finance in transitional and developing economies : china and others

Stodder: Financial Transition, JulyStodder: Financial Transition, July 11

Finance in Transitional and Developing Finance in Transitional and Developing EconomiesEconomies: China and Others: China and Others

Topics:Topics:

Growth and Inequality in a ‘Dualistic’ Growth and Inequality in a ‘Dualistic’ EconomyEconomy

Property Rights and DistributionProperty Rights and Distribution

Financial Financial DepthDepth vs. vs. BreadthBreadth


Surplus Labor in Agriculture: Surplus Labor in Agriculture: Marginal Product approaches 0Marginal Product approaches 0

Total Product of Labor in Agric.

0V = Labor in Agriculture

Agricultural Labor Surplus

Marginal Product of Labor -> 0


Gus Ranis: “Labor Surplus Economies”, http://papers.ssrn.com

Consumption

Agricultural Production

Non-Agricultural Production

(transition)

investment

investment


Surplus Labor, Dualistic Economy Surplus Labor, Dualistic Economy Nobel PrizeNobel Prize Winning Model Winning Model

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

Growth with Equity: The Taiwan Case

(Oxford University Press, 1979)

-John C. H. Fei, Gustav Ranis, Shirley W. Y. Kuo


ImplicationsImplications of Two-Sector Model: of Two-Sector Model:

Agricultural and Industrial Wages Agricultural and Industrial Wages Linked, kept flat by Surplus Labor.Linked, kept flat by Surplus Labor.

Wages can only rise strongly when Wages can only rise strongly when Labor Surplus is used up.Labor Surplus is used up.

Non-Agricultural Profits grow much Non-Agricultural Profits grow much faster than Wages.faster than Wages.


Tied Wages, JapanTied Wages, Japan


Tied Wages, TaiwanTied Wages, Taiwan


Gini Coefficients, East Asia, 1961-2005

0.25

0.30

0.35

0.40

0.45

0.50

0.55

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Thailand

Philippines

Singapore

Malaysia

CHINA

Vietnam

Indonesia

S. Korea


Property Rights & DistributionProperty Rights & Distribution East Asian Development successes linked with East Asian Development successes linked with

new new broadly distributedbroadly distributed forms of property rights. forms of property rights. (South Korea, Taiwan, China, Vietnam)(South Korea, Taiwan, China, Vietnam)

These property rights land reforms achieve: These property rights land reforms achieve: • Better matching of labor with land resources, Better matching of labor with land resources, • Incentives for long term investment,Incentives for long term investment,• More liquidity in the market for agricultural property.More liquidity in the market for agricultural property.

Broader Distribution of Broader Distribution of Financial AssetsFinancial Assets is more is more complex, but may have even greater long term complex, but may have even greater long term benefits for productivity and growth. benefits for productivity and growth.


CountryGrowth 2000-05 Gini Coef.

China 9.6 44.0

Cambodia 8.9 40.0

Vietnam 7.5 36.1

Laos 6.2 37.0

Ukraine 8.0 31.0

Lithuania 7.8 32.5

Estonia 7.5 33.0

Belarus 7.5 30.4

Russia 6.2 40.5

Romania 5.8 28.8

Bulgaria 5.0 31.6

Slovakia 4.9 25.8

Hungary 4.1 26.9

Czech Rep. 3.5 27.3

Poland 3.2 34.1

East-Asian: Growth and Equality Inversely Correlated

TWO TRANSITIONS onINCOME DISTRIBUTION

East-European: No Clear Pattern


Soviet-Sphere PrivatizationsSoviet-Sphere Privatizations

Large Range of Methods:Large Range of Methods:

Rapid ‘Voucher’ Privatization, Rapid ‘Voucher’ Privatization, Czech RepublicCzech Republic

Gradual Privatization, HungaryGradual Privatization, Hungary

‘‘Oligarch’ Loans-for-Shares, RussiaOligarch’ Loans-for-Shares, Russia


China’s Financial System:China’s Financial System:Deep but not BroadDeep but not Broad

We will see that Financial Assets in We will see that Financial Assets in China:China:

Have unusual Have unusual depthdepth, forming an , forming an unusually unusually high portion of GDPhigh portion of GDP, but, but

Lack the Lack the breadthbreadth associated with associated with other Rapidly Developing Economies, other Rapidly Developing Economies, since they are since they are narrowly confined to narrowly confined to the Banking Sectorthe Banking Sector..


Financial ‘Deepening’ Correlates with Financial ‘Deepening’ Correlates with Higher GDP per capitaHigher GDP per capita

M2/GDP vs GDP per capita

M2/GDP = 27.19 + 0.0051*GDPpc

R2 = 37.4%

0

1020

3040

50

6070

8090

100

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000

GDP per capita

M2/

GD

P %

http://unctad.org/en/docs/dp_142.en.pdf


But China’s M2/GDP ratio is But China’s M2/GDP ratio is out of proportion to its GDPout of proportion to its GDP

Figures for 1999/2000

Country GDP per capita M2/GDP(%)

CHINA $2,001 150.0

Singapore $12,963 90.0

Korea, Rep. of $5,626 40.0

Malaysia $2,368 70.3

Thailand $1,466 69.5

Philippines $706 31.8

Indonesia $580 41.1

Sri Lanka $466 30.5

India $358 46.1

Pakistan $336 39.7

Bangladesh $200 31.3

http://www.allcountries.org/china_statistics/index.html


M2 and Household Savings M2 and Household Savings Very High Proportion of GDPVery High Proportion of GDP


M2/GDP Ratio Still Climbing

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2000 2001 2002 2003 2004

140%

150%

160%

170%

180%

190%

200%

GDPpc M2/GDP

http://www.allcountries.org/china_statistics/index.html


Volatility of Shanghai Composite IndexVolatility of Shanghai Composite IndexDaily Index Volatility of 6 Global Indices

June 2006 to May 2007

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

DateApr-07Mar-07Feb-07Jan-07Dec-06Nov-06Oct-06Sep-06Aug-06Jul-06Jun-06

SSE Composite

Bovespa

Hang Seng

ATX

DJIA

FTSE100


If Household Saving is ‘Bottled-up’ in Banks, If Household Saving is ‘Bottled-up’ in Banks, May Pressure Excess Stock SpeculationMay Pressure Excess Stock Speculation

HangSeng

FTSEDJIA

ATXBovespa

SSE

4.5% 4.8% 5.2%

8.4%

11.5%

14.4%

0.5%0.5%

0.4% 0.9% 1.1%1.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

AbsAvChAnnual Max-Min


Bank Dependency may also Bank Dependency may also Weaken Response to Currency Crisis Weaken Response to Currency Crisis

0%

2%

4%

6%

8%

-2%

-4%

-6%

-8%

t t+1 t+2 t+3t-1t-2t-3

www.meti.go.jp/english/report/downloadfiles/g99W004e.pdf


Banking is State-Owned in ChinaBanking is State-Owned in ChinaState Ownership of Banking in 1990

9081 80 78

55 50

32

15

1019 20 22

45 50

68

85

0

10

20

30

40

50

60

70

80

90

100

China Hungary Poland Czech Rep. Peru Brazil Chile S. Korea

Perc

en

t

PrivateState

McKinsey Global Institute, China Capital Report, 2006State Ownership of Banking in 2004

83

820

312

3316 18

17

9280

9788

67

84 82

010

20304050

607080

90100

China Hungary Poland Czech Rep. Peru Brazil Chile S. Korea

Per

cen

t

Private

State


State Banks Loan MostlyState Banks Loan Mostlyto State-Connected Enterprisesto State-Connected Enterprises


Foreign & Private Enterprises More Efficient, Foreign & Private Enterprises More Efficient, Even in Similar IndustriesEven in Similar Industries


Integration of ReformsIntegration of Reforms Observed Problems Closely Inter-linkedObserved Problems Closely Inter-linked

Cheap CorporateBank Loans

Limited SMEAccess to Capital

Very Small BondMarket

Lack of DomesticInstitutional

Investors

Small, Under-performing

Equity Market

Inefficient BankOperation

UndevelopedConsumer Loan

Market


ROOT CAUSESROOT CAUSES

Cheap CorporateBank Loans

Inefficient BankOperation

Limited SMEAccess to Capital

Lack of BankCompetition

UndevelopedConsumer Loan

Market

Very Small BondMarket

Lack of DomesticInstitutional

Investors

Small, Under-performing

Equity Market

Limited formsof Collateral

Poor CreditAssessment


Conclusion:Conclusion:

If If ProblemsProblems are Inter-Linked are Inter-Linked

- - ReformsReforms must also be must also be well-Integratedwell-Integrated

finance in transitional and developing economies : china and others

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