A high value of domestic credit to private sector (% of GDP) is a sign of a strong economy!

One of the indications or signs (but not the only one), of economic development and prosperity is the development and increasing share (role) of private sector in the national economy or GDP of a certain country. Referring to data from the world Bank, an economic measure of so called domestic credit to private sector ( % to GDP ) means that financial resources like loans and non equity securities are provided to the private sector by financial institutions like banks and other financial corporations all measured as percentages with respect to GDP ( or national size of economy ) . The higher this measure is, the higher financial resources or financing is to private sector in a country and so the greater opportunity and space for the private sector to develop and grow. The better the private sector gets and bigger role it has in national economy , the better is generally the health and development of the economy of this country is. To illustrate taking examples from statistics done by World Bank, China in 2013 has the ratio of domestic credit to private sector / GDP at a rate of 133.7 % . This explains why China has succeeded in high economic growth because it allowed a space and opportunity for private sector to get financing and as a result emerge and grow leading to a mixed economy instead of just communism. Another examples in 2013, Australia, USA , and UK have indications of 122.4% , 183.6 % and 176.8 % respectively , which is one measure that these countries have well developed and advanced economies because private companies have great financing as US companies for example have 13,000 billion $ of loans . In contrast, with all respect to developing countries like Algeria in North Africa and Argentina in Latin America have this ratio of 14.5 % and 14.6 % respectively ( although both rich in minerals and natural resources like oil, metals and agricultural products) means that private sector have less role.( These countries in one way or another have recently military regimes with governmental dominance for some decades). In general, this is a one important ( but not the only one ) indicator or measure of economic degree of development and success because it shows the well being and goodness of private sector working hand in hand with public or governmental sector especially nowadays.

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19 thoughts on “A high value of domestic credit to private sector (% of GDP) is a sign of a strong economy!”

  1. Is there any reason to be concerned if the % is greater than 100%? Does this indicate a level of potential instability with money chasing money and not actually contributing to GDP growth? Your explanation doesn’t indicate that, but others argue along these lines. Looking for a bit more explanation. Thanks

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    1. You have a good question and point.
      As to my knowledge , the market can correct itself like what happened in 2008 and 2009 . As an example in Dubai , many real estate properties were overvalued. In 2008 and 2009 , many overvalued properties to my knowledge were corrected by the market itself. Governments can make and issue new laws to prevent market bubbles as much as possible. My idea is that financing private sector and companies ,especially successful ones, can lead to buying new machines in order to grow , create job opportunities and increase productivity and hence GDP growth unless a company does not succeed. This is another case.

      Another thing , look at many past communist countries where the economy was controlled by governments how they have fallen in the 90 s where they private sector had little or almost no role.

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  2. I have read that Chinese and US companies have taken Trillions of dollars in loans and many are very successful. Many companies have good rating and can get cheap loans if they desire.

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  3. The presumption your making is that capitalist markets are completely efficient and that is a very common mistake. I recommend you look into the work of an economist named Steve Keen. He and other post-Keynesian economists like Minsky have proven that capitalist economies do not work efficiently and that 2008 was not a correction but a bust caused by private debt/GDP getting out of control and then unravelling. Also when you say that the government is creating laws that help to prevent bubbles, remember these are the same people who using outdated economics did not even see the bubble coming in 2008. They still have not adjusted their economics to account for precisely what you are talking about (private debt). They don’t see it as a concern. Why should someone who didn’t see the bubble coming know how to prevent one in the future. Again, I would look into the economics of Steve Keen and his blog debt watch (http://www.debtdeflation.com/blogs/) as well as Yves Smith and her book Econned. I don’t say any of this out of hostility but rather to help a fellow economics enthusiast to see the outdated and dangerous nature of neoclassical economics. I think you will find that post-Keynesian economics will answer all of the questions or doubts you might have about the outdated kind that is ruining Europe and countries all over the world through the IMF and central banks.

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  4. I am trying to say that countries that allow more space for economic freedom ( under supervision of advanced laws ) where private sector is given a greater freedom is much better than have governmental complete dominance on the economy. Look at China after it allowed more role for private sector how its economy grew termendously since the 1990 s.
    Thank you for your comment. Even post -keynesian economists are sometimes ideologically motivated and biased in some ways as some say about him , with all my respect for his ideas and work.

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    1. I really appreciate the quick response. I totally agree that economic freedom is a good thing and is certainly much better than complete government dominance. However, when credit levels start shooting up as rapidly they have in all the countries that you mention, it is more the symptom of a post-industrial and therefore previously strong economy than it is the direct sign of a strong economy. This is because the growth is by definition driven by debt and therefore is not sustainable. I would also like to point out that the in the example of China, the privatization of the economy while certainly a good thing, was not really privatization. The only reason why they have been able to sustain their extreme level of debt acceleration (about 3 times quicker than the US from 1992 to the crash in 2008) is precisely because of govt. intervention in private investment. This has worked so far in the business sector but as we have seen this year wreaked havoc on the financial markets. Also, while I agree that all economists can be in some way or another ideologically motivated, but I fail to see how a post-Keynesian could possibly be biased. There’s virtually nothing for them to lose, which when stacked up against what the other side has to lose, makes them seem like a much less likely source of bias. Anyway, I love having these discussions and again appreciate the quick response.

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      1. Also, financial institutions are not creating growth when they muddle about in derivatives and complicated financial products which produce systemic risk (they do this on a massive scale by the way, just look at the CDO’s and other products in the leadup to 2008) , quite the opposite actually when they cause a crash and unemployment skyrockets, growth stagnates, and politicians respond completely incorrectly. Research shows that productivity per capita drops precipitously after these “corrections”. This harms growth/GDP. Another thing, because of their fundamental misunderstandings of economics, government “advanced laws” have not, do not, and will not work.

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      2. Despite all the imperfections in American, Chinese and (northern) Euro economies (Denmark tops the charts at 212% P.S. debt), lives of ordinary citizens continue to improve. Take a look at Pakistan. It peaked at 29% private sector debt in 2009. That has dropped to 15% today. For ordinary citizens, electricity and water are unavailable for hours every day. Imagine the incentive this gives to what industry remains.

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      3. Companies need to sort out and find the balance in finacing their operations. Financing should be usually balanced between equity or stocks , taking loans or t bonds , and have cash at hand. If the companies are successful , they can use retained earnings to make effective and efficient research and development to grow and prosper. Successful and thriving companies can help boost profits of banks and financial institutions that give them loans.
        You are right that sometimes problems may arise , but they can be relatively solved in the world and be taken as lessons for the future. Incomes worldwide have been rising up despite imperfections in some ways here and there.
        This is life and we all hope that a better future will await us anf future generations.
        Thank you .

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  5. God bless our world . In God’s will, hope we will use the weath , riches and technological development on earth to improve and better the lives of all nations and individuals .

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  6. Given as a credit line, around one billion dollars have subsequently been lent to Egypt, Tunisia, Morocco, Jordan and Lebanon. According to some sources, these loans granted to small and medium companies in 4 years starting from 2011 , have directly created more than 150 thousand jobs .

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  7. Banks must make economic feasibility study before they lend to private sector to make projects and must get enough provisions for non performing loans , so that banks would have good management and great performance.

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