Chapter

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

Jahangir Aziz

in Emerging Giants

Published in print April 2010 | ISBN: 9780199575077
Published online September 2010 | e-ISBN: 9780191722141 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199575077.003.0008
Deconstructing China's and India's Growth: The Role of Financial Policies

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The links between financial and economic development are well established in theory, but country-specific empirical evidence is hard to come by. This chapter shows that one empirical measure, the investment wedge or the gap between household's rate of intertemporal substitution and the marginal product of capital, is large. It is a significant determinant of Chinese and Indian growth in the last two decades. In China, distortions caused by nonperforming loans, borrowing constraints, and uncertainty over changes in government guidance in bank lending have implied large transfers from households to firms that have kept capital cost low and encouraged investment. In India, post-1992 financial sector reforms, particularly the reduction in the funds pre-empted by the government from the banking system, have played an important role in reducing the cost of capital. Simulations show that for rebalancing growth in China and sustaining high investment rate in India, financial sector reforms and financial market development will be key.

Keywords: growth accounting; financial distortions; financial reforms; China; India

Chapter.  11363 words.  Illustrated.

Subjects: Economic Development and Growth

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