National Savings and Balanced Growth: China vs India

Yin ZhangNorthwest A&F University

Guanghua WanUNU-WIDER

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

PPP GDP Shares of Major Economies in 2004

China13% India

6%

USA21%

Euro Area15%

Japan7%

Rest of the World38%

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)

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

China India

Share of industry in GDP

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

China India

Share of services in GDP

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.– China’s industrial policy– India’s over-regulated labour market

Gross National Saving Rates

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

1999

2000

2001

2002

2003

China India

Imbalances: China• High savings curtails consumption

– Reliance on investment expansion increased growth volatility

– Diminishing returns misallocation of capital non-performing loans

– Excess capacity deflation

• Insufficient domestic absorption– Reliance on export expansion– Trade disputes incite protectionism in major

export markets

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

Shares of public saving in total 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

1999

2000

2001

2002

2003

China India

Private savings have risen in both countries

0

5

10

15

20

25

30

35

40

45 % of GDP

China India

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 savings rate:

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

• DataNBS, CSO, RBI, IMF, WDI and WIID

Determinants of private savings rate in China

Coefficient Standard Error Coefficient Standard ErrorGDP per capita 0.104 0.055 0.092 0.051GDP per capita growth 0.147 0.064 0.203 0.029DE1 -0.620 -0.135 -0.419 -0.105DE2 -0.009 -0.005 0.006 0.004Real interest rate -0.013 -0.016 -0.008 -0.008Inflation -0.189 -0.096 -0.165 -0.085Fiscal deficit 0.197 0.313 0.124 0.155Inequality 0.109 0.056 0.091 0.051Financial depth 0.157 0.087 0.103 0.129

OLS IV

Determinants of private savings rate in India

Coefficient Standard Error Coefficient Standard ErrorGDP per capita 0.061 0.02 0.073 0.035GDP per capita growth 0.082 0.037 0.096 0.046DE1 -0.262 -0.131 -0.322 -0.115DE2 -0.009 -0.006 -0.011 -0.007Real interest rate -0.114 -0.054 -0.089 -0.048Inflation -0.056 -0.027 -0.106 -0.054Fiscal deficit -0.144 -0.085 -0.132 -0.088Inequality -0.311 -0.240 0.263 0.202Financial depth 0.020 0.011 0.012 0.006

OLS IV

• 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, what’s in store for saving rate?

Result I: Demography

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, China

0-14, India

over 65, China

over 65, India

% of total population

Result II: Development & Growth

• Saving rate rises with income level

• Saving rate rises with higher growth

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 effect on savings in India

Policy Implications• The rise in saving rates in both countries are mainly

structural– can expect saving rates to increase further with

rising income and declining minors dependency ratio

• To balance growth in China– monetary instruments are ineffective (interest rate)

or undesirable (inflation)– fiscal policy promising (Ricardian equivalence

absent)– income redistribution

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 causal relationship, 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 world economy

– Downside risks are mainly short-run