In this video we’ll be talking about how the Gerschenkron growth model spells disaster for China and Chinese stocks. Make sure to watch it above!
Alexander Gerschenkron was a Ukrainian born American economist who taught at Harvard during the first half of the 20th century. In 1951, he authored a paper titled Economic Backwardness in Historical Perspective in which he laid out his theory on the linear development stages that “backward” countries — backward meaning lacking in socio-economic development and institutions — follow in their transition from agrarian to industrial based societies.
Gerschenkron noted that developing countries suffer from poor infrastructure (ie, they have high investment needs) as well as low savings rates. Since savings are equal to investment (as part of the national accounting identity framework), developing countries are dependent on foreign capital which tends to be a risky and unreliable form of investment.
To get around this, he noted that countries needed to boost their savings rate. Again, because higher savings equals higher investment which means better infrastructure and faster economic development.
The easiest way to accomplish this is by lowering the household income share of GDP.
Now, we’re not going to get too wonky here. Just stay with me, this is an important concept and we’ll soon get to why this matters.