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GLOBAL CRISIS: Impact On Growth Strategies
Arvind Virmani
(views are personal)
10 March, 2010 AV 2
Introduction Global Crises: Worst since Great
Depression Slower Growth of World GDP, Trade Export oriented economies will loose Development strategy/Growth Model
E, S E Asia: FDI-Export or Public Investment-Export led growth model
China’s Growth/Development model
11/20/2009 EconomicCrisesEcPower 3
Introduction India: Domestic Entrepreneur led growth
Export Neutrality, Investment neutrality Continue Policy, Institutional Reform
India has to speed up existing approach
Crisis originating AEs (USA, UK..) Credit/Debt(de-leveraging) -> Growth Fiscal Constraints: Ec power
Energy/Oil rich: Return to normal growth Russia, Brazil
19 March, 2009 CPR: AV 4
Global Financial & Economic Crisis
Growth bubble => Below trend GDP medium Term: Lower trend growth due to
higher public debt? Trade/Exports: Globalisation of Production
(fragmentation and dispersal) Trend reaching completion? Bubble element => Compensated by below trend Heightened risk and risk perception
10 March, 2010 4AV
20th August 2010 TripolarInstPeace:av 5
Fiscal Impact
Fiscal Deficits: USA, EU (Japan) Foreign Aid, Military expenditures
China: Fiscal Surplus, CAS Global rebalancing(US CAD)? China: Domestic caution (Ec-tech)
External Assertion(Pol-Mil nationalists) S China Sea, Arunachal-Kashmir
20th August 2010 TripolarInstPeace:av 6
Impact on Exports Global GDP & Import slowdown
Export oriented => Export neutral Development strategy, Growth model
E, S E Asia: FDI-Export or Public Investment-Export led growth model
India: Domestic Entrepreneur led gr Export Neutrality, Investment neutrality
Continue Policy, Institutional Reform
10 March, 2010 AV 7
Growth Model: CHINA Goal / Objective : Growth Maximization Means: Maximize Investment
Foundation of Growth Socialist Owned Enterprise =>100% Reinvestment of returns
(0 dividends) => High investment (Kuijs) Govt: Low tax rates, Low social expenditures, Solid
investment in (quasi) Public goods Engine of Growth: Exports and FDI/Public Investment
Export Machine: Comprehensive Support till full establishment, support at any sign of trouble
Initial (pre Asian crisis): FDI Post Asian Crisis: Public/Infrastructure Investment
10 March, 2010 AV 8
Socialist Control And Subsidies Capital Intermediation
Domestic Saving Banks: Public Sector or Govt. Depts? Controls used to provide indirect subsidies for
FDI (Capital/Skill intensive- KI/SI) Exports: Vent for Surplus, export at any cost
Cap cost 0 to supplier of CG, Intermediate, materials SOE production, investment (inefficiency)
Infrastructure: Supply & Pricing (Capital subsidy) to ensure FDI (technology, expertise, export marketing)
Flip side: Controls subject to Corruption Useful in catch up phase, not at the frontier (HIC)
10 March, 2010 AV 9
Strategic Weakness and Risks Weakness: Other side of coin of past growth drivers
Govt/Socialist Ownership: Excess capacity (e.g. infrastructure), Falling returns, Rising NPAs, Falling public saving/investment
Rising export share: Vent for Surplus =>Falling unit values; Rising subsidies (NPAs)
Knife-edge character of FDI-export model Asian crises (euphoria risk) Over dependence on FDI Center and Periphery (Prebisch-Singer)
Share of World Exports
10 March, 2010 AV 10
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
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Japan China Germany
United States Poly. (China) Poly. (Germany)
Country Shares of World Exports
10 March, 2010 AV 11
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
India Thailand
Singapore Korea, Rep.
Export-GDP RATIOS
10 March, 2010 AV 12
0%
10%
20%
30%
40%
50%
60%
70%
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India Thailand Korea, Rep.
Japan China
Balance of Payments and Exchange Rate
10 March, 2010 AV 13
-2
0
2
4
6
8
10
12
14
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Balance on goods Current account balance
Overall balance ExRateAvg(Y/$)
Demand Contribution To Growth: China and India
10 March, 2010 AV 14
China China India India2002/1990 2007/2002 2002/1991 2007/2002
Private Consumption 40.5% 27.0% 56.5% 45.8%
Govt Consumption 16.7% 12.1% 11.8% 6.1%
Gross Investment 38.7% 53.7% 30.2% 57.0%
Net Exports 1.8% 19.8% 3.8% -15.2%
Average contribution during period
Consumption-GDP RATIOS
10 March, 2010 AV 15
35
40
45
50
55
60
65
70
1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
China Singapore Thailand Korea India Japan
Manufacturing: Export-Gdp
10 March, 2010 AV 16
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-5%
0%
5%
10%
15%
20%
25%
30%
35%
Mf:Exp/Gdp Mf:ExNet/Gdp
Growth of World Exports
10 March, 2010 AV 17
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
0%
5%
10%
15%
20%
25%
30%
19
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World Exp/Gdp WorldGr
Investment Rate: China/India
10 March, 2010 AV 18
1.0
1.2
1.4
1.6
1.8
2.0
2.2
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Investment Rate: China/India
InvRt:Ch/Ind Poly. (InvRt:Ch/Ind)
Tri-polar: USA, China, India
20th August 2010 TripolarInstPeace:av 19
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.020
09
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
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Power Potential: VIPPUSA China Japan
Germany UK France
India Russia
10 March, 2010 AV 20
Global Implication Bi-Polar (USA-China): 2020
US Fallibility => China Confidence => Global Assertiveness
Tri polar(US-China-India): 2035
Quadri-polar? EU- Opposite pulls
10 March, 2010 AV 21
CONCLUSION India: Return to high growth path (8.5 -
9%) by 2011-12 Growth: China’s < India’s (mid-decade)
Can offset external demand by public investment for ~ 5 years (i.e. till 2012)
China: Model change(2013-15) Demand: Export => Domestic PSU saving-inv => Private Income-Cons PSU investment: Manf. => Services Public Inf expend: Physical => Social
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