Rebacca Wilder: Two BRICs – India vs. Brazil
This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.
I started research on India to further explore economic prospects after reading and (excellent) FT article on necessary labor reform. In doing so, I now see a (possibly) much flatter economic growth trajectory for Brazil. Here is an excerpt from the article (last paragraph):
The data on the Indian labor market is patchy at best; that is, if you want something a little more descriptive than an annual unemployment rate. But how does India compare to its peers? The BRICs, for example (Brazil, Russia, India, and China). What I found is, that India is setting itself up pretty well to grow quickly – a finding that is consistent with the India-part of the overall BRIC theme (link to Goldman Sachs paper):
In fact, the BRIC data, side-by-side, paints a darker picture for Brazil’s growth trajectory than that for India. Let’s see why.
India, China, and Russia increased their respective investment shares of GDP over the latest decade- Brazil, too, but at a much slower rate. India (as I discussed in a previous post) has done this mostly through reducing barriers to inward foreign-direct investment.
However, more domestic saving is likely needed in India despite the falling of its consumption share (right graph) over the same 10-year period. India gets a bigger bang for each investment buck spent, so save more and supplement the inward FDI.
In stark contrast is Brazil, an economy that is clearly saving at a much lower rate than its peers. The consumption is a large 63.1% of GDP, essentially unchanged over the latest decade. And for a developing economy, the investment share is remarkably low in levels, 16.4% of GDP in 2008 (compared to India’s 32.2% share).
In all, the saving and investment story adds up to a level of productive capital stock. Without investment, there is no capital stock growth. And without capital stock growth, there is little productive GDP growth.
The chart above illustrates the capital stock per worker (CW) for Brazil, India, and China. Clearly, Brazil’s productive capacity per worker is the lowest – with CW being quickly outpaced by India, and especially, China. India’s CW is on a respectable trajectory, but even an incremental increase in the rate of investment (i.e., the capital stock) could have profound effects on productivity and growth. Here is what the FT says:
With labor reform and ongoing policy focused on domestic investment, India’s economy is on a path that should turn up quickly. This is Solow’s premise: low income countries invest in productive capacity, and the growth rates can be quite startling given the base effects (i.e., starting from a relatively low production level).
To be sure, there are risks. Currently India’s average income is low compared to its peers, based on years of questionable policy. Among the BRIC countries, India’s welfare measure (per-capita income) is the lowest, and that ranking is not expected to change by 2014 (see chart from a previous post, using data from the IMF World Economic Outlook in October 2009).
Brazil, on the other hand, is not setting itself up for sustained growth. The country is now enjoying the economic benefits of policy reform and open capital markets, an economic adolescent if you will. The next step in Brazil’s development is clearly to adopt policies that grow saving and investment.
Source: Rebecca Wilder, News N Economics, January 7, 2010.
* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.
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