Dynamic Divide
The glaring gap between rich and emerging economies has some interesting issues to present. First is the high savings rate in China. Second is the gap between opportunity and investment rates in emerging economies. Third is the requirement for new paths to social development to match the challenges of trailing economies by contrast with the path-breaking Western economies and the immediate followers in East Asia. These are related.
The savings rate in China is known to be extraordinarily high - on the order of 40 percent. This might not seem to be a dynamic issue, since the investment rate is also high (30 percent?). But much of the investment in China is replacing productive capacity in MEDCs,or pre-empting the creation of such capacity. Estimating conservatively, then, every dollar of gain for China at the expense of Western producers is increasing net savings in the world by about ten cents. Fortunately this is probably less than a quarter of their growth. Nevertheless adding to the world savings rate by a quarter of a tenth of a tenth of world GDP every year has a significant cumulative effect - the net world savings rate may be two percentage points higher than 10 years ago due to the shift in relative savings.
Trying to do the same math with gross shares of world GDP gives me only half as big an effect. It may be that replacement of MEDC production has been substantially offset by new Chinese demand for capital and business services from the MEDCs. That is more or less what would be expected from trade theory. Nevertheless one percentage point impact on world savings in a decade is substantial drag on aggregate demand.
One question it raises is whether the high rate will be sustained. It would seem to be temporarily high, due to rapid advance in affluence and slow growth of expectations about consumption. Furthermore their retirement wave is more imminent than Europe's and more drastic than Japan's,
creating temporarily high crash savings for retirement. It may be that we can expect a decline in the
rate of savings as more and more of the population moves from high pre-retirement savings to living off investments.
But this raises yet more questions -- about returns on investments and where they will come from. We know that LEDC returns have not dropped down to incredibly low MEDC levels (approximately zero), suggesting that opportunities for productive investments continue to be high, as would be expected. Yet if risks of financial investment were low, the flows of finance from rich to poor would be large enough to roughly equalize returns. Substantial barriers must be deterring the flows, perhaps as simple as fear of confiscation and lack of in-depth knowledge of the opportunities, by rich country intermediaries.
Note the implication that there are extensive untapped opportunities in the LEDCs. So if the barriers could be overcome, growth in developing countries could be considerably faster, while retirements of the MEDC elderly could be considerably better financed. Next question: is there some intervention in world institutions that would smooth those financial flows?
The background picture is that there is a coordination problem. If investors knew others would invest more, for example in housing, each would have more incentive to invest. (Perhaps more important, if they knew what kinds of investments were most likely to benefit from the latent growth, the overall amount would receive a further boost.)
There are at least two ways to intervene to reduce the coordination problem. One is a sort of growth insurance, in which the whole (i.e. the government) offers some interventions such as higher education at a cost that will be reduced for areas with growth below expectations, and above average costs for those with excessively high unexpected returns. Call it "progressive public service". By reducing ex ante system risks it encourages banks and other knowledgeable intermediaries to lend.
And of course assessing the expectations is an interesting problem. One could argue that MITI was assessing expected returns by industry, and this might be a valuable role worldwide for the Development Banks such as the ADB. Broadly, a geographical approach to assessing prospects, and providing growth insurance on that basis, might also benefit from international institutions pooling risks between regions.
A second type of intervention could be greater use of equity positions. Consider the motivation of confiscation risk. If we ask ourselves how governments get to the point of finding foreign investments to be tempting targets, it surely derives somewhat from "zero sum" foreign investments such as resource extraction, in which confiscation loses very little on-going input from the investor. But these do not seem to be the only kinds of investments subject to confiscation. In general, a high ratio of foreign proftis to local input would be a flag for danger investment.
Equity positions make such imbalances less likely. If it was routine, for example, to begin with at least 40 percent of equity from the host country (or a region, in the case of very small or very poor regions) or to build to it with employee share ownership plans, then the shared success would create mutuality, and encourage a mutual approach in upcoming waves of investment.
Which leads to the last issue - how to approach social development differently. In the West, this was created by the dramatic increase in productivity as the industrial era moved into mass production after WWI. It inevitably increased workers' wages and living standards. But as technology and the globalization of labor-intensive production halted the gains to labor starting in the late 70s, we have been given reasons to doubt whether labor would continue to progress. East Asia has adopted the Western model, by and large, and rapidly appropriated the same gains of industrialization for their workers.
But as countries such as Argentina and the Philippines have lagged, it is worth asking whether their social development can be created by the same dynamic of wage advancement due to industrialization. Further advancements in production of goods seems to be shifting toward capital intensive sources, and advancement in services seems to be a slow-growth process of gradually adapting to high-service approaches due to advancing incomes. The danger is that no sufficiently powerful source of advancing productivity will spread across enough sectors to turn technologcial gains into income gains for the masses of LEDCs.
Simply put, the advancement of productivity in goods may be diluted by too large a population of potential workers, so that the gains do not diffuse to the wage level and remain within too small a population of owners, unable to support the real mass-production economy that made the MEDCs what they are today. It seems more and more possible that productivity will continue to grow but without distributing the results broadly, so that "absorptive capacity" (i.e. demand) does not keep up. The result is low-level equilibrium, with extractive control of production and stunted actual growth.
My answer would be equity capital. Like "pension fund socialism" that seemed possible in the 70s but never materialized, this would involve a broad base of ownership, so that the surplus value created by industrialization is not held in foreign hands, or in the hands of a small group of "entrepreneurs" who are benefitting from increasingly concentrated production of goods and and increasingly large returns to positionality of marketing.
Like the introduction of credit in South Korea in the 90s, equity capital for equity would actually switch important sources of negative feedback into positive feedback for growth. But it may require governmental management of the process, either using external debt to create equity positions internally, or using mandates for foreign investors to include substantial local equity, with a large portion of this distributed broadly in the population. It may be necessary for education, or social institutions for managing the process, to link ordinary people to the accumulation and management of equity capital. But I think the role of such "social intermediation" is already visible and likely to grow more discernable quickly.
The savings rate in China is known to be extraordinarily high - on the order of 40 percent. This might not seem to be a dynamic issue, since the investment rate is also high (30 percent?). But much of the investment in China is replacing productive capacity in MEDCs,or pre-empting the creation of such capacity. Estimating conservatively, then, every dollar of gain for China at the expense of Western producers is increasing net savings in the world by about ten cents. Fortunately this is probably less than a quarter of their growth. Nevertheless adding to the world savings rate by a quarter of a tenth of a tenth of world GDP every year has a significant cumulative effect - the net world savings rate may be two percentage points higher than 10 years ago due to the shift in relative savings.
Trying to do the same math with gross shares of world GDP gives me only half as big an effect. It may be that replacement of MEDC production has been substantially offset by new Chinese demand for capital and business services from the MEDCs. That is more or less what would be expected from trade theory. Nevertheless one percentage point impact on world savings in a decade is substantial drag on aggregate demand.
One question it raises is whether the high rate will be sustained. It would seem to be temporarily high, due to rapid advance in affluence and slow growth of expectations about consumption. Furthermore their retirement wave is more imminent than Europe's and more drastic than Japan's,
creating temporarily high crash savings for retirement. It may be that we can expect a decline in the
rate of savings as more and more of the population moves from high pre-retirement savings to living off investments.
But this raises yet more questions -- about returns on investments and where they will come from. We know that LEDC returns have not dropped down to incredibly low MEDC levels (approximately zero), suggesting that opportunities for productive investments continue to be high, as would be expected. Yet if risks of financial investment were low, the flows of finance from rich to poor would be large enough to roughly equalize returns. Substantial barriers must be deterring the flows, perhaps as simple as fear of confiscation and lack of in-depth knowledge of the opportunities, by rich country intermediaries.
Note the implication that there are extensive untapped opportunities in the LEDCs. So if the barriers could be overcome, growth in developing countries could be considerably faster, while retirements of the MEDC elderly could be considerably better financed. Next question: is there some intervention in world institutions that would smooth those financial flows?
The background picture is that there is a coordination problem. If investors knew others would invest more, for example in housing, each would have more incentive to invest. (Perhaps more important, if they knew what kinds of investments were most likely to benefit from the latent growth, the overall amount would receive a further boost.)
There are at least two ways to intervene to reduce the coordination problem. One is a sort of growth insurance, in which the whole (i.e. the government) offers some interventions such as higher education at a cost that will be reduced for areas with growth below expectations, and above average costs for those with excessively high unexpected returns. Call it "progressive public service". By reducing ex ante system risks it encourages banks and other knowledgeable intermediaries to lend.
And of course assessing the expectations is an interesting problem. One could argue that MITI was assessing expected returns by industry, and this might be a valuable role worldwide for the Development Banks such as the ADB. Broadly, a geographical approach to assessing prospects, and providing growth insurance on that basis, might also benefit from international institutions pooling risks between regions.
A second type of intervention could be greater use of equity positions. Consider the motivation of confiscation risk. If we ask ourselves how governments get to the point of finding foreign investments to be tempting targets, it surely derives somewhat from "zero sum" foreign investments such as resource extraction, in which confiscation loses very little on-going input from the investor. But these do not seem to be the only kinds of investments subject to confiscation. In general, a high ratio of foreign proftis to local input would be a flag for danger investment.
Equity positions make such imbalances less likely. If it was routine, for example, to begin with at least 40 percent of equity from the host country (or a region, in the case of very small or very poor regions) or to build to it with employee share ownership plans, then the shared success would create mutuality, and encourage a mutual approach in upcoming waves of investment.
Which leads to the last issue - how to approach social development differently. In the West, this was created by the dramatic increase in productivity as the industrial era moved into mass production after WWI. It inevitably increased workers' wages and living standards. But as technology and the globalization of labor-intensive production halted the gains to labor starting in the late 70s, we have been given reasons to doubt whether labor would continue to progress. East Asia has adopted the Western model, by and large, and rapidly appropriated the same gains of industrialization for their workers.
But as countries such as Argentina and the Philippines have lagged, it is worth asking whether their social development can be created by the same dynamic of wage advancement due to industrialization. Further advancements in production of goods seems to be shifting toward capital intensive sources, and advancement in services seems to be a slow-growth process of gradually adapting to high-service approaches due to advancing incomes. The danger is that no sufficiently powerful source of advancing productivity will spread across enough sectors to turn technologcial gains into income gains for the masses of LEDCs.
Simply put, the advancement of productivity in goods may be diluted by too large a population of potential workers, so that the gains do not diffuse to the wage level and remain within too small a population of owners, unable to support the real mass-production economy that made the MEDCs what they are today. It seems more and more possible that productivity will continue to grow but without distributing the results broadly, so that "absorptive capacity" (i.e. demand) does not keep up. The result is low-level equilibrium, with extractive control of production and stunted actual growth.
My answer would be equity capital. Like "pension fund socialism" that seemed possible in the 70s but never materialized, this would involve a broad base of ownership, so that the surplus value created by industrialization is not held in foreign hands, or in the hands of a small group of "entrepreneurs" who are benefitting from increasingly concentrated production of goods and and increasingly large returns to positionality of marketing.
Like the introduction of credit in South Korea in the 90s, equity capital for equity would actually switch important sources of negative feedback into positive feedback for growth. But it may require governmental management of the process, either using external debt to create equity positions internally, or using mandates for foreign investors to include substantial local equity, with a large portion of this distributed broadly in the population. It may be necessary for education, or social institutions for managing the process, to link ordinary people to the accumulation and management of equity capital. But I think the role of such "social intermediation" is already visible and likely to grow more discernable quickly.
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