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

  • Jahangir Aziz

    (Indian Council for Research on International Economic Relations)

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    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.

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    File URL: http://www.eaber.org/node/22142
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    Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22142.

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    Date of creation: Jan 2008
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    Handle: RePEc:eab:macroe:22142
    Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
    Web page: http://www.eaber.org

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    7. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2008. "Formal versus informal finance : evidence from China," Policy Research Working Paper Series 4465, The World Bank.
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    15. Suparna Chakraborty, 2005. "Real Estate Prices, Borrowing Constraints and Business Cycles -A Study of the Japanese Economy," Macroeconomics 0504012, EconWPA.
    16. Keiichiro Kobayashi & Masaru Inaba, 2006. "Borrowing constraints and protracted recessions," Discussion papers 06011, Research Institute of Economy, Trade and Industry (RIETI).
    17. Finn E. Kydland & Carlos E. J. M. Zarazaga, 2002. "Online Appendix to Argentina's Lost Decade and the Subsequent Recovery Puzzle," Technical Appendices kydland02, Review of Economic Dynamics.
    18. Hiroko Oura, 2008. "Financial Development and Growth in India: A Growing Tiger in a Cage?," IMF Working Papers 08/79, International Monetary Fund.
    19. Richard Podpiera, 2006. "Progress in China'S Banking Sector Reform: Has Bank Behavior Changed?," IMF Working Papers 06/71, International Monetary Fund.
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