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
2
Consumption
investment
Agricultural
Production
investment
(transition)
Non-Agricultural
Production
Gus Ranis: “Labor Surplus Economies”, http://papers.ssrn.com
Stodder: Financial Transition, July
3
The Dualistic Economy (Arthur Lewis, John
Fei, Gustav Ranis)
Qa = Agricultural Output
 Qna = Non-Agricultural Output
 Wa = Agricultural Wage
 Wna = Non-Agricultural Wage
 L = Labor, L = V + B
 V = Agricultural Labor
 B = Non-Agricultural Labor
d = Demand for (Marginal Product of)
Non-Agricultural Labor

Stodder: Financial Transition, July
4
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
5
Tied Wages, Japan
Stodder: Financial Transition, July
6
Tied Wages, Taiwan
Stodder: Financial Transition, July
7
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
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 Developing Economies, since
they are narrowly confined to the
Banking Sector.
Stodder: Financial Transition, July
10
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
11
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
Stodder: Financial Transition, July
12
M2 and Household Savings
Very High Proportion of GDP
Stodder: Financial Transition, July
13
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
Stodder: Financial Transition, July
14
Stodder: Financial Transition, July
15
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
16
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
17
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
18
State Banks Tend to Loan
to State Interests
Stodder: Financial Transition, July
19
Foreign & Private Enterprises More Efficient,
Even in Similar Industries
Stodder: Financial Transition, July
20
Stodder: Financial Transition, July
21