely severe, tendency. What is equally disturbing is the factual falls in exports recorded from the maximum levels last year. Seven countries registered actual falls in exports of more than 40% and 19 of more than 30%.

It should be noted that trade today plays a more significant role in the world economy than at the onset of the 1929 crisis. Exports in an economy with relatively low exposure to trade such as the US now account for 12% of US GDP compared to 7% in 1929 - the figures for most countries are of course much higher. The result of any continuation of such rapid rates of decline of trade therefore, all other things being equal, would be more severe than in 1929.

The transmission mechanisms of the financial crisis into the productive economy are also made clear by such trends. As has been noted previously, initially in the present crisis there was a disjunction between the decline in financial markets, which was of 1929 magnitude, and the situation of the productive economy - which was of a severe but not equivalent decline. As such a disjunction is highly unlikely to continue either financial markets would recover, having overshot on the downside, or the trends and statistics in the productive economy would be shown to have been a lagging indicator and they would adjust downwards to the tendencies indicated in financial markets.

The extraordinarily powerful falls in world exports shown in the latest figures for all major economies indicate that the decline in trade is operating as a key mechanism by which the crisis revealed in financial markets is beginning to affect the productive economy. It may now be said that in two areas of the world economy, financial markets and trade, rates of decline are fully comparable to 1929 scale. How powerful the transmission mechanisms from the international sector are into domestic economies must clearly be carefully studied. The duration of the crisis is also critical - the so far unique severity of 1929 was not only due to the rapidity of the fall but by its duration. The decline in US trade and GDP in the 1930s continued for four years whereas the current decline in financial markets has lasted 17 months, the decline in trade slightly under one year, and the fall in GDP approximately six months.

Nevertheless quite sufficient data are now in to say with certainty that in the last three months of 2008 a convulsion in world trade occurred. The extreme rapidity of the fall in world trade, as with the situation in financial markets, confirms that the benchmark for present analyses must be not only post-World War II recessions but also 1929 itself.

* * *

This article originally appeared on Key Trends in Globalisation.

Notes to Tables - peak month for exports in 2008

1. Peak January 2008
2. Peak March 2008
3. Peak April 2008
4. Peak May 2008
5. Peak June 2008
6. Peak July 2008
7. Peak August 2008
8. Peak September 2008