Full-potential Economic Growth

Reaching Full PotentialThe concept of full-potential economic growth is essentially theoretical. It is a theoretical concept to the extent that the world, as a whole, has never achieved it. Moreover, it can also be argued that even during its brightest period, no individual nation has reached its full-potential economic growth.

A handful of countries around the globe have been able to achieve rates of growth averaging over 7% for extended, multi-annual periods. The Singapores of the world, and more recently China, New Zealand, and the Czech Republic, among others, are a living testimonial of it. However, not even during their brightest moments, have those nations been able to get close to their full-potential economic growth rate.

Knowing the exact level at which full-potential economic growth lies at any particular point in time is like trying to catch smoke with your bare hands. Mankind’s performance has been so far away from that potential that, for practical purposes, it is not that relevant to know where the full-potential level is at any particular point in time, given that the room for improvement is simply colossal.

It is axiomatic that, in order to consistently achieve turbo-charged economic growth rates for extended periods, say over 10 continuous years, it is indispensable to be a very poor nation, well below the world’s GDP per capita income level, or alternatively, to be a nation with a per capita income level substantially below the developed countries’.

In other words, provided that a virtuous and drastic change in governance is implemented, the poorer a country is, the higher its potential for a sustained and accelerated economic growth rate.

Another worthwhile notion in this fascinating topic is that the full-potential concept is not an immutable benchmark. Not at all. The full-potential concept is a dynamic objective, that moves up or down according to how some basic variables evolve along time: demographics, natural resource availability, technological progress, economic and political stability, etc. The world’s current economic system, the monetary economy, is easier to understand once we have a grasp of the most basic of economies: The Robinson Crusoe Economy.

Where do developed nations stand in all this?

economic growth

Well, it stands to reason that, given the multiple imperfections, limitations and deficiencies in public administration, even developed nations are far from growing at their full-potential.

Having established that fact, however, another quite different story is to conclude that because of that relative mismanagement, some developed nations are inevitably headed into chaos, as many analysts have been suggesting during the recent quarters, given the sizeable debt overload of the EU, the US and Japan. Granted, that enormous debt overload is a drag, a substantial negative factor on the world economy, and a significant risk, which truly is pushing the normal growth rate well below of what it otherwise would be. Yet, there doesn’t seem to be a clear connection between that relative (severe) mismanagement and the timing of the inevitable harmful critical consequences that severe imbalance will yield.

However regrettable the current situation is, specifically in the light of the humongous opportunity costs incurred, it does not necessarily have to lead to concluding that an imminent deep global synchronized recession is unavoidable and/or that the substantial, unbearable levels of unemployment among major developed nations are here to stay for long.

No single human being or group, however competent they happen to be, can rightfully pretend to have such an advanced insight as to know the precise timing of an event of that complexity.

It is truly important to understand the limits of knowledge and act accordingly. Unfortunately, such a mind frame has always been in short supply.

This reasoning does not pretend to suggest that heavily indebted developed nations are doing just fine. Not at all. The sooner the huge debt overload challenge is adequately confronted, the better. This means starting to grow at sufficient levels that consistently decrease the total debt/GDP ratio.


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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.


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