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

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)

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

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

Private savings have risen in both countries

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

Determinants of private savings rate in India

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

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