Telling the Difference Between Economic Evolution and a Nations Temporary Good Fortune

Chinese Economic Evolution and the Rostow Scale

After several questions from members regarding the future of china and its place in the world as the next great economic super power, the week before last we published an article regarding the economic evolution of china. (You can read the article here).

Many of you have since been in contact with questions about how we know the path that china is on. As a result we thought we would dedicate this article to taking a closer look at how economies develop, and how to tell a developing country from a struggling country without just relying on bankers acronyms like BRICS (Brazil, Russia, India China South Africa) or the EAGLEs (emerging and growth-leading economies)

The Rostow/Rosling Model

The Rostow model is old it dates from the 1960’s and over the years has been highly criticized. As a result many have moved away from using it, However Dr. Rosling has proved its effectiveness through his correlation and creation of the Trendalyzer software. As you can see from Dr. Hans Rosling’s video above there are three fundamental factors to economic evolution; family size, Mortality and wealth.

Now these are traditionally established by quality of healthcare, education and availability of services, as you progress up the scale of the Rostow model improving the fundamental factors becomes a slower and slower process as economies become more and more reliant on consumer spending to drive economic growth but the data does give us normal folk a reliable and easy to understand model, with which to judge  financial worlds decisions and opinions regarding the viability developing economies.

 

the rostow model

 

 

The traditional society

The traditional society is what in historical terms we would refer to as subsistence agriculture or hunting & gathering, there are very few countries or cultures that still exist at economic level, most of which choose to do so or have had limited exposure to external influences. Although it is worth noting that there are several nations such as Mongolia that still have significant percentages of their population who subsistence farm.

 

Pre-conditions for take-off

Probably the first economic level that most of us will recognize. Since the mid 1980’s the number of countries that have evolved into this bracket had seen exponential growth, this is largely down to improvements in healthcare and education lead by western aid projects.

This bracket is widely definable as ‘Longer life spans and higher skill bases’, this leads to shared economic interests development of more productive, commercial agriculture & cash crops, fore example Kenya and its production of coffee and tea for export. But the thing that makes this bracket so significant is that it represents the first true step onto the economic ladder. Because it brings enhanced investment in the physical environment for the purposes of expanding production.

Now most of you are probably wondering why this all matters, in short this is what a country looks like when it is classed as below the emerging economies (they fit in our next bracket) and when people first start talking about a countries growth and economic future.

These nations have high levels of corruption and tend to make for poor investments, as the number of years needed to jump to the next stage is significantly larger than at any other point in the process. This is largely down to the fact that infrastructure and cultures have to adapt and evolve significantly before a nation can see significant economic expansion.

 

Economic take off

Developing nations, the start a nations Industrialization that we saw in the last bracket begins to proceed at pace, with the expansion and creation of cities and the Urbanization of large percentages of its population. Economies in this bracket such as India, Mexico and Argentina are all moving away from agriculture as the need for labour decreases and towards emerging “secondary” goods-producing sectors within that nation’s economy.

The effects of the creation of secondary goods-producing sectors such as; Textiles, Toys and Furniture, Have most clearly been seen in China, South Korea and Indonesia. As those sectors where primarily aimed at creating “low value – high volume” goods for export.

Exports effectively drive a nation’s economic take off as they bring in high volumes of foreign capital and investment, which intern results in lower corruption levels, better government and higher taxation. Making the nation even more appealing to investors. The export market also ensures that there is plenty of work available to those who have chosen to urbanize, which reduces poverty and means the nation enters a cycle of exports driving foreign investment, which drive grater export capacity, which then drives a higher need for workers resulting in greater urbanization.

Which brings us back to the question of defining which developing countries are a good investment. Countries in this section are what we call ‘risk & reward’ nations, they have the opportunity to be fantastic investments with incredibly high levels of return however pick the wrong one and the risk level is extremely high.

 

Drive to Maturity

Up until this point a nation’s economic, growth has been driven by low or nonexistent wages. However, a nation’s ‘drive to maturity begins’ as its urbanization slows, the existing labour fore sees the benefits of grater education and as a result we see a massive diversification of the industrial base with  multiple industries expanding simultaneously & new ones take root quickly.

Until now, wages have been low because of the availability of labour, but as skills increase and so do life spans cities struggle to expand at high enough rates to keep pace with labour demand.  Without an increasing labour supply, wages begin to increase which means grated domestic demand. That in turn results in manufacturing beginning to shift from investment-driven (capital export goods) towards consumer durables and goods for domestic consumption.

With people, earning more and paying more taxes they want to see large-scale investment in social infrastructure such as schools, universities, transportation and hospitals. In short they want a better quality of life for both themselves and there children. This leads to lower corruption levels, higher skills and better government. Which are the final but most important pieces of the economic puzzle as they lead to the final round of foreign investment.

Which brings us back to the question of defining which developing countries are a good investment. Quite simply, those countries are towards the end of their drive to maturity.

 

High Mass consumption

The terminology is slightly out of dated but we are talking about ‘fully westernized’ economies. Countries whose industrial and services sectors dominate their economies, and whose the primary sector (agriculture) accounts for only a small percentage of their GDP as well as only having a small impact on the nations societal structure.

 

Post Script From Dr. Lumsden- Groom

The Datasets that have been released to Dr. Rosling are astonishing and thanks to his children we are able to see billions and billions of data points visualized on a single screen in an easy to understand way. so don’t be scared take a look at his website here, have a play and see how the world has evolved over the last 150 years. I was amazed to see the majority of human progress shown on a single chart, It’s astonishing! (not an overstatement)

 

 

 

Posted by: Duty Economist