EconomyPolitics 3rd Annual Latent Growth Index 2012


The idea of Index of Incremental GDP is an extension of the previous lists. The previous two indexes have measured economic efficiency and GDP growth rates. Both are inputs into the Incremental GDP measurement. For the wise investor seeking to capture economic growth, the major inputs are included. I have included portfolio percentages as to where you should be investing to capture that growth and build a globally diversified investment portfolio.

Looking at the list, one thing stands out. Incremental GDP is coming from both the developed world and emerging markets. China stands out as the best place to capture GDP growth because demographically, it has a lot to offer, but also because the Communist China is making investments into infrastructure and increasing economic freedom. I have outlined the basics of my methodology below.

Demographics Matter… a Lot

A more populous country, with similar economic freedom will have advantages of size and scale. Greater working population translates into greater economic activity given a similar GDP per capita. Furthermore, more populous countries have a larger internal market for their goods and services. For example, India may not have a lot of Free Trade Agreements with other countries, however their internal free trade area encompasses 17% of the world’s population, more than double the size of the European Union common market. The United States currently has free trade agreements with 17 countries, but this common market is less than half the size of the internal Chinese market.

In fact, if you eyeball the countries, going down the list, it is obvious that there is a clear preference for large countries, with their inherent network effect. Note that investment bankers understood this point when they coined the BRIC (Brazil, Russia, India, China). These countries are simply the most populous developing countries, with the exception of Indonesia. South Korea, Japan, Chile, Hong Kong and Thailand were not included in BRIC because they were either too small or too developed or both.

Low GDP Brings Higher Growth Rates

The rankings uses a long term GDP outlook called Latent GDP, which looks at long term growth potential for 116 countries. Using the United States as an anchor, we looked at future GDP Per Capita of the United States, using a 2.23% real growth rate for 40 years. In that timeframe, any country that practices sensible policies of economic liberalization should be able catch up in terms of GDP Per capita. In capturing GDP per capita, we used Purchasing Power Parity (PPP) to as long term, things drift toward PPP.

Countries that are catching up in terms of GDP per capita, will have higher growth rates than countries that have less catching up to do. The greater the difference in GDP per capita, the greater the potential for growth as the county builds new infrastructure, often leapfrogging old technology with new.

But High GDP leads to Greater Aggregate Growth

At the same time, high GDP leads to a higher incremental GDP with a similar growth rates. The reason is simple: the base is higher. For Example, if you have 3% growth on a very high GDP number, the incremental GDP will be higher. Africa might have higher GDP growth rates, but their GDP numbers are inconsequential compared to the United States. For a wise investor seeking growth, they should seek incremental economic activity, or as we call it Incremental GDP. That can come from high GDP countries with a much larger base, but lower growth, just as it can come from the emerging markets with a healthy catch-up factor.

Economic Efficiency Matters

Economic Efficiency encompasses economic freedom, infrastructure, monetary policy, property rights and fiscal policy. A country that has these characteristics will naturally be in a greater position to capture growth than one that is less efficient. This becomes an input into economic growth rates which in turn affects incremental GDP.

How to structure a portfolio to capture growth

Since growth is the ultimate driver of long-term portfolio returns, ultimately we should seek growth, as measured by incremental GDP. The most compelling incremental GDP stories come from poor countries with high economic efficiency and large populations. Tailor your portfolio to capture this incremental GDP. Likewise, a rich country with low populations and little economic freedom have little to offer investors.

Feel free to use but must source back to EconomyPolitics. See the full list below.



Country
USD GDP Per Capita
Population
Latent USD GDP Growth
Portfolio Weights
1
China
 7,600
 1,347,350,000
 6,352
23.5%
2
India
 3,500
 1,210,193,422
 3,376
12.5%
3
United States
 47,200
 313,115,000
 2,602
9.6%
EU 27
 411,069,077
 1,963
7.2%
4
Brazil
 10,800
 192,376,496
 923
3.4%
5
Mexico
 13,900
 112,336,538
 794
2.9%
6
Indonesia
 4,200
 237,641,326
 756
2.8%
7
United Kingdom
 34,800
 62,300,000
 529
2.0%
8
Turkey
 12,300
 74,724,269
 496
1.8%
9
Thailand
 8,700
 65,926,261
 430
1.6%
10
France
 33,100
 65,350,000
 413
1.5%
11
Saudi Arabia
 24,200
 27,136,977
 375
1.4%
12
Malaysia
 14,700
 28,334,135
 327
1.2%
13
Canada
 39,400
 33,476,688
 316
1.2%
14
Japan
 34,000
 127,770,000
 302
1.1%
15
South Korea
 30,000
 48,580,000
 298
1.1%
16
Colombia
 9,800
 46,407,000
 295
1.1%
17
Egypt
 6,200
 81,625,000
 289
1.1%
18
Australia
 41,000
 22,847,458
 273
1.0%
19
Philippines
 3,500
 94,013,200
 270
1.0%
20
Russia
 15,900
 143,030,106
 262
1.0%
21
Spain
 29,400
 46,196,278
 261
1.0%
22
Nigeria
 2,500
 162,471,000
 248
0.9%
23
Pakistan
 2,500
 178,874,000
 242
0.9%
24
Vietnam
 3,100
 87,840,000
 216
0.8%
25
United Arab Emirates
 49,600
 8,264,070
 210
0.8%
26
South Africa
 10,700
 50,586,757
 207
0.8%
27
Germany
 35,700
 81,796,000
 207
0.8%
28
Peru
 9,200
 29,797,694
 204
0.8%
29
Italy
 30,500
 60,776,531
 195
0.7%
30
Chile
 15,400
 17,248,450
 182
0.7%
31
Poland
 18,800
 38,092,000
 174
0.6%
32
Bangladesh
 1,700
 142,319,000
 162
0.6%
33
Iran
 10,600
 76,146,000
 156
0.6%
34
Argentina
 14,700
 40,117,096
 108
0.4%
35
Morocco
 4,800
 32,481,700
 108
0.4%
36
Taiwan
 35,700
 23,230,506
 104
0.4%
37
Israel
 29,800
 7,836,300
 87
0.3%
38
Ethiopia
 1,000
 84,320,987
 82
0.3%
39
Kazakhstan
 12,700
 16,674,000
 80
0.3%
40
Netherlands
 40,300
 16,725,902
 79
0.3%
41
Kenya
 1,600
 38,610,097
 73
0.3%
42
Sri Lanka
 5,000
 20,653,000
 70
0.3%
43
Romania
 11,600
 19,042,936
 67
0.2%
44
Singapore
 62,100
 5,183,700
 66
0.2%
45
Ghana
 2,500
 24,233,431
 66
0.2%
46
Algeria
 7,300
 37,100,000
 61
0.2%
47
New Zealand
 27,700
 4,439,700
 59
0.2%
48
Guatemala
 5,200
 14,713,763
 59
0.2%
49
Tunisia
 9,400
 10,673,800
 58
0.2%
50
Uganda
 1,300
 32,939,800
 56
0.2%
51
Tanzania
 1,400
 43,188,000
 50
0.2%
52
Portugal
 23,000
 10,561,614
 49
0.2%
53
Hungary
 18,800
 9,985,722
 43
0.2%
54
Azerbaijan
 10,900
 9,111,100
 42
0.2%
55
Ukraine
 6,700
 45,644,419
 42
0.2%
56
Hong Kong
 45,900
 7,103,700
 42
0.2%
57
Ireland
 37,300
 4,581,269
 40
0.1%
58
Sweden
 39,100
 9,482,855
 40
0.1%
59
Czech Republic
 25,600
 10,548,527
 38
0.1%
60
Oman
 25,600
 2,773,479
 37
0.1%
61
Denmark
 36,600
 5,580,516
 35
0.1%
62
Switzerland
 42,600
 7,870,100
 32
0.1%
63
Dominican Republic
 8,900
 9,378,818
 32
0.1%
64
Qatar
 179,000
 1,699,435
 31
0.1%
65
Ecuador
 7,800
 14,483,499
 30
0.1%
66
Slovakia
 22,000
 5,445,324
 29
0.1%
67
Syria
 4,800
 21,465,000
 29
0.1%
68
Zambia
 1,500
 13,046,508
 29
0.1%
69
Kuwait
 48,900
 2,818,000
 28
0.1%
70
Finland
 35,400
 5,405,300
 28
0.1%
71
Panama
 13,000
 3,405,813
 28
0.1%
72
Belgium
 37,800
 10,839,905
 27
0.1%
73
Jordan
 5,400
 6,272,600
 27
0.1%
74
Costa Rica
 11,300
 4,301,712
 26
0.1%
75
Honduras
 4,200
 8,215,313
 25
0.1%
76
Bahrain
 40,300
 1,234,571
 22
0.1%
77
Rwanda
 1,100
 10,718,379
 22
0.1%
78
Bulgaria
 13,500
 7,364,570
 22
0.1%
79
Yemen
 2,700
 23,833,000
 22
0.1%
80
El Salvador
 7,200
 6,227,000
 21
0.1%
81
Cameroon
 2,300
 19,406,100
 19
0.1%
82
Paraguay
 5,200
 6,337,127
 19
0.1%
83
Bolivia
 4,800
 10,426,154
 19
0.1%
84
Georgia
 4,900
 4,469,200
 18
0.1%
85
Papua New Guinea
 2,500
 7,014,000
 18
0.1%
86
Madagascar
 900
 20,696,070
 17
0.1%
87
Nepal
 1,200
 26,620,809
 16
0.1%
88
Botswana
 14,000
 2,031,000
 16
0.1%
89
Lithuania
 16,000
 3,195,700
 16
0.1%
90
Austria
 40,400
 8,419,776
 16
0.1%
91
Serbia
 10,900
 7,120,666
 15
0.1%
92
Côte d'Ivoire
 1,800
 21,395,000
 14
0.1%
93
Uruguay
 13,700
 3,203,792
 14
0.1%
94
Mozambique
 1,000
 23,049,621
 14
0.1%
95
Burkina Faso
 1,200
 15,730,977
 13
0.0%
96
Senegal
 1,900
 12,855,153
 13
0.0%
97
Croatia
 17,400
 4,290,612
 13
0.0%
98
Norway
 54,600
 4,997,000
 13
0.0%
99
Cambodia
 2,100
 13,395,682
 13
0.0%
100
Belarus
 13,600
 9,465,400
 12
0.0%
101
Armenia
 5,700
 3,268,500
 11
0.0%
102
Mali
 1,200
 14,517,176
 11
0.0%
103
Lebanon
 14,400
 4,259,000
 11
0.0%
104
Uzbekistan
 3,100
 28,000,000
 11
0.0%
105
Mauritius
 14,000
 1,280,924
 10
0.0%
106
Nicaragua
 3,000
 5,815,524
 10
0.0%
107
Albania
 8,000
 2,831,741
 10
0.0%
108
Cyprus
 21,000
 838,897
 10
0.0%
109
Malawi
 800
 13,077,160
 10
0.0%
110
Macedonia
 9,700
 2,057,284
 10
0.0%
111
Namibia
 6,900
 2,324,000
 9
0.0%
112
Kyrgyzstan
 2,200
 5,477,600
 9
0.0%
113
Mongolia
 3,600
 2,736,800
 9
0.0%
114
Jamaica
 8,300
 2,705,800
 9
0.0%
115
Niger
 700
 16,274,738
 9
0.0%
116
Benin
 1,500
 9,100,000
 8
0.0%
117
Latvia
 14,700
 2,049,500
 7
0.0%
118
Luxembourg
 82,600
 511,840
 7
0.0%
119
Bosnia and Herzegovina
 6,600
 3,839,737
 6
0.0%
120
Gabon
 14,500
 1,534,000
 6
0.0%
121
Slovenia
 28,200
 2,056,680
 6
0.0%
122
Estonia
 19,100
 1,316,541
 5
0.0%
123
Tajikistan
 2,000
 7,616,000
 5
0.0%
124
Moldova
 2,500
 3,560,400
 5
0.0%
125
Congo DRC
 300
 67,758,000
 5
0.0%
126
Sierra Leone
 900
 5,997,000
 4
0.0%
127
Togo
 900
 5,753,324
 4
0.0%
128
Angola
 8,200
 20,609,294
 3
0.0%
129
Haiti
 1,200
 10,085,214
 3
0.0%
130
Trinidad and Tobago
 21,200
 1,317,714
 3
0.0%
131
Guinea
 1,000
 10,217,591
 3
0.0%
132
Brunei
 51,600
 422,700
 2
0.0%
133
Bahamas
 28,700
 353,658
 2
0.0%
134
Fiji
 4,400
 868,000
 2
0.0%
135
Gambia
 1,900
 1,776,000
 2
0.0%
136
Congo
 4,100
 4,140,000
 2
0.0%
137
Montenegro
 10,100
 620,029
 2
0.0%
138
Iceland
 38,300
 319,575
 2
0.0%
139
Greece
 29,600
 10,787,690
 1
0.0%
140
Belize
 8,400
 312,698
 1
0.0%
141
Mauritania
 2,100
 3,340,627
 1
0.0%
142
Lesotho
 1,700
 2,194,000
 1
0.0%
143
Sudan
 2,300
 30,894,000
 1
0.0%
144
Swaziland
 4,500
 1,203,000
 1
0.0%
145
Equatorial Guinea
 36,600
 720,000
 1
0.0%
146
Liberia
 500
 3,476,608
 1
0.0%
147
Guyana
 7,200
 784,894
 1
0.0%
148
Bhutan
 5,500
 708,265
 1
0.0%
149
Antigua and Barbuda
 16,400
 89,138
 1
0.0%
150
Solomon Islands
 2,900
 542,287
 1
0.0%
151
Laos
 2,500
 6,348,800
 1
0.0%
152
Cape Verde
 3,800
 491,575
 1
0.0%
153
Suriname
 9,700
 529,000
 1
0.0%
154
St. Vincent and the Grenadines
 10,300
 100,892
 0
0.0%
155
Samoa
 5,500
 184,032
 0
0.0%
156
Vanuatu
 5,100
 234,023
 0
0.0%
157
Comoros
 1,000
 754,000
 0
0.0%
158
Guinea-Bissau
 1,100
 1,520,830
 0
0.0%
159
Maldives
 6,900
 317,280
 0
0.0%
160
Kiribati
 6,200
 101,000
 0
0.0%
161
Seychelles
 23,200
 90,945
 0
0.0%
162
Djibouti
 2,800
 906,000
 0
0.0%
163
Tonga
 6,100
 103,036
 0
0.0%
164
Dominica
 10,400
 71,685
 0
0.0%
165
Burundi
 300
 8,575,000
 0
0.0%
166
St. Kitts and Nevis
 13,700
 51,970
 0
0.0%
167
Grenada
 10,200
 110,821
 0
0.0%
168
Central African Republic
 700
 4,487,000
 0
0.0%
169
Sao Tome
 1,800
 169,000
 0
0.0%
170
Eritrea
 600
 5,415,000
 (1)
0.0%
171
Chad
 1,600
 11,274,106
 (1)
0.0%
172
Zimbabwe
 500
 12,754,000
 (1)
0.0%
173
Afghanistan
 900
 24,485,500
 (2)
0.0%
174
Iraq
 3,800
 33,330,000
 (7)
0.0%
175
Myanmar
 1,400
 48,337,000
 (11)
0.0%
176
Venezuela
 12,700
 27,150,095
 (13)
0.0%

endoflist

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