Growth vs. Return on Capital: The Chinese Dilemma
At times it is instructive to go back in time and read some of the seminal pieces which describe the mood of that day. Worst case, you get a reminding glimpse of the prevailing thoughts (and giggle at their naïveté), but if you are lucky, you uncover a long forgotten treasure that provides you with timeless insight.
I recently stumbled upon Krugman’s 1994 piece, “The Myth of Asia’s Miracle.” Brushing aside the discussions surrounding the honesty of the statistics of the Eastern block, a perceivable faster growth rate in these economies was a worry to the West in the 1950s/1960s. Similarly, the contemporary thinkers were fretting about the Asian growth in the 1990s (when Krugman was writing). Yet one should not forget that it is the nature of production: the more inputs you throw at it, the more you will get out. Yet the basic law of economics, diminishing returns, start setting in. This means that there is a limit to input driven growth. On the other hand, we know that natural and sustainable growth path of per capita income is driven by a rise productivity.