Per capita GDP growth rate and absolute value; long-term vs. medium-term
Through a series of posts in this category, we continue to reflect upon and sharpen our learning on issues of global leadership, cultures, and direction and scale of economic development in selected regions of the world. We have two principal objectives for the continued enriching journey on this path. First, given our plans for an ambitious growth in the wealth management practice, we are acutely interested in developments across the regions and societies of our targeted markets. Second, in wake of crisis of trust engulfing our most revered institutions and spreading like a wild fire, deeply flawed leadership decisions that irreparably damage lives and weaken the very basic fiber of society, and dearth of leadership talent recognized across the globe, in virtually all domains, study of leadership (a very elusive, difficult to understand field) is in itself an incredibly fascinating and enormously rewarding endeavor. We expect seasoned clients to first and foremost assess the quality and character of an organization’s leadership, its culture and values before they decide to do business with or continue to trust an enterprise. What the leadership believes in, stands for is equally or more important than what it knows.
Per Capita PPP Adjusted GDP
In this post we analyze factual linkage between nations’ rate of growth of per capita PPP adjusted GDP and absolute level of per capita GDP to some key qualitative fundamentals.
Recently Professor Sheena Iyengar of Columbia twitted a link to an article by Alan Henry entitled, Seven Productivity Myths, Debunked by Science (and Common Sense). It is interesting how uncorroborated conventional wisdom passes on as fact, unchallenged in many circles, for quite sometime. That made us wonder if there is some myth in the conventional wisdom that nations cannot achieve superior economic growth rate unless they first address key fundamentals such as corruption, economic freedom, human development, and innovation prowess, quality of institutions and infrastructure.
Certain respected think tanks (Exhibit 1) rate nations across globe on these qualitative dimensions mentioned above. We have used raking data from them in our analysis; web links to these think tanks are provided at the end of the post.
In our analysis, firs,t we look at the relationship between economic freedom and per capita GDP. The Fraser Institute ranked 144 countries on the level of prevailing economic freedoms. We compared per capita GDP of the top quintile (36 countries) countries from this ranking to that of other countries and groups. Exhibit 2 below shows the comparison. As intuitively expected, the top quintile group with highest score (one) on the economic freedom index (EFI) have the highest level of current per capita GDP. But the growth rate of per capita GDP over the 1993-2010 period tell a dramatic different story: countries and group of countries with lower ranking on EFI racked up an impressive level of growth rate over this period.
|Exhibit 2: Per Capita GDP|
|Per Capita PPP GDP|
No. of Countries
|2010 Per Capita PPP GDP US$||1993-2010 Per Capita GDP Growth Rate|
|Top Quintile of EFI||36||38,506||3.8%|
Exhibit 3 tabulates and graphically depicts the divergence in the rate of GDP growth among various constituent group of countries. The data for the table is deduced from Penn World Table Version 7.1.
Inclusion of China in both the BRIC and Asian Tigers groups helped to lift the average of both groups.
Next we expand our enquiry and include additional country-specific qualitative dimensions, such as, the level of corruption, human development, innovation prowess, quality of infrastructure and institutions. We used ranking data from these think tanks for 138 countries for which information was available on all qualitative variables. Rank 1 was the highest on a variable; rank of 138 being the lowest. Exhibit 4 shows correlations of these qualitative variables to the rate of GDP growth and its end-of-the-period absolute value. We reconfirm the same conclusion as derived in Exhibits 2 and 3: virtually no correlation with recent rate of growth, but a strong correlation with the current level of per capita GDP achieved.
Exhibits 5 and 6 below attempt to gain further insights into the relationships using regression analysis. This analysis also confirms the same conclusions reached above: qualitative variables have virtually no explanatory power for the rate of growth (Exhibit 6); but they do for the current level of per capita GDP attained by these 138 countries (Exhibit 5), meaning historical leadership decisions and historical path of a country’s journey have difficult to reverse, enduring consequences, positive or negative.
In order to avoid overly technical nature of discussion on regression analysis, further comments on the t-Stat, F-Stat, and P-Values are omitted, but they are all presented in the tables for those who are curious and interested.
So what conclusions we can draw from this analysis? Well, it is quite a complex subject with no definitive policy conclusions or prescriptions. I leave that to those much more qualified. But following are my assertions.
A nation’s per capita GDP’s rate of growth and its current level are affected by different forces. Depending on its leadership, a nation may engage over generations in building institutions and infrastructure that promote and sustain long-term prosperity; or make no investment in such institution-building endeavors and even engage in activities that slowly destroy these institutions built over decades and centuries (a phenomenon common to declining empires and super powers). The former build endowments; the latter deplete it. The level of endowment is not static; the process of building and depletion is an ongoing cycle. The endowment effect is more dominant on the current level of per capital GDP (as evident in old democracies); country-specific other forces, such as unleashing dormant, pent up entrepreneurial energy under new leadership, resource demand, growth of FDI flow, access to low-cost technology (as is the case of China) dominate the rate of growth in short- and medium-term. So the current generation of a nation could be endowment depleting or building.
The endowment effects may persist for a long period, depending on its depletion rate. Rome did not fall in one day. While rivals of power and market share engage in building endowment. But there is always a crossover; all failed empires dreadfully aware of this natural phenomenon. If we can devise a mechanism to accurately measure the rates of depletion and renewal of endowments of two rivals, one on a degenerating path; the other on an ascending journey, perhaps we can determine the crossover period. I also leave it to those who are much more qualified.
The conventional wisdom that a nation first needs to build the outlined qualitative fundamentals in order to grow its per capita GDP is a myth, at least in short- and medium-term. The smart and seasoned leadership of China knows it; I wish India takes a note. India’s media, elite, and youth are so preoccupied with the grandiose objective of eradicating corruption before seriously addressing major economic growth issues. The nation is paralyzed; serious policy decisions are deferred. We all know that national cultures and civilizations are built over centuries; they do not change overnight. If corruption is a cultural phenomenon, it is here to stay, for decades, if not centuries. The wise policy choice is to wrest its growth and manage it as a seasoned physician manages a patient’s chronic condition that is not life-threatening. Accelerated economic growth amid rampant corruption has collateral effects, such as imbalanced and inequitable distribution of its gains, rapid degradation of environment, quality of life, which need to be managed effectively.
It’s all about Leadership.
Website links to data used in the analysis:
- Corruption: Transparency International
- Economic Freedom: Fraser Institute
- Human Development: United Nations – UNDP
- Innovation, Infrastructure, and Institutions: INSEAD – Global Innovation Index
- Population and GDP Data: University of Pennsylvania – Penn World Table Version 7.1