February 20, 2024
In our recent analysis we examine the capital stock's contribution to GDP across various countries, comparing it to Saudi Arabia within the growth accounting framework. This framework attributes growth to labor, capital, and technology. Long-term growth primarily depends on technological progress, with diminishing returns indicating that disproportionate increases in any single factor are inefficient for boosting output. The stage of development influences the ratio between these factors, with early to mid-stage countries often having abundant labor, the capacity to import technology, but a lack of capital. The economic structure, especially in resource-rich countries, can lead to high capital returns in the extractive sector and concentration of capital stock within it but challenges in diversifying.
The capital stock's share in GDP offers insights into development stages, factor abundance, and growth bottlenecks, particularly when accounting for income levels and resource endowments.
Egypt's economic reorientation in the 1970s towards market reforms aimed to attract foreign direct investments (FDIs) to bolster key industrial sectors. However, complex bureaucracy hindered investment in productive sectors like manufacturing. Investments, peaking at 25% of GDP, focused on the public sector and services like tourism and banking. The mid-1980s oil price collapse led to structural adjustments, but Egypt's capital stock did not achieve a balanced growth path, widening the gap with Saudi Arabia.
Germany experienced rapid post-war investment-driven growth, particularly in the 1950s and 1960s, due to high technology and human capital levels. By the 1970s, capital stock exceeded 400% of GDP, indicating a balanced growth path and expansion driven by technological innovation. Compared to Saudi Arabia, Germany's capital/GDP ratio has been higher, though the gap has narrowed recently.
South Korea embarked on a state-led investment drive in the 1970s to transition from an agrarian to an industrial economy. Investment rates above 30% of GDP and a focus on heavy industries and exports laid the foundation for technological advancements. The 1980s saw liberalization and domestic R&D investment, leading to a balanced increase in production factors and a significant capital stock.
Australia has maintained a stable capital/GDP ratio, indicating a balanced growth path. The mining sector's expansion in the 1990s, alongside deeper ties with growing Asian economies, led to increased investments and a diversified economy, contrasting with the volatility seen in resource-rich economies.
The United Arab Emirates, sharing a growth path with Saudi Arabia until the early 2000s, began diversifying its economy earlier. The post-2000 oil boom had a less pronounced impact on the UAE due to lower oil production, highlighting different growth dynamics compared to Saudi Arabia, especially in per capita terms due to Saudi's larger population and growth.
This analysis underscores the importance of balanced factor growth and diversification in achieving sustainable economic development, with the capital stock share in GDP serving as a key indicator of development stages and economic health.
