On Why China and India Are Growing Much Faster Than the West; Animal Fast and Diabetes!

From: aditya rana
Date: Sat, Sep 24, 2016 at 12:42 PM
Subject: On Why China and India Are Growing Much Faster Than the West; Animal Fast and Diabetes!
To:

Hi!,

Economic growth matters, not only from the perspective of increasing household income but also due to its impact on the stock market’s performance over the long run. So what is the reason behind the wide differential in growths rates between the developed world (2% or less) versus China and India (over 6%)? John Ross, Senior fellow at Renmin University, wrote an interesting piece which highlights the key fundamental reason behind this wide gap. To summarise:

-China and India are the world’s fastest growing major economies, due to rapidly growing state investment while Western (US, Europe and Japan) economies remain mired in slow growth due to their reliance on private investment which is growing slowly or declining.

-In 2015, China and India’s per capita GDP growth rates were 6.4% and 6.3% respectively, while for the West they were a meager 1.7% (EU), 1.6% (US) and 0.6% (Japan). This trend has continued into 2016, with China and India maintaining their per capita GDP growth rates while growth rates slipped even further in the Western world (see chart below). Data for the 2nd quarter 2016 show a further widening of growth rates, with the US level slipping to 0.4%, implying that China’s per capita GDP grew 14 times faster than the US over the preceding year.

-Looking at this trend over a longer period (2007-2015) starting from the year prior to the global financial crisis and the last peak of the last US business cycle, per capita GDP grew by 85% in China , 52% In India, but only 3% in the US and 2% in the EU and Japan (see chart below).

-The driver for higher growth in China and India was the growth rate of state-owned investment, which as 23.5% for China and 21% for India, while private investment growth declined to 2.8% in China and actually fell in India by 1.4%. (see two charts below).

-State-owned investment in China follows differing regional paths- for example, in Shanghai where many state-owned companies have diversified ownership and have become shareholding companies, pure state-owned investment actually decline by 11% , pure private investment declined by 5.1% but investment outside the purely state sector actually rose by 15.0% due to the 30% rise in investment by companies with both state and private ownership.

-Comparing the levels of state and private investment in China and India with the US (as representative of the Western world), the increase in private investment in the US over the year ending in the 1st quarter of 2016 was similar to that of China and India – 2.4%. Private investment in the US has been falling steadily and, in contrast to China and India, it is not being compensated by a rise in state investment (which grew by only 1.2% over the year prior to 2nd quarter 2016 versus over 20% in China and India).

-Both the Chinese and Indian governments have deliberately taken the decision to increase state investment while the US is ideologically opposed to state investment. After the slowing of the Chinese economy in late 2015-early 2016, the government deliberately stepped up state investment – mainly in infrastructure covering railways, highways, waterways, airports and urban rail transit. Similarly India in 2014, led by the new economic advisor to the government Arvind Subramanian (formerly of the Peterson Institute for International Ecnomics , a specialist on China’s economy and author of Eclipse: Living in the Shadow of China’s Economic Dominance), explicitly made public investment as the main driver of growth.

-By contrast the US, driven by an ideology of “state=bad” and “private=good” rejects state investment and also does not have a developed state sector capable of delivering a rapid build-up of state investment.

-The role of the state investment in driving growth is not limited to China and India as many other EM economies are following a similar path, as noted by the Harvard economist Dani Rodrik:

-“In Africa, Ethiopia is the most astounding success story of the last decade. Its economy has grown at an average annual rate exceeding 10% since 2004, which has translated into significant poverty reduction and improved health outcomes. The country is resource-poor and did not benefit from commodity booms, unlike many of its continental peers. Nor did economic liberalization and structural reforms of the type typically recommended by the World Bank and other donors play much of a role.”

-“Rapid growth was the result, instead, of a massive increase in public investment, from 5% of GDP in the early 1990s to 19% in 2011 – the third highest rate in the world. The Ethiopian government went on a spending spree, building roads, railways, power plants, and an agricultural extension system that significantly enhanced productivity in rural areas, where most of the poor reside. Expenditures were financed partly by foreign aid and partly by heterodox policies (such as financial repression) that channeled private saving to the government.”

-To summarise “ Global factual trends therefore show clearly that as President Xi Jinping rightly put it in an earlier economic discussion, for economic success China requires both the ‘invisible hand’ and the ‘visible hand’. This is counterposed to the ‘state bad, private good’ dogma which as has been shown is doing great damage in the West.”

-Interesting and thought provoking piece which certainly calls into question the ideology of “state=bad” and “private=good”. While, this does not necessarily imply the reverse “state=good”, “private=good” , what one can possibly conclude is that there needs to be a balance between the two, and depending on local and global conditions, the importance of one relative to the other should change. For developing economies, where the main focus is on increasing household incomes, a dominant state/semi-state sector is critical to cushion the fluctuating cycles in private investment which are more dependent on global demand. Additionally, maintaining robust growth in income levels driven by public investment set the stage for subsequent increases in private investment down the road.

-The Western world, constrained by poor demographics, a private debt deleveraging cycle and high levels of public debt, will be unable to boost private investment and economic growth unless private credit begins to rise above historical trend. On this front, the US is showing initial signs of ending the deleveraging cycle with household debt/GDP rising above GDP for the first time since the global financial crisis, while Europe and Japan continue to be in a deleveraging mode.

-Higher economic growth rates generally imply superior stock market returns over the long run, and the case for having a significant weighting in EM assets in a global portfolio continues to be intact. While long-term historical stock returns in India (in US$) have actually exceeded GDP growth, they have lagged growth in China. This is partly due to the speculative nature of retail investors in the market, but also due to the insignificant weighting to financial assets in household portfolios which are heavily weighted in bank deposits and real estate. This has begun to change with the government introducing various measures to institutionalize (and internationalize) the stock market, which is likely to attract a greater pool of household savings over time, leading to a catch-up of stock returns with GDP growth.

Animal Fats Increase Risk for Type 2 Diabetes:

-Interesting research which calls into question the current focus on carbohydrates as being the major risk factor for diabetes.

PRCM, Sept 23, 2016:

-Fats specific to animal products increase the risk for type 2 diabetes, according to research presented last week at the 52nd Annual Meeting of the European Association for the Study of Diabetes (EASD). Researchers followed the consumption of various types of omega-3 and omega-6 fats in the diets of 71,334 women and tracked diabetes incidence rates. Those who consumed the most fats increased their risk for diabetes by 26 percent when compared to those who consumed the least. Specifically, omega-3 (DPA) and omega-6 (AA), both of which are mostly found in meat, fish, and eggs, almost doubled the risk for type 2 diabetes, and, when controlling for weight, by as much as 41 and 49 percent, respectively.

-The authors noted that “the incidence of type 2 diabetes is influenced by many modifiable risk factors, with diet being one of the most important. However, focus has been placed heavily on carbohydrate consumption, though fats are responsible for a large part of energy intake and also have strong metabolic effects. Fatty acids are required for normal growth and development, but preliminary evidence is suggesting that excessive intake of certain fatty acids may have negative health effects. We wouldn’t necessarily recommend cutting these sources out of our diet, but perhaps diminishing meat intake, as it is often consumed in quantities much greater than our nutritional requirements."

Dow C, Mangin M, Balkau B, et al. Fatty acid consumption and incident type 2 diabetes: evidence from the E3N cohort study. Poster presented at: the European Association for the Study of Diabetes (EASD) 52nd Annual meeting; September 14, 2016: Munich, Germany

-Here’s to reducing the intake of all types of meat and replacing it with healthy plant based food!

​ ​
I will be travelling over the next two weekends so the next newsletter will be sent out on October 15.​

Regards,

Aditya

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