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Deconstructing China's and India's Growth: the Role of Financial Policies

Author

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  • Jahangir Aziz

    (Indian Council for Research on International Economic Rela)

Abstract

This paper uses the standard one-sector neoclassical growth model to investigate why China's 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.

Suggested Citation

  • Jahangir Aziz, "undated". "Deconstructing China's and India's Growth: the Role of Financial Policies," Indian Council for Research on International Economic Relations, New Delhi Working Papers 224, Indian Council for Research on International Economic Relations, New Delhi, India.
    • Handle: RePEc:ind:icrier:224
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    File URL: http://www.icrier.org/publication/WorkingPaper224.pdf
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    Cited by:

    1. Ms. Hiroko Oura, 2008. "Financial Development and Growth in India: A Growing Tiger in a Cage?," IMF Working Papers 2008/079, International Monetary Fund.

    More about this item

    Keywords

    Business cycle accounting; rebalancing growth; financial distortions;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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