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
2
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
3
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
4
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
5
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
6
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$z
(4.4)*** (-4.4)***
(5.9)***

R2 = 0.83, R2 (adjusted) = 0.81, DW = 1.88.

19 March, 2009
CPR: AV
7
China: Weakness and Risks

Weakness: Other side of coin of past growth drivers

Govt/Socialist Ownership: Excess capacity (e.g.
infrastructure), Falling returns, Rising NPAs, Falling public
saving/investment

Rising export share: Vent for Surplus


=>Falling unit values; Rising subsidies (NPAs)
Knife-edge character of FDI-export model
Asian crises (euphoria risk)
 Over dependence on FDI
 Center and Periphery (Prebisch-Singer)

19 March, 2009
CPR: AV
8
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Share of World Exports
18%
16%
19 March, 2009
Japan
China
Germany
14%
United States
Poly. (China)
Poly. (Germany)
12%
10%
8%
6%
4%
2%
0%
CPR: AV
9
Country Shares of World Exports
3.0%
India
Thailand
Singapore
Korea, Rep.
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
19 March, 2009
CPR: AV
10
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Export-GDP RATIOS
140%
120%
19 March, 2009
India
Thailand
Singapore
Korea, Rep.
Japan
China
100%
80%
60%
40%
20%
0%
CPR: AV
11
Balance of Payments and
Exchange Rate
14
Balance on goods
Current account balance
Overall balance
ExRateAvg(Y/$)
12
10
8
6
4
2
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: 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
19 March, 2009
CPR: AV
20