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
Stodder: Financial Transition, JulyStodder: Financial Transition, July 22
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
Stodder: Financial Transition, JulyStodder: Financial Transition, July 33
Gus Ranis: “Labor Surplus Economies”, http://papers.ssrn.com
Consumption
Agricultural Production
Non-Agricultural Production
(transition)
investment
investment
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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
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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.
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Tied Wages, JapanTied Wages, Japan
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Tied Wages, TaiwanTied Wages, Taiwan
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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
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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.
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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
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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
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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..
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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
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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
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M2 and Household Savings M2 and Household Savings Very High Proportion of GDPVery High Proportion of GDP
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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
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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
Stodder: Financial Transition, JulyStodder: Financial Transition, July 2020
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
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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
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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
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State Banks Loan MostlyState Banks Loan Mostlyto State-Connected Enterprisesto State-Connected Enterprises
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Foreign & Private Enterprises More Efficient, Foreign & Private Enterprises More Efficient, Even in Similar IndustriesEven in Similar Industries
Stodder: Financial Transition, JulyStodder: Financial Transition, July 2525
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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
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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
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Conclusion:Conclusion:
If If ProblemsProblems are Inter-Linked are Inter-Linked
- - ReformsReforms must also be must also be well-Integratedwell-Integrated