Monday, August 2, 2010

Does The Consumption Rate Matter ?

Quite a bit of fuss has been made over China's low consumption rate in some quarters. It is noticeable in the 'gap' that opens up in the graph between 1980 and 2008.

But I wonder if there is any correlation between high consumption rates and a rising standard of living. China's diminishing consumption rate has not stifled a rapid increase in living standards even if one strips out per capita GDP and only looks at household consumption. As the following chart shows, consumption rates dropped most every year between 2000-2008 while household per capita consumption was increasing.

China had a much 'healthier' consumption rate when it was among the poorest countries in the world. Low consumption in China may just correlate with large amounts of investment, i.e.. a large denominator - remembering that investment is generally the engine of a capitalist economy.

Seen in this light, high consumption rates in the West and low consumption rates in Asia over the last generation are basically a reflection of rates of investment. Or not. But I do question the notion that there is a 'normal' level of consumption that corresponds to an increased per capita GDP and standard of living. And that China must falter because of low consumption and high investment ratios. If China falters, in my opinion, it will be more likely because of weaknesses in its institutions and governmental set-up.

Notes: I am aware of the greater inputs theory, for instance described by Krugman before the Asian Financial Crisis. But growth in Asia was real and dramatic in the following decade as Asian economies rebounded quite strongly.

Consumption rate is defined here as Consumption/GDP.
Statistics from UN National Accounts Division

1 comment:

Anonymous said...

I am a long time reader.

This economist/blogger claims that the story is indeed about investment.

John Ross:

You might already be aware of him as he has had a few arguments with Michael Pettis.