India and China and the efficiency of savings
The Economist again:
India is much more efficient than China at using capital. Having invested an average of 22-23% of GDP for a decade, it has seen average economic growth of about 6% a year in real terms. China has invested twice as much, but its average growth rate has been only about 50% higher than India’s. It is indeed staggering how much investment is needed to power Chinese growth. This measure (the incremental capital output ratio) has been climbing in recent years, but the investment figures include land sales, which makes them unreliable.
All the same, China has undeniably enjoyed an investment boom, which is why pessimists expect its economy to come crashing to earth. Its growth of 9.1% in 2003 required investment of 42% of GDP, and last year’s 9.5% probably needed an even higher ratio. Anywhere else, capital accumulation on that scale would look like a bubble. However, few economists in China and Hong Kong expect a hard landing, let alone a crash. First, they argue, there is no reason to expect investment suddenly to dry up. And second, there are signs that consumption is stronger than in recent years, and may withstand a falling-off in investment. For the first time in 20 years, consumption growth may be uncoupling itself from investment. Retail sales in December were up 14.5% on the same month in 2003.
Over the past couple of weeks, we’ve sketched out the pessimist’s case on China, and frankly, from time to time, we have been skeptical of our own analysis, since China is obviously booming. But when we look at these huge investment numbers required to drive China’s growth, the problems with loan quality at China’s banks, and the international clouds gathering against China’s stratospheric export growth, we still see problems ahead. As we have said previously, one common characteristic of bubbles is that they never feel that way when you are in them.