GLOBAL CRISIS: Impact

On CHINA & INDIA

Arvind Virmani
(views are personal)

Introduction

Development strategy/Growth Model

China:

FDI-Export=> Investment-Export
India: Neutral Regime for Entrepreneurs
Evolutionary

19 March, 2009

strategy: 10th 11th plans

Global Crises: Worst since Great Depr

China: Strategy-Model change to sustain
India: Accelerate Policy, Institutional
(governance) Reform

CPR: AV

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

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

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

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

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

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)

19 March, 2009

CPR: AV

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
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
2004
2005
2006
2007
2008

Share of World Exports

18%

16%

19 March, 2009
Japan
China
Germany

14%

United States
Poly. (China)
Poly. (Germany)

12%

10%

8%

6%

4%

2%

0%

CPR: AV
9

Country Shares of World Exports

3.0%
India

Thailand

Singapore

Korea, Rep.

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
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

19 March, 2009

CPR: AV

10

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
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
2004
2005
2006

Export-GDP RATIOS

140%

120%

19 March, 2009
India
Thailand
Singapore

Korea, Rep.
Japan
China

100%

80%

60%

40%

20%

0%

CPR: AV
11

Balance of Payments and

Exchange Rate
14

Balance on goods

Current account balance

Overall balance

ExRateAvg(Y/$)

12

10

0
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-2

19 March, 2009

CPR: AV

12

Demand Contribution To Growth:

China and India

Private Consumption
Govt Consumption
Gross Investment
Net Exports

19 March, 2009

Average contribution during period

China
China
India
India
2002/1990 2007/2002 2002/1991 2007/2002
40.5%
27.0%
56.5%
45.8%
16.7%
12.1%
11.8%
6.1%
38.7%
53.7%
30.2%
57.0%
1.8%
19.8%
3.8%
-15.2%

CPR: AV

13

Consumption-GDP RATIOS
70

China,

Singapore

Thailand

Korea,

India

Japan

65

60

55

50

45

40

35
1990

19 March, 2009

1995

1996

1997

1998

1999

2000

2001

2002

CPR: AV

2003

2004

2005

2006

2007

14

Sector Contribution: China

Avg. Contribution during
2002/1990 2007/2002
Agriculture
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%

19 March, 2009

CPR: AV

15

Manufacturing: Export-Gdp

90%

Mf:Exp/Gdp

80%

35%

Mf:ExNet/Gdp

30%

70%
25%
60%
20%
50%
15%
40%
10%
30%
5%
20%

0%

10%

0%

-5%
1992

1993

19 March, 2009

1994

1995

1996

1997

1998

1999

2000

2001

CPR: AV

2002

2003

2004

2005

2006

2007

16

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
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
2004
2005
2006
2007
2008

Growth of World Exports

30%

World Exp/Gdp

19 March, 2009
CPR: AV

WorldGr
7.0%

25%
6.0%

5.0%

20%

4.0%

15%

3.0%

10%
2.0%

5%

1.0%

0%
0.0%

17

1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
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
2004
2005
2006
2007

Investment Rate:China/India

2.2

Investment Rate: China/India

InvRt:Ch/Ind

19 March, 2009
Poly. (InvRt:Ch/Ind)

2.0

1.8

1.6

1.4

1.2

1.0

CPR: AV
18

Impact of Global Meltdown on

Growth
GDP growth rate (CY)

2007
(act)

2008
(est)

China

13.0%

9.0%

+/- 1%

India

9.3%

7.3%

+/- 0.75%

3.7%

1.7%

0%

+/- 0.75%

Difference (Ch-Ind)

19 March, 2009

CPR: AV

2009
(frcst)

19

CONCLUSION

Growth: Chinas < Indias 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

19 March, 2009

CPR: AV

20