Upside down views on development

In: Uncategorized

27 Sep 2010

This is my latest comment from Fund Strategy.

One of the most peculiar ideas in investment circles is that consumption growth is driving the development of emerging economies. According to this view the growing demand for consumer goods among the poorer countries is leading them to become richer.

Even more strange, and nearly as widespread, is the emphasis on demographics in explaining development. This view holds that populations with younger average ages generally have more favourable demographics. Having lots of young people of working age without having too many children is seen as the most favourable scenario of all.

Both of these views are upside down. It is production rather than consumption that drives development. Demographic change, too, is typically led by more fundamental economic changes.

Take consumption growth first. It is strange to suggest that people in poorer countries have suddenly started to desire washing machines, colour televisions and banking services. No doubt the bulk of the population in the world’s poorest countries, from Afghan­istan to Zimbabwe, has long desired such items.

The reason they find it hard to translate their desires into effective demand is that they are so poor. They simply do not have the financial resources.

This poverty is itself a symptom of the lack of economic development. Underdeveloped countries are not productive enough to be able to afford to pay their workers reasonable wages. Some, the poorest people of all, even have to rely on subsistence agriculture.

Escaping the poverty trap means building an economy that can produce more. It can then pay employees enough to buy the consumer goods that western commentators often obsess over.

The emphasis on the benefits of youthful demographics is also naïve. Some of the world’s richest countries also have the highest average ages, including Germany, Japan and Sweden. No doubt India, which is often lauded for its favourable demographics, would love its productivity to be approaching the levels of such rich nations.

Typically as countries become richer their inhabitants tend to have fewer children. Really large families are, at least in part, a form of insurance in countries where many children die prematurely. Having many children ensures that at least some survive to give birth to the next generation.

Consumption growth and even demographic growth are the result, rather than the cause, of more fundamental forces. Economic growth, leading to a transformation of the productive side of the economy, is the key driver of development.