Now close to 50 percent of GDP, this paper assesses the appropriateness of China's current investment levels. It finds that China's capital-to-output ratio is within the range of other emerging markets, but its economic growth rates stand out, partly due to a surge in investment over the last decade. Moreover, its investment is significantly higher than suggested by cross-country panel estimation. This deviation has been accumulating over the last decade, and at nearly 10 percent of GDP is now larger and more persistent than experienced by other Asian economies leading up to the Asian crisis. However, because its investment is predominantly financed by domestic savings, a crisis appears unlikely when assessed against dependency on external funding. But this does not mean that the cost is absent. Rather, it is distributed to other sectors of the economy through a hidden transfer of resources, estimated at an average of 4 percent of GDP per year. JEL Classification Numbers: E22, D60, D91, G21
The views expressed in this Working Paper are those of the author( s) and do not necessarily represent those of the IMP or Tht1F policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. WPI03/15The contribution of the information and communication technology (ICT) sector to growth in Asian economies is clearly evident from the expenditure side (net exports) and became particularly significant in the second half of the 1990s. This paper employs an extension of the standard growth accounting framework, using estimates of stock of ICT capital (hardware, software, and telecommunications equipment), to estimate the direct contributions to growth. The contribution ofICT to growth in Asia during the 1990s is found to be mainly from capital deepening. Total factor productivity (TFP) is also decomposed (using the dualor revenue-based-approach) into the contributions ofnon-ICT capital stock, ICT capital stock, and labor. TFP growth is found to be relatively small in most Asian countries.
This paper proposes a possible framework for identifying excessive investment. Based on this method, it finds evidence that some types of investment are becoming excessive in China, particularly in inland provinces. In these regions, private consumption has on average become more dependent on investment (rather than vice versa) and the impact is relatively short-lived, necessitating ever higher levels of investment to maintain economic activity. By contrast, private consumption has become more self-sustaining in coastal provinces, in large part because investment here tends to benefit household incomes more than corporates. If existing trends continue, valuable resources could be wasted at a time when China's ability to finance investment is facing increasing constraints due to dwindling land, labor, and government resources and becoming more reliant on liquidity expansion, with attendant risks of financial instability and asset bubbles. Thus, investment should not be indiscriminately directed toward urbanization or industrialization of Western regions but shifted toward sectors with greater and more lasting spillovers to household income and consumption. In this context, investment in agriculture and services is found to be superior to that in manufacturing and real estate. Financial reform would facilitate such a reorientation, helping China to enhance capital efficiency and keep growth buoyant even as aggregate investment is lowered to sustainable levels. JEL Classification Numbers: E22, H4, O14, R11, R12
We investigate the effect of exchange rate flexibility on economic growth. We find that exchange rate flexibility negatively affects economic growth, but this effect varies with the degree of financial market openness. Countries with high financial market openness benefit from maintaining high exchange rate flexibility, whereas the opposite is true for countries with low financial market openness. This empirical result implies that policymakers should consider the long-term growth effect when formulating exchange rate policy as it could be a useful policy option for emerging markets with limited policy independence. This is particularly relevant to policy coordination since greater exchange rate flexibility alone cannot solve the global imbalance.
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