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%
Rest of the World
38%
India
6%
USA
21%
Japan
7%
Euro Area
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)
2004
2003
2002
2001
2000
China
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
55
Share of industry in GDP
50
45
40
India
35
30
25
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
55
Share of services in GDP
50
45
40
China
India
35
30
25
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
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
China
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
Gross National Saving Rates
50
India
45
40
35
30
25
20
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
-10
-20
2003
2002
2001
China
2000
1999
1998
50
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
Shares of public saving in total saving
60
India
40
30
20
10
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Private savings have risen in both countries
45
40
% of GDP
China
India
35
30
25
20
15
10
5
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
Coefficient Standard Error
GDP per capita
0.104
0.055
GDP per capita growth 0.147
0.064
DE1
-0.620
-0.135
DE2
-0.009
-0.005
Real interest rate
-0.013
-0.016
Inflation
-0.189
-0.096
Fiscal deficit
0.197
0.313
Inequality
0.109
0.056
Financial depth
0.157
0.087
IV
Coefficient Standard Error
0.092
0.051
0.203
0.029
-0.419
-0.105
0.006
0.004
-0.008
-0.008
-0.165
-0.085
0.124
0.155
0.091
0.051
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
40
% of total population
0-14, China
0-14, India
35
over 65, China
over 65, India
30
25
20
15
10
5
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