global crisis: impact on china & india arvind virmani (views are personal)
TRANSCRIPT
GLOBAL CRISIS: Impact On CHINA & INDIA
Arvind Virmani
(views are personal)
19 March, 2009 CPR: AV 2
Introduction Development strategy/Growth Model
China: FDI-Export=> Investment-Export India: Neutral Regime for Entrepreneurs
Evolutionary strategy: 10th 11th plans Global Crises: Worst since Great Depr China: Strategy-Model change to sustain India: Accelerate Policy, Institutional
(governance) Reform
19 March, 2009 CPR: AV 3
Global Financial & Economic Crisis
Financial: Uncertainty, Risk perception, Risk aversion
Economy: Demand Depression Effect on China, India, other EMEs
Global money supply/liquidity squeeze Fragmentation of markets, transmission channels Risk Capital flows: Equity, LT Debt Export demand: Manufacturing Investment demand Oil, commodity prices
19 March, 2009 CPR: AV 4
China: Socialist Market Economy Chinese Communist Party (CCP) Network
Mix of centralization & decentralization Goal / Objective: Growth Maximization
Subject to Preservation of Party/welfare constraint Ensured at all levels: Nation, Province, City, Firm
Means: Investment Maximization Foundation of Growth: Socialist Enterprise re-
investment Engine of Growth: FDI-Export
19 March, 2009 CPR: AV 5
Socialist Control And Subsidies Capital Intermediation
Domestic Saving Banks are like Govt. Depts. Controls used to provide indirect subsidies for
FDI (Capital/Skill intensive- KI/SI) Exports: Vent for Surplus, export at any cost
Cap cost 0 to supplier of CG, Intermediate, materials SOE production, investment (inefficiency)
Infrastructure: Supply & Pricing (Capital subsidy) to ensure FDI (technology, expertise, export marketing)
Flip side: Controls subject to Corruption
19 March, 2009 CPR: AV 6
China: Growth Model Goal / Objective : National Power
Growth Maximization s.t. CCP retaining power Ensured at all levels: Nation, Province, City, Firm Corporate growth maximization, market share, export
Means: Maximize Investment Foundation of Growth
Socialist Owned Enterprise =>100% Reinvestment of returns (0 dividends) => High investment (Kuijs)
Govt: Low tax rates, Low social expenditures, Solid investment in (quasi) Public goods
Engine of Growth: FDI and Exports FDI-export led growth
Infrastructure Investment since Asian Financial Crisis
19 March, 2009 CPR: AV 7
China: Max Investment, Exports, FDI Growth equation (OLS, Similar results from TSLS)
GrPcGdp= 0.54 + 0.24*GrGfcf + 0.12*GrGfcf(-1) + 1.03 GrGwrld + 0.017*GrFDIg$ (1.0) (3.6)*** (3.9)*** (4.6)*** (2.5)*** R2 = 0.96, R2 (adjusted) = 0.95, DW = 2.1
TFPG and Determinants GrGdp_L = 1.47+0.832*GrKf_L+0.283*AR(1) (1.9) (2.9)*** (1.9)*
R2 = 0.29, R2 (adjusted) = 0.24, DW = 1.79.
TFPG = 478 – 0.24*year + 0.04*FDIg$z (4.4)*** (-4.4)*** (5.9)***
R2 = 0.83, R2 (adjusted) = 0.81, DW = 1.88.
19 March, 2009 CPR: AV 8
China: Weakness and Risks Weakness: Other side of coin of past growth drivers
Govt/Socialist Ownership: Excess capacity (e.g. infrastructure), Falling returns, Rising NPAs, Falling public saving/investment
Rising export share: Vent for Surplus =>Falling unit values; Rising subsidies (NPAs)
Knife-edge character of FDI-export model Asian crises (euphoria risk) Over dependence on FDI Center and Periphery (Prebisch-Singer)
Share of World Exports
19 March, 2009 CPR: AV 9
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
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Japan China Germany
United States Poly. (China) Poly. (Germany)
Country Shares of World Exports
19 March, 2009 CPR: AV 10
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
India Thailand
Singapore Korea, Rep.
Export-GDP RATIOS
19 March, 2009 CPR: AV 11
0%
20%
40%
60%
80%
100%
120%
140%
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India Thailand Singapore
Korea, Rep. Japan China
Balance of Payments and Exchange Rate
19 March, 2009 CPR: AV 12
-2
0
2
4
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14
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Balance on goods Current account balance
Overall balance ExRateAvg(Y/$)
Demand Contribution To Growth: China and India
19 March, 2009 CPR: AV 13
China China India India2002/1990 2007/2002 2002/1991 2007/2002
Private Consumption 40.5% 27.0% 56.5% 45.8%
Govt Consumption 16.7% 12.1% 11.8% 6.1%
Gross Investment 38.7% 53.7% 30.2% 57.0%
Net Exports 1.8% 19.8% 3.8% -15.2%
Average contribution during period
Consumption-GDP RATIOS
19 March, 2009 CPR: AV 14
35
40
45
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55
60
65
70
1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
China, Singapore Thailand Korea, India Japan
Sector Contribution: China
19 March, 2009 CPR: AV 15
Avg. Contribution during 2002/1990 2007/2002Agriculture 6.9% 5.1%Manufacturing 45.9% 49.2%Construction 5.4% 6.2%Trade 9.2% 8.7%Transport and communications 6.1% 5.9%Others 27.2% 27.7%
Manufacturing: Export-Gdp
19 March, 2009 CPR: AV 16
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-5%
0%
5%
10%
15%
20%
25%
30%
35%
Mf:Exp/Gdp Mf:ExNet/Gdp
Growth of World Exports
19 March, 2009 CPR: AV 17
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
0%
5%
10%
15%
20%
25%
30%
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World Exp/Gdp WorldGr
Investment Rate:China/India
19 March, 2009 CPR: AV 18
1.0
1.2
1.4
1.6
1.8
2.0
2.2
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Investment Rate: China/India
InvRt:Ch/Ind Poly. (InvRt:Ch/Ind)
Impact of Global Meltdown on Growth
19 March, 2009 CPR: AV 19
GDP growth rate (CY) 2007 2008(act) (est)
China 13.0% 9.0% ? +/- 1%
India 9.3% 7.3% ? +/- 0.75%
Difference (Ch-Ind) 3.7% 1.7% 0% +/- 0.75%
2009(frcst)
19 March, 2009 CPR: AV 20
CONCLUSION Growth: China’s < India’s by middle of
next decade. Crises will accelerate China will have to change model:-
Demand: Export => Domestic PSU saving => Private Income and
consumption PSU investment: Manuf => Services Public Expenditure: Physical Inf=> Social
India: Opportunity for Transformative Reform(a la 1991)=>Hi gr. path by 2011