Yin Zhang&Guanghua Wan

8/6/2019 Yin Zhang&Guanghua Wan

1/21

National Savings and Balanced

Growth: China vs India

Yin Zhang

Northwest A&F University

Guanghua Wan

UNU-WIDER


2/21

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


3/21

PPP GDP Shares of Major Economies in 2004

China

13% India

6%

USA

21%

Euro Area15%

Japan7%

Rest of the World

38%


4/21

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)


5/21

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


6/21

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


7/21

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


8/21

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


9/21

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


10/21

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


11/21

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


12/21

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


13/21

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


14/21

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


15/21

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


16/21

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


17/21

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


18/21

Result II: Development & Growth

Saving rate rises with income level

Saving rate rises with higher growth


19/21

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


20/21

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


21/21

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

Yin Zhang&Guanghua Wan

Documents

Transcript of Yin Zhang&Guanghua Wan