Why is there all this fuss about developing economies driving the rest of the world in terms of economic growth? It’s simple really (once my class on macroeconomics pointed me in the direction of a book dealing with the subject). The overall growth of an economy is the growth of the output of that economy-the GDP. In the mid-20th century, USA and other industrialized countries had average growth rates of 2.9%. Seems small right? Well at least in comparison to the current figures being reported in most SSA (sub-Saharan Africa) countries as well as the Asian block.
In China it was a different scenario. China is the wonder kid in economic circles. How did they do it? Before the 1980’s their real GDP growth rate per capita (per person) was 2.2% per year. After the 1980’s they were recording growth rates of 8.7% and more. Large difference but it still doesn’t shed light on what these random percentages mean in actual terms. For that economists use the Rule of 70 the average growth of 10% that China experienced since the 1980’s had it doubling its total output every 7 years. Doubling! Looking at the simplified view of growth percentages can be very deceptive don’t you think.
When we look at Kenya, its average GDP since 2011 stands at 4.5%. According to the Rule of 70, it will take us 15 years to double our output. That is a more relevant angle of approaching our GDP and what it means for the millions of job seekers (though as long as the population keeps growing at current figures the situation of job seekers may not be improved). It also means we are doubling our total output faster than the developed world. Problems in the Euro zone are still quite visible with its reported real GDP growth rates of 0.3% as of the 1st quarter of 2014. I’ll leave the Rule of 70 math to you there…
Now, if you were like me before, thinking of the inconsequential drop that Kenya’s GDP contributes to the total global output bucket, the prospects were bleak. We would never make it, the economies holding trillions of dollars would stay as they were and we wouldn’t get any. Relatively the results are not encouraging.
But we are doubling our economies, we can catch up. They know we can. They are investing in our economies so that our growth fuels their rise out of the global recession. An East African country stuck at a GDP of 40 billion USD will not be there much longer. I suggest we come back 50 years from now and analyse the situation again. Plus the increased revenues from the oil will hopefully flow through the right channels and boost the economy.
What do we then need? A sustained high growth rate. This will lead to larger economic growth than that realized from intermittent growth periods.
What does this mean for developing countries? That should they maintain the growth recorded today, in 100 years the countries may well have reached the levels of output, or exceeded those, in high income countries.
Other factors do play a role though-good governance, relevant policy that will encourage development targeted at increasing productivity.
Increasing productivity, we’ll get to that once I am past that chapter in the book.