Deconstructing China’s and India’s Growth - The Role of Financial Policies

Jahangir Aziz
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Jahangir Aziz: Indian Council for Research on International Economic Relations

Macroeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: This paper uses the standard one-sector neoclassical growth model to investigate why Chinas consumption has been low and investment high. It finds that the low cost of capital has been quantitatively an important factor. Theory predicts that the price of capital may have been significantly distorted in the 1990s and 2000s. The distortion could have been caused by nonperforming loans, borrowing constraints, and uncertainty over changes in government guidance in bank lending. In one form or the other, these distortions have implied significant transfers from households to firms. If China is to rebalance growth towards relying more on consumption and less on exports and investment, banking sector reforms and financial market development could, therefore, turn out to be key.

Keywords: Business cycle accounting; rebalancing growth; financial distortions (search for similar items in EconPapers)
JEL-codes: E21 E22 O53 (search for similar items in EconPapers)
Date: 2008-01
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