Post on 29-May-2018
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National Savings and Balanced
Growth: China vs India
Yin Zhang
Northwest A&F University
Guanghua Wan
UNU-WIDER
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Background China
GDP annual growth 9.5%
2nd largest in PPP term in 2004
India
GDP annual growth 5.8%
4th largest in PPP term in 2004
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PPP GDP Shares of Major Economies in 2004
China
13% India
6%
USA
21%
Euro Area15%
Japan7%
Rest of the World
38%
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Contrasting Development Models
China
Manufacturing-led
GDP shares: industry 46%, services 41% (2005
National Economic Census)
East Asian Model?
India
Services-driven
GDP shares: industry 27%, services 52%
New growth paradigm? (leapfrog
industrialisation stage)
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25
30
35
40
45
50
55
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
China
India
Sha
reofindustryin
GDP
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25
30
35
40
45
50
55
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
hina ndia
ha e o e vice in
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Why the difference? different saving rates
Currently, China saves nearly half of its GDP,
India saves 28%
Historically, saving rate was also much higher
in China
Other forces at work, e.g. Chinas industrial policy
Indias over-regulated labour market
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Gros
sNationalSavingRates
15
20
25
30
35
40
45
50
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Chi
I
i
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Imbalances: China
High savings curtails consumption
Reliance on investment expansion increasedgrowth volatility
Diminishing returns misallocation of capital non-performing loans
Excess capacity deflation
Insufficient domestic absorption
Reliance on export expansion
Trade disputes incite protectionism in majorexport markets
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Imbalances: India
Lack of investment funds led to neglect of
infrastructure
High production costs stunted manufacturing sector
will eventually constrain the growth of high-tech
centres
IT and IT-enabled services are skill-intensive,
rather than labour-intensive
Jobless growth: rural unemployment and poverty
Lack of progress in urbanisation
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Sharesofpublicsavingintotal
saving
-20
-10 0
10
20
30
40
50
60
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Chi
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Private savings have risen in both countries
0
5
10
15
20
25
30
35
40
45
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
% of GDP
China India
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Empirical Model
Extended Life-cycle model Current per capita GDP: Keynesian absolute income
hypothesis
income growth: adjustment lag or perfect foresight
rise in real interest rate has ambiguous effects on savingsrate: substitution vs. income effect
high dependency ratio lowers savings rate
Inflation: money illusion or wealth effect
Fiscal deficit: Ricardian equivalence
Inequality: propensity to save of the rich is higher Financial depth: M2/GDP, Domestic credit/GDP
Data
NBS, CSO, RBI, IMF, WDI and WIID
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Determinants of private savings rate in China
Coefficient t ndard rror Coefficient tandard rror
GDP er capita 0.104 0.055 0.092 0.051
GDP per capita growth 0.147 0.064 0.203 0.029
D 1 -0.620 -0.135 -0.419 -0.105D 2 -0.009 -0.005 0.006 0.004
Real interest rate -0.013 -0.016 -0.008 -0.008
Inflation -0.189 -0.096 -0.165 -0.085
Fiscal deficit 0.197 0.313 0.124 0.155
Inequality 0.109 0.056 0.091 0.051Financial depth 0.157 0.087 0.103 0.129
OLS IV
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Determinants of private savings rate in India
Coefficient Standard Error Coefficient Standard Error
GDP per capita 0.061 0.02 0.073 0.035
GDP per capita growth 0.082 0.037 0.096 0.046
DE1 -0.262 -0.131 -0.322 -0.115DE2 -0.009 -0.006 -0.011 -0.007
Real interest rate -0.114 -0.054 -0.089 -0.048
Inflation -0.056 -0.027 -0.106 -0.054
Fiscal deficit -0.144 -0.085 -0.132 -0.088Inequality -0.311 -0.240 0.263 0.202
Financial depth 0.020 0.011 0.012 0.006
OLS IV
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Demographic shifts have powerful effects
on the saving rates of both countries
However, the effect of elder dependency
ratio is still not discernible
As demographic transition continues,
whats in store for saving rate?
Result I: Demography
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Demographic Dividend
0
5
10
15
20
25
30
35
40
45
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
0-14,Chi
0-14, I i
v r65,Chi
v r65, I i
f t t l l ti
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Result II: Development & Growth
Saving rate rises with income level
Saving rate rises with higher growth
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Result III: Other
In both economies, inflation has a negative
effect on savings, probably because of
heavy weight of financial wealth in private
assets portfolio Increase in income inequality raises saving
rate in China
Financial development has positive effecton savings in India
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Policy Implications The rise in saving rates in both countries are
mainly structural
can expect saving rates to increase further withrising income and declining minors dependency
ratio
To balance growth in China
monetary instruments are ineffective (interestrate) or undesirable (inflation)
fiscal policy promising (Ricardian equivalenceabsent)
income redistribution
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Policy Implications
To raise savings in India
Further development of financial saving instruments
The negative relation between public dis-saving and
private saving is puzzling. Yet if it represents a causalrelationship, India shall surely rein in its fiscal deficit.
For the world at large
Structural high savings in the two most vibrant
economic powerhouses are a boon to the worldeconomy
Downside risks are mainly short-run