Investment is the critical spending driver of growth and a high and rising level of investment is normally a good sign.
For a country, investment running
- below 20% of GDP foretells of shortages and gridlock;
- above 40% is excessive and often presages a serious slowdown.
The sustainable sweet spot for investment is between 25% to 35% of GDP, and it can last for many years, particularly if the investment is going to projects that generate growth in the future.
Link between weak investment and weak growth is clear and it is so common.
If investments is too low as a share of GDP, around 20% or less for emerging countries, and stays low for a long period, it likely to leave the economy full of holes that make rapid growth unlikely.
Weak investment tends to degrade both the supply network and respect for the government.
If a nation's supply chain is built on inadequate road, rail and sewer lines, supply cannot keep up with demand, which drives up prices.
In this way, weak investment is a critical source of inflation - a cancer that has often killed growth in emerging nations.
Best and worst investments
The most productive investment binges are in
- manufacturing,
- technology, and
- infrastructure, including roads, power grids and water systems.
- real estate, which often rings up crippling debts and
- commodities, which often have a corrupting influence on the economy and society.
Although a case can be made that services will come to rival manufacturing as a catalyst for sustained growth, that day has yet to arrive.
For now, the best investment binges are still focused on manufacturing and technology.
Additional Notes:
In Malaysia, investment peaked in 1995 at 43% of GDP, the second-highest level ever recorded in a large economy, behind China today.
Guided by an autocratic prime minister, the country poured money into some projects that proved useful, like a new international airport and many that did not.
The prime minister's grand vision included a new government district called Putrajaya, which today is home to just a quarter of the 320,000 people it was designed to house. This is another classic case of a bad binge that left behind little of value.
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