PROBLEMS Return to Capital Remain High. Saving Rate Remain High. Foreign Surplus growth fast. How to...

22
Growing Like China Wei Chen

Transcript of PROBLEMS Return to Capital Remain High. Saving Rate Remain High. Foreign Surplus growth fast. How to...

Growing Like China

Wei Chen

PROBLEMS

Return to Capital Remain High.

Saving Rate Remain High.

Foreign Surplus growth fast.

Contradict

How to Solve This Puzzle ?

ANSWERS

Return on

capital

• Reallocation of resources

Saving

• Transfer from external financial firm to entrepreneurial firms

Surplus

• Domestic Saving invests in foreign assets

HISTORY BACKGROUND

Video: History background1

1. Cameron D’AngeloChina’s, Economic Growth, <http://www.youtube.com/watch?v=7TT8uHVZWBY>

REALLOCATION

DPE: Domestic Private EnterprisesSOE: State-owned EnterprisesFE: Foreign Enterprises

DIFFERNECE BETWEEN DPE & SOEProductivi

tyAccess to Financial

Markets

DPE High Hard

SOE Low Easy

• China Scores poorly in terms of creditor rights, investor protection, accounting standards, nonperforming loans, and corruption

Reason

• Chinese firms must rely heavily on retained earnings to finance investments and operational costs.

Consequence

DIFFERNECE BETWEEN DPE & SOE

SOE finance more than 30 percent of their investments through bank loans compared to less than 10 percent for DPE

INCOME INEQUALITY

Fact: The Gini coefficient in China grew from 0.36 in 1992 to 0.474 in 2012 (0.61 in Southwestern University of Finance and Economics’ report )

Reason: This development may be due in part to the slow growth of wages relative to entrepreneurial income.

A. Preference, Technology, and Market 1

1. Two Periods Model: the first period and live off savings in the second period.

2. Utility Function:

3. Workers: N t+1 = (1 + ν) N t .

A. Preference, Technology, and Market 24. Firm types: Entrepreneurial firms (E) & Financially Integrated (F)

the manager makes decisions

based on superior information (χ > 1 extra efficiency)

the manager can divert a positive

share of the firm’s output for his own

use. (ψ < 1)

F firms are weak at corporate

governance and cannot effectively

monitor their managers

F firms will always choose a

centralized organization,

while E firms opt for delegation

A. Preference, Technology, and Market 3

5. Technology:

6. Budget:

7. Saving:

Conclusion: wages equal the marginal product of labor

A. Preference, Technology, and Market 4

E Value:

Interpreted: Value = Max {Total Output –money stolen – wages}

Conclusion:

A. Preference, Technology, and Market 5Capital = saving + Loan:

Firms need enough money to pay back loan

Conclusion:

Optimal Saving Rate:

B. Discussion of Assumptions

SOE

Weak Corporate Government

Less Productive

Easy Borrow Money

DPE

Manager related

High productive

Hard Borrow Money

Result :Hard for money to flow to high productive DPE firms

C. Equilibrium During Transition 1 Prove: Due to the disadvantage in raising funds,

E firms choose in equilibrium a lower capital-output ratio than do F firms.

1. Capital per labor:

2. Define lending rate R l pins down the marginal product of capital of F firms

3. κF is constant. in standard neoclassical open-economy:

4. Conclusion

C. Equilibrium During Transition 2

The growth rate of ρE is hump-shaped in ψ.

Recall: ρE is return on capital from E firm; ψ is the stolen rate

Assumption: 1.Ke and A are state variable. 2. capital per labor is constant. 3. entrepreneur savings is linear in Ke

Conclusion:

D. Foreign Surplus, Savings, and Investment

1. Bank Balance:

Interpreted: Loan to Firms F + Loan to Firm E + Foreign Bond = Saving

2. Foreign Surplus:

Condition: The intuition for the growing foreign surplus is that as employment is reallocated towards the more productive E firms.

3. All E Firms:

4. Conclusion: Due to the financial frictions, the growth rate ofthe foreign surplus can exceed that of GDP, resulting in a growing B t / Y t ratio

E. Discussion of Results Firstin spite of the high investment and growth of industrial production, the rate of return of firms does not fall.

SecondA lower capital intensity in E firms than in F firms. Moreover, the rate of return to capital is higher in E firms than in F firms

Third

the reallocation from SOE to DPE in the data

Forthsuch reallocation leads to an external imbalance— as in the data, the economy runs a sustained foreign surplus.

Fifthpredicts a growing inequality between workers’ wages and entrepreneurial earnings

QUANTITATIVE ANALYSIS1. In Theory, we used two period model. Now, we extend our theory to an Auerbach-Kotlikoff OLG model in which agents live T periods.

2. Young entrepreneurs (富二代) work as managers for T/2 periods and as entrepreneurs for the remaining T/2 periods

3. The parameters set exogenously. One period is one year. Agents enter the economy at age 28 and live until 78 (T = 50). The average retirement age in China is 58, so workers retire after J = 30 years of work.

RESULT

MY OPINION

• Developing market (Magic Happens1) • Increasing in investment caused increasing in demand at

beginning . The market in China is empty in 1978. When there was investment, there would be demand for the products.

• Recent complete market caused foreigner surplus increase. After market is complete, government and E companies realized less of future grow opportunity. They looked for foreigner investment opportunities.

• Better political status. At very beginning, if a company wanted to do business in China, there would millions of front cost caused by political agreements. While less political agreements would be for the recent 10 years.

• Begin from 2008, F firms grew fast with a high rate of return than E firms.

CHINA

• Developed market (Under Expectation)

USA

1. Yuan Da Corporation, Time Lapse Video Of China Completing 15 Story Hotel In 6 Days, <http://www.youtube.com/watch?v=VgXi2iKpX_0>

Thanks for listening!