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
1
Surplus Labor in Agriculture:
Marginal Product approaches 0
Marginal Product of Labor -> 0
Total Product of
Labor in Agric.
0
V = Labor in Agriculture
Agricultural Labor Surplus
Stodder: Financial Transition, July
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Consumption
investment
Agricultural
Production
investment
(transition)
Non-Agricultural
Production
Gus Ranis: “Labor Surplus Economies”, http://papers.ssrn.com
Stodder: Financial Transition, July
3
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
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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
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Tied Wages, Japan
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Tied Wages, Taiwan
Stodder: Financial Transition, July
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Gini Coefficients, East Asia, 1961-2005
0.55
0.50
0.45
0.40
Thailand
0.35
Philippines
Singapore
Malaysia
CHINA
0.30
Vietnam
Indonesia
S. Korea
0.25
1955
1960
1965
1970
1975
1980
1985
1990
Stodder: Financial Transition, July
1995
2000
2005
2010
8
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
9
Country
Growth
2000-05
Gini Coef.
China
9.6
44.0
Cambodia
8.9
40.0
Vietnam
7.5
36.1
Laos
6.2
37.0
Ukraine
8.0
31.0
Lithuania
7.8
32.5
Estonia
7.5
33.0
Belarus
7.5
30.4
Russia
6.2
40.5
Romania
5.8
28.8
Bulgaria
5.0
31.6
Slovakia
4.9
25.8
Hungary
4.1
26.9
Czech Rep.
3.5
27.3
Poland
3.2
34.1
TWO TRANSITIONS on
INCOME DISTRIBUTION
East-Asian:
Growth and Equality
Inversely Correlated
Stodder: Financial Transition, July
East-European:
No Clear Pattern
10
Soviet-Sphere Privatizations
Large Range of Methods:

Rapid ‘Voucher’ Privatization,
Czech Republic

Gradual Privatization, Hungary

‘Oligarch’ Loans-for-Shares, Russia
Stodder: Financial Transition, July
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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
12
Financial ‘Deepening’ Correlates with
Higher GDP per capita
M2/GDP %
M2/GDP vs GDP per capita
100
90
80
70
60
50
40
30
20
10
0
M2/GDP = 27.19 + 0.0051*GDPpc
2
R = 37.4%
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
GDP per capita
http://unctad.org/en/docs/dp_142.en.pdf
Stodder: Financial Transition, July
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But China’s M2/GDP ratio is
out of proportion to its GDP
Figures for 1999/2000
Country
GDP per capita
M2/GDP(%)
CHINA
$2,001
150.0
Singapore
$12,963
90.0
Korea, Rep. of
$5,626
40.0
Malaysia
$2,368
70.3
Thailand
$1,466
69.5
Philippines
$706
31.8
Indonesia
$580
41.1
Sri Lanka
$466
30.5
India
$358
46.1
Pakistan
$336
39.7
Bangladesh
$200
31.3
http://www.allcountries.org/china_statistics/index.html
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M2 and Household Savings
Very High Proportion of GDP
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M2/GDP Ratio Still Climbing
$12,000
200%
GDPpc
M2/GDP
$10,000
190%
$8,000
180%
$6,000
170%
$4,000
160%
$2,000
150%
$0
140%
2000
2001
2002
2003
2004
http://www.allcountries.org/china_statistics/index.html
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Volatility of Shanghai Composite Index
Daily Index Volatility of 6 Global Indices
June 2006 to May 2007
6%
4%
2%
0%
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
Date
-2%
-4%
SSE Composite
Bovespa
Hang Seng
-6%
ATX
DJIA
-8%
FTSE100
-10%
Stodder: Financial Transition, July
19
If Household Saving is ‘Bottled-up’ in Banks,
May Pressure Excess Stock Speculation
16%
AbsAvCh
Annual Max-Min
14%
14.4%
12%
11.5%
10%
8.4%
8%
4.5%
6%
4.8%
5.2%
4%
2%
0.5%
0.5%
0%
0.4%
Hang
Seng
FTSE
DJIA
0.9%
ATX
1.1%
Bovespa
Stodder: Financial Transition, July
1.2%
SSE
20
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
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Banking is State-Owned in China
State Ownership of Banking in 1990
100
90
10
19
20
22
80
45
70
Percent
Private
State
50
68
60
50
40
85
90
81
80
78
30
55
20
50
32
10
15
0
China
Hungary
Poland
Czech Rep.
Peru
Brazil
Chile
S. Korea
McKinsey Global Institute, China Capital Report, 2006
Private
Percent
State Ownership of Banking in 2004
100
90
80
70
60
50
40
30
20
10
0
State
17
67
80
92
97
88
84
82
16
18
Chile
S. Korea
83
33
20
8
China
Hungary
3
Poland
Czech Rep.
12
Peru
Stodder: Financial Transition, July
Brazil
22
State Banks Loan Mostly
to State-Connected Enterprises
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Foreign & Private Enterprises More Efficient,
Even in Similar Industries
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Integration of Reforms

Observed Problems Closely Inter-linked
Undeveloped
Consumer Loan
Market
Very Small Bond
Market
Limited SME
Access to Capital
Cheap Corporate
Bank Loans
Inefficient Bank
Operation
Lack of Domestic
Institutional
Investors
Small,
Under-performing
Equity Market
Stodder: Financial Transition, July
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
ROOT CAUSES
Limited forms
of Collateral
Limited SME
Access to Capital
Poor Credit
Assessment
Very Small Bond
Market
Undeveloped
Consumer Loan
Market
Cheap Corporate
Bank Loans
Lack of Bank
Competition
Inefficient Bank
Operation
Lack of Domestic
Institutional
Investors
Small,
Under-performing
Equity Market
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Conclusion:
If Problems are Inter-Linked
- Reforms must also be
well-Integrated
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