1. GLOBAL CRISIS: Impact On CHINA & INDIA Arvind Virmani (views are personal)

2. 19 March, 2009CPR: AV2 Introduction n Development strategy/Growth Model u China: FDI-Export=> Investment-Export u India: Neutral Regime for Entrepreneurs F Evolutionary strategy: 10 th 11 th plans n Global Crises: Worst since Great Depr n China: Strategy-Model change to sustain n India: Accelerate Policy, Institutional (governance) Reform

3. 19 March, 2009CPR: AV3 Global Financial & Economic Crisis n Financial: Uncertainty, Risk perception, Risk aversion n Economy: Demand Depression n Effect on China, India, other EMEs u Global money supply/liquidity squeeze u Fragmentation of markets, transmission channels u Risk Capital flows: Equity, LT Debt u Export demand: Manufacturing u Investment demand u Oil, commodity prices

4. 19 March, 2009CPR: AV4 China: Socialist Market Economy n Chinese Communist Party (CCP) Network u Mix of centralization & decentralization u Goal / Objective: Growth Maximization F Subject to Preservation of Party/welfare constraint F Ensured at all levels: Nation, Province, City, Firm u Means: Investment Maximization F Foundation of Growth: Socialist Enterprise re- investment F Engine of Growth: FDI-Export

5. 19 March, 2009CPR: AV5 Socialist Control And Subsidies n Capital Intermediation u Domestic Saving Banks are like Govt. Depts. n Controls used to provide indirect subsidies for u FDI (Capital/Skill intensive- KI/SI) u Exports: Vent for Surplus, export at any cost F Cap cost 0 to supplier of CG, Intermediate, materials u SOE production, investment (inefficiency) n Infrastructure: Supply & Pricing (Capital subsidy) to ensure FDI (technology, expertise, export marketing) n Flip side: Controls subject to Corruption

6. 19 March, 2009CPR: AV6 China: Growth Model n Goal / Objective : National Power u Growth Maximization s.t. CCP retaining power F Ensured at all levels: Nation, Province, City, Firm F Corporate growth maximization, market share, export n Means: Maximize Investment u Foundation of Growth F Socialist Owned Enterprise =>100% Reinvestment of returns (0 dividends) => High investment (Kuijs) F Govt: Low tax rates, Low social expenditures, Solid investment in (quasi) Public goods u Engine of Growth: FDI and Exports F FDI-export led growth u Infrastructure Investment since Asian Financial Crisis

7. 19 March, 2009CPR: AV7 China: Max Investment, Exports, FDI n Growth equation (OLS, Similar results from TSLS) n GrPcGdp= 0.54 + 0.24*GrGfcf + 0.12*GrGfcf(-1) + 1.03 GrGwrld + 0.017*GrFDIg$ n (1.0) (3.6)*** (3.9)*** (4.6)*** (2.5)*** n R2 = 0.96, R2 (adjusted) = 0.95, DW = 2.1 n TFPG and Determinants n GrGdp_L = 1.47+0.832*GrKf_L+0.283*AR(1) n (1.9) (2.9)*** (1.9)* n R2 = 0.29, R2 (adjusted) = 0.24, DW = 1.79. n TFPG = 478 – 0.24*year + 0.04*FDIg$z n (4.4)*** (-4.4)***(5.9)*** n R2 = 0.83, R2 (adjusted) = 0.81, DW = 1.88.

8. 19 March, 2009CPR: AV8 China: Weakness and Risks n Weakness: Other side of coin of past growth drivers u Govt/Socialist Ownership: Excess capacity (e.g. infrastructure), Falling returns, Rising NPAs, Falling public saving/investment u Rising export share: Vent for Surplus F =>Falling unit values; Rising subsidies (NPAs) u Knife-edge character of FDI-export model F Asian crises (euphoria risk) F Over dependence on FDI F Center and Periphery (Prebisch-Singer)

9. Share of World Exports 19 March, 2009CPR: AV9

10. Country Shares of World Exports 19 March, 2009CPR: AV10

11. Export-GDP RATIOS 19 March, 2009CPR: AV11

12. Balance of Payments and Exchange Rate 19 March, 2009CPR: AV12

13. Demand Contribution To Growth: China and India 19 March, 2009CPR: AV13

14. Consumption-GDP RATIOS 19 March, 2009CPR: AV14

15. Sector Contribution: China 19 March, 2009CPR: AV15

16. Manufacturing: Export-Gdp 19 March, 2009CPR: AV16

17. Growth of World Exports 19 March, 2009CPR: AV17

18. Investment Rate:China/India 19 March, 2009CPR: AV18

19. Impact of Global Meltdown on Growth 19 March, 2009CPR: AV19

20. 19 March, 2009CPR: AV20 CONCLUSION n Growth: China’s < India’s by middle of next decade. Crises will accelerate n China will have to change model:- u Demand: Export => Domestic u PSU saving => Private Income and consumption u PSU investment: Manuf => Services u Public Expenditure: Physical Inf=> Social n India: Opportunity for Transformative Reform(a la 1991)=>Hi gr. path by 2011