investment rates surged to over 40 per cent of GDP in response to generous tax
incentives in Singapore in the 1980s and 1990s, yet similar incentives in
Pakistan over the 1990s led to investment falling to below 20 per cent of GDP.
Part II of this book analyses the deeper determinants of economic growth.
Some scholars (see Box 3.1) view investment as far more than just a driver
of economic growth.
Investment:the basic concepts
Investment can be divided into physical and human capital. Physical capital
investment includes expenditure on buildings, machines, and infrastructure by
households, firms or the government. Human capital investment includes
education and learning-by-doing. Learning for its own sake, perhaps philoso-
phy rather than engineering, would not then count as investment. There is an
obvious problem in measuring additions to the aggregate capital stock (invest-
ment). All of the existing machinery, roads, buildings and human capital must
be measured, valued and summed. This is a large statistical exercise, which
may not be possible at all in poor developing countries where much investment
occurs at the level of small-scale production by the household and goes
unrecorded.
There is an important distinction between gross and net investment. Gross
investment is aggregate addition to the (physical and human) capital stock,
usually measured over the course of twelve months. However the capital stock
will deteriorate over time. Roads will break up, machines will become less reli-
able and cost more to maintain. Even human capital will atrophy as learned
skills become obsolete.
A true measure of real investment is net investment, so:
Present capital stock = Prior capital stock + Net investment
where
Net investment = Gross investment – DepreciationAgain, this is very hard to estimate so company accountants and economists
use rules of thumb. The British tax system, for example, assumes that the real
value of buildings depreciates by 4 per cent per year, and plant and machinery
by 20 per cent per year.
Robust empirical results and an elusive quest
The literature that explores the link between investment and GDP growth is
both reassuring and confusing. It offers two widely accepted conclusions.
First, that investment is robustly related to economic growth (reassuring), and
second that investment fails to explain observed growth rates and differences
64 Sources of Growth in the Modern World Economy since 1950