24The Bahamas InvestorWhy are some economies more successful in deliveringeconomic prosperity and why do others fail so badly? Themost recent success story of economic growth centres verymuch on the emerging markets, with China, India andBrazil as the most prominent examples. On the otherhand, there are countries which have clearly failed withregard to economic prosperity. Measured by the UnitedNations Human Development Index, a number ofAfrican countries were poor 30 years ago and haveremained so until today.Growth theories suggest that the developments indemographics and productivity, as well as possibleendowments in the form of natural resources, are themain drivers of prosperity. More recently, however, superpowers and rich nations have focused more on boostingproductivity. The dominance of higher productivity overmore endowments has brought the way societies areorganized to the centre of attention when it comes toeconomic success.Productivity drivers include: . Property rights . Functioning legal systems . Money as a counter-value for goods and services. Tradable ownership rights such as shares and thedevelopment of stock markets. Appropriate economic frameworks . Social security systemsStrong demographics,advances in finances,telecommunicationscritical to success ofemerging economiesBy Janwillem C AcketLINDA M HUBER/©DUPUCHINVESTINGGrowth models: A new order emerges

The Bahamas Investor25This short list is certainly notexhaustive. Furthermore, these aspectsare of prime interest when analyzingcurrent divergences in economic growthand wealth. The ability of a society to increaseproductivity relies on a number ofinterdependent factors. Among them isan efficient incentive structure by theestablishment of property rights, a fullyfunctioning credit channel includingappropriately regulated financial marketsand the availability of credit. Furthermore,research and development and, even moreimportantly, innovation play a central rolein achieving higher productivity.Property rights essentialProperty rights are an essential part oflending agreements. If a borrower isrequired to back a loan with his or herown property, a major incentive iscreated to use the borrowed capitalefficiently. As in the worst caseborrowers can lose everything, and theyare strongly encouraged to work moreor become more productive in order toavoid a default. Borrowing without theguarantee of private property, hencewithout any real incentive to serviceand/or repay debt, severely limits thepositive impact that the availability ofcredit can have on economic growth. The rise in public debt may also havean adverse impact on the incentivesgoverning the relationship betweenborrowers and lenders. This can beillustrated by the structural break in thepositive correlation between debt andwealth in the US.As public debt is generally notguaranteed by private property, theincentive structure is partly invalidated.The fact that in the US privatemortgages tend to be guaranteed onlyby the house itself additionally weakensthe incentive structure of credit. This isin contrast to the situation in othercountries, where private households canbe obliged to use all of their assets toguarantee a loan. In those emergingeconomies where property rights areinadequately protected by the legalsystem, or where property is at risk dueto political factors (corruption or otheroperational shortcomings), incentives tohonour credit obligations in full mayalso be lacking, although significantprogress has been made in this regardover the past decade.Economic policy can stimulate andcontrol debt-based growth not only byshaping incentive structures throughlegal frameworks, but also byappropriately regulating financialmarkets. However, the sheer complexityof contemporary financial markets doesnot make their regulation easy. Thesearch of financial institutions for newareas of revenue has pushed financialinnovations closer to the limits ofregulation and comprehension. In someexamples, economic policy makers wereunaware of the risks of certain financialproducts while embracing them ascatalysts for debt-based economic120% of GDPEvolution of government debt1101009080706050403019701975Advanced economiesSource: IMF, Julius BaerEmerging marketsWorld19801985199019952000200520102015The importance of credit to enhance growth is undisputed and the accessibility to capital markets is decisive in developing the capital base.INVESTING