National Savings and Balanced

Growth: China vs India

Yin Zhang
Northwest A&F University

Guanghua Wan
UNU-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

China
13% India
Rest of the World 6%
38%

USA
21%
Japan Euro Area
7% 15%
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
Share of industry in GDP

1993

1994
1995
1996
1997
China

1998
1999
India

2000

2001
2002

2003
2004
 25
30
35
40
45
50
55
19
87
19
88
19
89
19
90
19
91
19
92
19
Share of services in GDP

93
19
94
19
95
19
96
19
97
19
98
19
China

99
20
00
20
India

01
20
02
20
03
20
04
 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
 15
20
25
30
35
40
45
50
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
China

1989
1990
1991
India

1992
1993
1994
1995
1996
Gross National Saving Rates

1997
1998
1999
2000
2001
2002
2003
 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
 0

-20
-10
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
China

1998
Shares of public saving in total saving

1999
2000
India

2001
2002
2003
 Private savings have risen in both countries
45
% of GDP

40 China India

35

30

25

20

15

10

0
 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
• Data
NBS, CSO, RBI, IMF, WDI and WIID
 Determinants of private savings rate in China

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

OLS IV
Coefficient Standard Error Coefficient Standard Error
GDP per capita 0.061 0.02 0.073 0.035
GDP per capita growth 0.082 0.037 0.096 0.046
DE1 -0.262 -0.131 -0.322 -0.115
DE2 -0.009 -0.006 -0.011 -0.007
Real interest rate -0.114 -0.054 -0.089 -0.048
Inflation -0.056 -0.027 -0.106 -0.054
Fiscal deficit -0.144 -0.085 -0.132 -0.088
Inequality -0.311 -0.240 0.263 0.202
Financial depth 0.020 0.011 0.012 0.006
 Result I: Demography
• 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?
 Demographic Dividend
45 % of total population

40 0-14, China
0-14, India
35 over 65, China
over 65, India
30

25

20

15

10

0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
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