On Predicting Global Capital Flows, and the Blue Zones of Longevity – Part IV!

From: aditya rana
Date: Sat, Sep 28, 2013 at 2:28 PM
Subject: On Predicting Global Capital Flows, and the Blue Zones of Longevity – Part IV!


The recent turmoil in emerging markets has put the spot light (once again!) on the importance of global capital flows. But what drives capital flows? And why does capital seem to flow from poor countries to rich countries? These are important questions and it is critical to identify the underlying key determinants of capital flows to help formulate a longer term investment view on different countries. Daniel Gros, Director of the Centre for European Policy Studies, provides a useful framework in a recent note (http://www.voxeu.org/article/why-does-capital-flow-poor-rich-countries )- to summarise:

-The poorer countries of the world tend to run current account surpluses (thereby exporting capital) while the richer countries of the world (i.e. the U.S.) tend to run current account deficits (thereby importing capital). This phenomenon has remained true even after the financial crisis (see table below).

-To help understand this phenomenon one has to first look at "total factor productivity" – which is described as the technical productivity of capital and labour to produce GDP.

-The return on capital is determined by the capital-to-output ratio, and not the capital -to-labour ratio. A country with a higher capital-to-output ratio will have a lower return to capital, and the reverse holds as well. These ratios (and therefore the returns on capital) can be easily calculated from readily available data.

-Therefore it readily follows, that capital should flow from countries with a high capital-to-output ratio to countries with a low capital-to-output ratio. Therefore, to predict capital flows over time one has to focus on the dynamics of this ratio rather than income per capita or other parameters.

-The capital-to-output ratio of a country is calculated as the ratio of its investment rate to its growth rate plus depreciation rate. A higher investment rate raises the this ratio, while a higher growth rate lower this ratio.

-Looking at current data, it is somewhat surprising that the current capital-to-output ratios for emerging markets and the developed markets are at similar levels, and the ratio for emerging markets is poised to overtake that of the developed world if these groups maintain current investment and growth rates.

-Using IMF data, the investment rate for the developed world is expected to remain at 20%, the trend growth rate at 2%, and assuming a 6% depreciation rate, the projected capital-to-output ratio (until 2018) works out to 2.4 {0.2/(.02+.06)}.

-For emerging economies, the investment rate is expected to rise from 30% to 33% , and with an expected trend growth rate of 6%, the projected capital-to-output ratio (until 2018) works out to 2.7.

-While the differences between the two large groups are small, there are important differences in terms of the ratio between the groups: China is the outlier with a capital ratio close to 3, while India is significantly below the average. Japan and Germany have an above average ratio, while the U.S. is below average.

-This fits well with the global scenario, with China, Germany and Japan running current account surpluses and being major exporters of capital, while the U.S. and India run current deficits and are importers of capital. So global capital markets are "efficient" in the sense that capital goes where the returns are highest.

-So the real puzzle here is not that capital flows from emerging countries to the developed world (which should be the case), but why do poor countries save so much?

An insightful piece which provides a fundamental reason behind the low historical rates of return experienced in surplus countries like China and Japan, and the higher returns achieved in the stock markets of the U.S. and India. The implications are somewhat contrary to current conventional wisdom, i.e. investing in countries with current-account deficits (i.e. with lower capital-to-output ratios) provides the potential for superior returns while surplus countries provide for inferior returns. It also highlights the importance of the Chinese economy being able to successfully transition from an investment driven high growth model towards a consumption driven growth model, resulting in a lower capital-to-output ratio and higher returns on capital going forward.

The Blue Zones of Longevity-Part IV:

This is the third part of the summary of the recent book: "Blue Zones: Lessons for Living Longer From the People Who’ve Lived the Longest" written by Dan Buettner, an internationally recognized explorer and educator. The Blue Zones are five specific towns or regions around the world, where people are up to three times more likely to live to be at least 100 years old, while remaining active, with a significantly lower rate of disease. The Blue Zones include the Barbagia region of Sardinia in Italy, Okinawa in Japan, the community of Loma Linda in California, the Nicoya Peninsula in Costa Rica, and the Greek island of Ikaria.

-In 2002, a demographer working in Costa Rica discovered that the men in the area seemed be living longer than those in more developed countries around the world.

-He found that a Costa Rican man at age 60, had about twice the chance of reaching age 90 as did a man living in the U.S, France or even Japan. Costa Ricans spend only 15% of what Americans spend on health care, but lived longer and healthier lives than in any other country on the planet.

-Specifically, a group of villages around the Nicoyan Peninsula had a higher proportion of older people than the rest of the country. They traced their roots to the indigenous Chorotega Indians, and maintained their traditions zealously.

-The people were shaper and more active than elsewhere, had regular routines (awaking at sunrise and sleeping shortly after sunset), were religious with a strong work ethic, had strong family connections and a sense of service to others.

-Their low-calorie, low-fat, plant-based diet consisted of mainly corn and beans with occasional meat (pork) and eggs, garden vegetables, and an abundance of fruit (papaya, mango, oranges, bananas). They drank hard water (with a high calcium and magnesium content), got a lot of sunshine and ate a light and early dinner.

To be continued!




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