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Finance in Transitional and Developing Economies : China and Others

Finance in Transitional and Developing Economies : China and Others. Topics: Growth and Inequality in a ‘Dualistic’ Economy Property Rights and Distribution Financial Depth vs. Breadth. Surplus Labor in Agriculture: Marginal Product approaches 0. Consumption. investment. Agricultural

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Finance in Transitional and Developing Economies : China and Others

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  1. Finance in Transitional and Developing Economies: China and Others Topics: • Growth and Inequality in a ‘Dualistic’ Economy • Property Rights and Distribution • Financial Depth vs. Breadth Stodder: Financial Transition, July

  2. Surplus Labor in Agriculture: Marginal Product approaches 0 Stodder: Financial Transition, July

  3. Consumption investment Agricultural Production investment (transition) Non-Agricultural Production Gus Ranis: “Labor Surplus Economies”, http://papers.ssrn.com Stodder: Financial Transition, July

  4. Surplus Labor, Dualistic Economy Nobel Prize Winning Model Developed by • Arthur Lewis (St. Lucia) • Gustav Ranis (Germany) • John Fei (Taiwan) • Growth with Equity: The Taiwan Case • (Oxford University Press, 1979) • John C. H. Fei, Gustav Ranis, Shirley W. Y. Kuo Stodder: Financial Transition, July

  5. Implications of Two-Sector Model: • Agricultural and Industrial Wages Linked, kept flat by Surplus Labor. • Wages can only rise strongly when Labor Surplus is used up. • Non-Agricultural Profits grow much faster than Wages. Stodder: Financial Transition, July

  6. Tied Wages, Japan Stodder: Financial Transition, July

  7. Tied Wages, Taiwan Stodder: Financial Transition, July

  8. Stodder: Financial Transition, July

  9. Property Rights & Distribution • East Asian Development successes linked with new broadly distributed forms of property rights. (South Korea, Taiwan, China, Vietnam) • These property rights land reforms achieve: • Better matching of labor with land resources, • Incentives for long term investment, • More liquidity in the market for agricultural property. • Broader Distribution of Financial Assets is more complex, but may have even greater long term benefits for productivity and growth. Stodder: Financial Transition, July

  10. TWO TRANSITIONS on INCOME DISTRIBUTION East-Asian: Growth and Equality Inversely Correlated East-European: No Clear Pattern Stodder: Financial Transition, July

  11. Soviet-Sphere Privatizations Large Range of Methods: • Rapid ‘Voucher’ Privatization, Czech Republic • Gradual Privatization, Hungary • ‘Oligarch’ Loans-for-Shares, Russia Stodder: Financial Transition, July

  12. China’s Financial System:Deep but not Broad We will see that Financial Assets in China: • Have unusual depth, forming an unusually high portion of GDP, but • Lack the breadth associated with other Rapidly Developing Economies, since they are narrowly confined to the Banking Sector. Stodder: Financial Transition, July

  13. Financial ‘Deepening’ Correlates with Higher GDP per capita http://unctad.org/en/docs/dp_142.en.pdf Stodder: Financial Transition, July

  14. But China’s M2/GDP ratio is out of proportion to its GDP http://www.allcountries.org/china_statistics/index.html Stodder: Financial Transition, July

  15. M2 and Household Savings Very High Proportion of GDP Stodder: Financial Transition, July

  16. http://www.allcountries.org/china_statistics/index.html Stodder: Financial Transition, July

  17. Stodder: Financial Transition, July

  18. Stodder: Financial Transition, July

  19. Volatility of Shanghai Composite Index Stodder: Financial Transition, July

  20. If Household Saving is ‘Bottled-up’ in Banks, May Pressure Excess Stock Speculation Stodder: Financial Transition, July

  21. Bank Dependency may also Weaken Response to Currency Crisis 8% 6% 4% 2% 0% -2% -4% -6% -8% t-3 t-2 t-1 t t+1 t+2 t+3 www.meti.go.jp/english/report/downloadfiles/g99W004e.pdf Stodder: Financial Transition, July

  22. Banking is State-Owned in China McKinsey Global Institute, China Capital Report, 2006 Stodder: Financial Transition, July

  23. State Banks Loan Mostlyto State-Connected Enterprises Stodder: Financial Transition, July

  24. Foreign & Private Enterprises More Efficient, Even in Similar Industries Stodder: Financial Transition, July

  25. Stodder: Financial Transition, July

  26. Integration of Reforms • Observed Problems Closely Inter-linked Undeveloped Consumer Loan Market Very Small Bond Market Limited SME Access to Capital Lack of Domestic Institutional Investors Cheap Corporate Bank Loans Small, Under-performing Equity Market Inefficient Bank Operation Stodder: Financial Transition, July

  27. Poor Credit Assessment Limited forms of Collateral • ROOT CAUSES Very Small Bond Market Undeveloped Consumer Loan Market Limited SME Access to Capital Lack of Domestic Institutional Investors Cheap Corporate Bank Loans Lack of Bank Competition Small, Under-performing Equity Market Inefficient Bank Operation Stodder: Financial Transition, July

  28. Conclusion:If Problems are Inter-Linked- Reforms must also be well-Integrated Stodder: Financial Transition, July

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