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No developing country can get rich from consumption

No developing country is known to get rich from the consumption sector of their economy. Most rich countries have got their wealth from their manufacturing activities, called as the secondary sector, with different levels of technological complexity, now or in the past. The percentage contributions of the primary and secondary sectors to their GDP have been declining in the past 50 years. For example, what the UK and the US have seen in their GDP compositions.

It is true that they began developing their countries with the primary sector, including agriculture. Then, they shifted most of their economic activities to the secondary sector, and saved most of their disposable income, accumulating wealth. Once they reached the level of adequate affluence, they started consuming more of their income, and hence, lowering the ratios of both their savings as well as investment to GDP. As a result, their saving rates have been relatively very low. See the chart below.

In addition, developing countries with a high (>60%) ratio of public and household debts to their GDP, coupled with a similar ratio of their external loans to GDP and a low ratio of savings to GDP, have found themselves struggling to pay interest charges and/or repay debts. Their economies are also vulnerable to both internal and external financial and other shocks.

Reasons: Investment has a reproductive effect, but consumption does not. Consumption supports life and health and occasionally helps maintain an unsustainable standard of living to a certain extent. As a result, the higher a country’s ratio of consumption expenditure to its GDP, the less money its households and businesses save and the less money they both have for investment. As a further result, its GDP growth rate declines and its consumption ratio to GDP goes up. In order to prevent further declines, its households and government must borrow money heavily and/or the latter monetizes its debts.

Many countries with similar situations have even borrowed much more to survive the current Covid-19 pandemic. For example, the UK, Japan and the US.

Source: www.yahoo.com: https://finance.yahoo.com/news/pandemic-16-trillion-bill-come-210000693.html

In addition, consumptive nations tend to demand a higher and standard of living. In the long run, their consumption can exceed income, and they will begin to live beyond their means and have to borrow money to keep their standards of living. The most recent example is what the US has been experiencing in the past 50 years: change of international standing from a creditor to debtor nation (https://www.latimes.com/archives/la-xpm-1985-09-17-mn-20088-story.html).

Unsustainable Consumption (combined with corruption) can get a country bankrupt

For example, Nauru, a small country in the Pacific (How Nauru got bankrupt: https://www.news.com.au/finance/money/wealth/how-nauru-squandered-its-staggering-fortune-and-ended-up-bankrupt/news-story/02862341eec1b05de55845410cde9a56).

CAVEAT: Certain individuals and businesses have got so wealthy from the consumption sector. For example, Hartono brothers of the famous Djarum group, ranked first in terms of wealth in Indonesia; Zhong Shanshan, the king of water and the wealthiest person in China and Asia.

Tjan Sie Tekhttp://www.tjansietek.com/translation.html
A former licensed stock market analyst and investment advisor with 20+ years experience with M.Sc. in Finance from Leicester University; now a Chinese, US and Indonesian macroeconomic and financial analyst, CEO of Center for New Indonesia (CEFNI).

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