Small numbers can have large consequences

Finance Minister Jim Flaherty. (File Photo)

Finance Minister Jim Flaherty. (File Photo)

Michel Kelly-Gagnon, QMI Agency

, Last Updated: 2:29 PM ET

All of you who have money invested know - or if not, should know - the power of compound interest.

There may not be a big difference from one year to the next between an annual return on investment of, say, 4.5% and one of 4.6%. For $1,000, that's a meagre dollar. But keep that grand for 30 years, and you'll end up with $3854 instead of $3745, or $109 more, with the higher return sustained over the whole period. That's because when you add that $1 in additional interest to the principal, it too earns you money, and so on every year after that.

Now, think about the results if you invest hundreds of thousands of dollars over your whole career: this small difference in the rate of return could mean one more trip abroad every year after you retire.

Small numbers don't only have large consequences for your personal finances, but also for a country's economy.

In 1900, Argentina and Canada has more of less the same standard of living. But during the following century, Canada's GDP per capita (adjusted for the cost of living) grew by an average rate of 2.02% per year, while that of Argentina grew by 1.29%.

What's the end result? In 2008, Canadians were two and a half times richer than Argentinians.

The reasons for Argentina's poor performance are well known. The country has gone through periods of destructively high inflation, massive debts, protectionism, large-scale nationalization of industries and other populist measures that wreaked havoc with the economy.

But what about the dozens of less-than-optimal policies that our own governments are responsible for?

Yes, we are a rich country with a relatively open and free economy. But we also have inefficient and costly government monopolies, high taxes, a growing debt, a risky low-interest monetary policy, a legally cartelized agricultural sector, countless programs wasting money on subsidies to corporations and interest groups, an uncertain environment for foreign investment, and the list could go on and on.

Each one of these policies may not be disastrous in itself. Perhaps they shave only 0.01% off our overall growth rate. But as we just saw, small numbers do add up over time.

Public policy debates may sometime seem not very relevant. But we should not lose sight of the compounded effect. In the long term, they do matter.

Michel Kelly-Gagnon is president of the Montreal Economic Institute (www.iedm.org). The views reflected in this column are his own.

 


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