Finance in Transitional and Developing Economies: China and Others

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Finance in Transitional and Developing Economies
China and Others

• Topics
• Growth and Inequality in a Dualistic Economy
• Property Rights and Distribution
• Financial Depth vs. Breadth

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Surplus Labor in Agriculture Marginal Product
approaches 0
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Consumption
investment
Agricultural Production
investment
(transition)
Non-Agricultural Production
Gus Ranis Labor Surplus Economies,
http//papers.ssrn.com
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Surplus Labor, Dualistic Economy Nobel Prize
Winning Model

• Developed by
• Arthur Lewis (St. Lucia)
• Gustav Ranis (Germany)
• John Fei (Taiwan)

• Growth with Equity The Taiwan Case
• (Oxford University Press, 1979)
• John C. H. Fei, Gustav Ranis, Shirley W. Y. Kuo

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Implications of Two-Sector Model

• Agricultural and Industrial Wages Linked, kept
  flat by Surplus Labor.
• Wages can only rise strongly when Labor Surplus
  is used up.
• Non-Agricultural Profits grow much faster than
  Wages.

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Tied Wages, Japan
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Tied Wages, Taiwan
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Property Rights Distribution

• East Asian Development successes linked with new
  broadly distributed forms of property rights.
  (South Korea, Taiwan, China, Vietnam)
• These property rights land reforms achieve
• Better matching of labor with land resources,
• Incentives for long term investment,
• More liquidity in the market for agricultural
  property.
• Broader Distribution of Financial Assets is more
  complex, but may have even greater long term
  benefits for productivity and growth.

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TWO TRANSITIONS on INCOME DISTRIBUTION
East-Asian Growth and Equality Inversely
Correlated
East-European No Clear Pattern
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Soviet-Sphere Privatizations

• Large Range of Methods
• Rapid Voucher Privatization,
• Czech Republic
• Gradual Privatization, Hungary
• Oligarch Loans-for-Shares, Russia

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Chinas Financial SystemDeep but not Broad

• We will see that Financial Assets in China
• Have unusual depth, forming an unusually high
  portion of GDP, but
• Lack the breadth associated with other Rapidly
  Developing Economies, since they are narrowly
  confined to the Banking Sector.

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Financial Deepening Correlates with Higher GDP
per capita
http//unctad.org/en/docs/dp_142.en.pdf
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But Chinas M2/GDP ratio is out of proportion to
its GDP
http//www.allcountries.org/china_statistics/index
.html
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M2 and Household Savings Very High Proportion of
GDP
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http//www.allcountries.org/china_statistics/index
.html
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Volatility of Shanghai Composite Index
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If Household Saving is Bottled-up in Banks,
May Pressure Excess Stock Speculation
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Bank Dependency may also Weaken Response to
Currency Crisis
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6
4
2
0
-2
-4
-6
-8
t
t1
t2
t3
t-1
t-2
t-3
www.meti.go.jp/english/report/downloadfiles/g99W00
4e.pdf
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Banking is State-Owned in China
McKinsey Global Institute, China Capital Report,
2006
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State Banks Loan Mostlyto State-Connected
Enterprises
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Foreign Private Enterprises More Efficient,
Even in Similar Industries
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Integration of Reforms

• Observed Problems Closely Inter-linked

Undeveloped Consumer Loan Market
Very Small Bond Market
Limited SME Access to Capital
Lack of Domestic Institutional Investors
Cheap Corporate Bank Loans
Small, Under-performing Equity Market
Inefficient Bank Operation
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• ROOT CAUSES

Poor Credit Assessment
Limited forms of Collateral
Very Small Bond Market
Undeveloped Consumer Loan Market
Limited SME Access to Capital
Lack of Domestic Institutional Investors
Cheap Corporate Bank Loans
Lack of Bank Competition
Small, Under-performing Equity Market
Inefficient Bank Operation
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ConclusionIf Problems are Inter-Linked-
Reforms must also be well-Integrated