High Growth Rate Drivers

Stephen DeAngelis

January 26, 2007

China just reported another year of over 10 percent growth in its GDP. Nobel laureate, Michael Spence, writing in the Wall Street Journal, discusses factors that drive high growth rates [“What Drives High Growth Rates?” 24 January 2007]. He focuses on three of them: demand, technology, and investment.

“With China and India growing at high rates, there has been a dramatic increase in the fraction of the world’s population experiencing the benefits and challenges of rapid growth. There are a number of common ingredients in the cases of sustained high growth that have been observed: a functioning market system, high levels of saving, public and private sector investment, resource mobility and the capacity to accomodate rapid change at the microeconomic level without leaving people excessively exposed to the risks inherent in creative destruction.”

Those who would like to see the U.S. sustain higher economic growth should note what Spence has to say about the personal savings rate — especially since it is at an all time low in the U.S. Our economy is being sustained on consumer credit at the moment — not a good long-term recipe for resilience. I also found it interesting that Spence noted (if only by implication) the fact that creative destruction is important for high growth rates. What exactly does that mean? As I understand it, creative destruction recognizes that Clayton Christensen’s “innovator’s dilemma” is quite real. That dilemma involves the fact that companies seldom appreciate the impact of disruptive technologies until it is too late. Disruptive technologies (like the PC or iPod) change people’s purchasing habits and even lifestyles. Old behavior patterns and products caught in this creative process often end up in the dustbin and people associated with them find themselves out of work. Spence says that a resilient system must accommodate this creative destruction and keep its workforce gainfully employed even through transition periods. Spence continues:

“It is the resources of the global economy that stand out as driving forces in sustaining high growth. These come in three parts.

  • Demand: In a relatively poor economy, demand is limited and its composition does not necessarily correspond to sectors of comparative advantage. The global economy is huge, in comparison; and at the right prices and costs, demand is, for practical purposes, unlimited. …
  • Technology: A second resource the global economy provides is know-how. This ranges from engineering and production technology to managerial expertise and knowledge of global markets — and it does not have to be redeveloped domestically from scratch. …
  • Investment: A third area in which the global economy supports higher than otherwise attainable growth is investment, or more precisely through investment beyond the capacity of the domestic economy to save. One component is FDI, typically not a large fraction of total investment (20% of overall investment would be typical). But its magnitude understates its importance, because of its role in bringing technology, know-how and access to external markets. …

As the high-growth economies become richer, the relative importance of the domestic economy as a driver of growth increases.”

Spence’s observations fit neatly with our Development-in-a-Box approach whose foundation is the belief that you don’t have to build know-how from scratch. Peter Schwartz of Global Network Solutions points out to audiences that Singapore went from a third-world to first-world country in a single generation by concentrating on education, attracting development funds, and generating a prosperous middle class. Such success can be repeatable. Spence argues:

“People do question the future applicability to developing economies that are ‘starting late.’ The argument is that for those countries that are not resource-rich, the principal resource that they have is abundant labor, inexpensive relative to its productive value, and that the natural territory for comparative advantage is in labor-intensive manufacturing or services. For these countries, the argument goes, it is impossible to compete with China and prospectively India. One reason is that the size of China and India, and a variety of advantages that go with scale, are insurmountable. Another is that the infrastructure investments make China hypercompetitive and difficult to match. The conclusion is that one needs to wait for China and India to grow, and that at some point their incomes will rise to the point that they are no longer in labor-intensive sectors. This argument is unlikely to be right. While China and India are formidable competitors, exchange rates can adjust to increase the competitiveness of export sectors of new entrants. In addition, while we sometimes talk about labor intensive industry as if it were one big lump, in reality there are hundreds of niches. Further, multinationals are risk-averse and unlikely to source in their supply chains in just one or two countries. Finally, China and India together now account for close to one-fifth of the U.S. economy, and they are becoming an important source of demand for exports of developing countries — so that newcomers have expanding markets in these two rapidly growing economies. In short, the global economy remains a resource for generating and sustaining high growth in developing countries. China and India, accounting for 40% of the world’s population, are in high-growth mode and are pulling much of Asia with them. There have also been recent increases in export and overall growth in Africa, though some of that is attributable to an upsurge in commodity prices. Latin America, with the notable exception of Chile, has been stalled at lower middle-income levels, but has the human resources and other assets to shift back onto high-growth trajectories. The prospects for developing countries are, in fact, probably more favorable now than they have been since World War II. International trade is growing faster than global GDP. The benefits of decades of learning with respect to operating global supply chains are accessible. Information and technology continues to lower transactions costs and to be a powerful integrating force. But perhaps even more important, the key players in all this — the leaders in emerging economies who have the responsibility for building policies that support private sector entrepreneurship and that lead to sustained inclusive growth — have a wealth of experience to rely on. No one is in the dark.”

Spence’s arguments dovetail nicely both with our fundamental assessment of the value of Development-in-a-Box and with Tom Barnett’s grand vision that claims connectivity provides much of the answer for bringing countries out of poverty and making the world both safer and more prosperous.