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GLOBAL CRISIS: Impact On Growth Strategies

GLOBAL CRISIS: Impact On Growth Strategies. Arvind Virmani ( views are personal ). Introduction. Global Crises: Worst since Great Depression Slower Growth of World GDP, Trade Export oriented economies will loose Development strategy/Growth Model

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GLOBAL CRISIS: Impact On Growth Strategies

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  1. GLOBAL CRISIS: Impact On Growth Strategies Arvind Virmani (views are personal)

  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 AV

  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 EconomicCrisesEcPower

  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 19 March, 2009 CPR: AV AV 4

  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 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 TripolarInstPeace: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 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) 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) AV

  10. Share of World Exports AV

  11. Country Shares of World Exports AV

  12. Export-GDP RATIOS AV

  13. Balance of Payments and Exchange Rate AV

  14. Demand Contribution To Growth: China and India AV

  15. Consumption-GDP RATIOS AV

  16. Manufacturing: Export-Gdp AV

  17. Growth of World Exports AV

  18. Investment Rate: China/India AV

  19. Tri-polar: USA, China, India TripolarInstPeace: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 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 AV

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