Asia is changing rapidly from a region known for export-driven growth to a diverse and successful region for investment, according to Guinness Asian Equity Funds' James Weir and Edmund Harriss.
As investors, we think of a firm as a stock of productive capital which then generates returns on that capital to give us its return on invested assets.
The absolute return from a firm can be grown by increasing the asset base or by improving the returns on that asset base. If both can be increased at the same time, then this can drive a period of rapid growth in the returns from that firm.
For a country, the stock of productive capital comprises its fixed assets, its intellectual property and its workers, and the return on these assets can be seen in terms of its total factor productivity. The simplest way to drive growth in a country’s output is to add new workers to the workforce; as the proportion of a population which is of working age rises then GDP per capita is likely to grow.
This process is known as the ‘demographic dividend’. As a country becomes better off, mortality rates and birth rates tend to fall, helping to sustain economic growth on a per capita basis. If productivity can improve in parallel, the return on that capital effectively increases, driving a sustained period of fast real GDP growth.
To help judge where China is in its development cycle, it is useful to consider the structure of its demographics, as this is one of the drivers of economic development. The dependency ratio, as measured by the United Nations, tracks the size of the population below 15 years old and above 64 years old, relative to the size of the population between 15 and 64.
This broadly indicates the proportion of non-workers to those available to work in a country. This is useful to judge economic growth potential in late stage developing nations.
In developed nations such as the US and Germany, the dependency ratio peaked in the mid-1960s as the post-war baby boomers stopped being dependents and entered the workforce. As the dependency ratio fell in the 1970s and 1980s this reflected an on-going trend of younger workers moving into the working age group, and this helped to stimulate economic growth in these economies.