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8 References

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Appendix 1: Asian Fast Growing Economies

Table A1.1:

Asian HGEs rate of Growth of per capita GDP (per cent annual and 10 year compound)

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Table A1.2:

Asian pHGE’s Per capita GDP growth (annual & 10 year compound)

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Note: Malaysia & Indonesia did not meet the criteria for pHGE.

Appendix 2: China Growth

Based on earlier analysis of Chinese growth and that of other fast growing economies, we formulate and estimate the following GDP growth (PcGgr) equation, using two stage least squares(TSLS) with HAC procedure for the period 1983 to 2009(determined by data availability).52

Base equation


R2 = 0.71, R2 (adj) =0.66; DW =1.9. *(**) = significant at 5 per cent (1 per cent) level.

Thus, gross fixed capital formation (GFCF) and FDI, Export growth (Exportgr) and natural resource rents (Rent) appear to have played a significant role in China’s growth. Initial per capita GDP (PcGDP(t-1)) has the wrong sign but is not significant.

The natural resource rents to GDP ratio rose from 1970 to 1980 and then declined, sharply at first and then gradually till 1998 (not shown). Thereafter it grew gradually. We have therefore broken this ratio into a forecast (rentyf) and residual (rentyr) portion substituted these for the rent variable in the following equation.

Alternative with modified rent variable


R2 = 0.77, R2 (adj) =0.72; DW =1.9. ** = significant at 1 per cent level.

Rent/GDP = 3.9 – 0.76 FDI/Gdp+0.16 GFCFgr-0.095 Exportgr+0.94 WrldGdpgr

2.1(1.9)˄ 0.35(-2.2)* 0.09(1.7)˄ 0.05(-1.9)˄ 0.33(2.8)**

R2 = 0.60, R2 (adj) =0.53; DW =1.4. ˄/*/**) = significant at 10 per cent/ 5 per cent/1 per cent level respectively.

The coefficients are largely unaffected by the replacement of the rent variable by a trend and cyclical component. The latter is, however, not significant.

This regression has two important implications. (1) That World demand for resources and domestic demand arising from investment are the two important factors in determining China’s Natural resource rents. As investment in infrastructure and real estate are a part of GFCF, the significant co-efficient on GFCF indicates that land rents were officially/formally used for this purpose i.e. land rents were created simultaneously with their use for urban investment. (2) That companies (National/State, Provincial and Party led SPVs) owning/producing Natural resources are an important conduit for indirect/hidden subsidies to exports and to FDI that the system decides to promote. Thus a 10 per cent point increase in export growth leads to a 1 per cent point decline in the recorded resource rent to GDP ratio. Similarly a 10 per cent rise in the FDI:GDP ratio leads to a 2/3rd of a per cent point reduction in recorded Resource Rent/GDP ratio. Based on the average values of the variables during the high growth period, we estimate that these indirect/hidden subsidies to exports and FDI constituted about 3.4 per cent of GDP. As the significance of the rent variable is a surprising new result, it should be treated as a hypothesis requiring further analysis and empirical investigation.

Appendix 3: Testing the J curve Hypothesis

Economic Reforms and Growth

The approach adopted by the author in a series of papers on India since 2004 to measuring the effect of reforms on growth is similar to that used by Wacziarg and Welch (2003) in the cross country context [(Virmani(2005a, 2006a)].

Base Equation: E1


GdpGr = Growth rate of GDP at factor cost.

Dum 1 = 1 from 1980 to 1991, 0 after that. Dum 2 = 0 from 1980 to 1991, 1 after that till 2011. Rimd is monsoon rainfall variation from mean (IMD data). Rain effects on GDP has often confounded and confused conclusions about growth trends in Indian literature.

J curve Hypothesis: E2


Dw=2.0, R2 = 0.67, R2 (adj) = 0.63, * = significant at 1 per cent level.

Dumj =1 from 1992 to 2002-3, 0 in other years.

Investment/GDP: E3


Dw=2.6, R2 = 0.85, R2 (adj) = 0.83, Gdcf/GDP = Gross Domestic capital formation/GDP at market prices.

World Growth Hypothesis: Rising World Tide lifts all boats

Equation Ela


Dw=1.97, R2 = 0.57, R2 (adj) = 0.50, * = significant at 1 per cent level.

WgdpGr = rate of growth of world GDP.

Equation E2a


Dw=1.9, R2 = 0.68, R2 (adj) = 0.63, * = significant at 1 per cent level. Rest Not-significant.

Figure A3.1:
Figure A3.1:

Growth Phases II and III and J curve effect on latter

Citation: IMF Working Papers 2012, 185; 10.5089/9781475505337.001.A999

Monetary Hypothesis:

Equation Elb


Dw=1.98, R2 = 0.54, R2 (adj) = 0.47, * = significant at 1 per cent level. ˄= significant at 10 per cent level.

Ryld is average call money rates minus average inflation measured by GDP deflator for private consumption.

Equation E2b


Dw=2.0, R2 = 0.72, R2 (adj) = 0.66, * = significant at 1 per cent level. Rest Not-significant.

Appendix 4: Recent Trends, Cycles and Shocks

Seen from a medium term perspective economic growth shows a declining trend from 2003-4 to 2011-12 (figure A4.1). The cyclical variations around this declining trend are more clearly visible in the quarterly data which also shows the declining trend since around the first quarter of 2005-6 (figure A4.2), accentuated by the US/global financial crisis of 2008 and the US slowdown that preceded it. Growth has slowed dramatically in 2011, with GDP growth in the fourth quarter of 2011-12 falling to 5.3 per cent (Q/Q(-4)). This is due to a combination of shocks, cyclical factors, a political inability to address supply side problems and a slowing of economic policy and regulatory reforms over the past five years or so. The shocks emanating from the Euro-crisis acted as a trigger, coming as they did on top of the continuing effects of the global financial crisis that started in 2008 (figure A4.1). These shocks and cyclical factors such as monetary policy have pushed growth below even this declining trend (figure A4.2).

Figure A4.1:
Figure A4.1:

Annual Rate of Growth of GDP at Market Prices (2004-5 prices)

Citation: IMF Working Papers 2012, 185; 10.5089/9781475505337.001.A999

Figure A4.2:
Figure A4.2:

: Rate of Growth of GDP at 2004-5 market price (quarterly)

Citation: IMF Working Papers 2012, 185; 10.5089/9781475505337.001.A999

The cyclical trough of the cycle (that peaked in Q4 of 2009-10), was probably reached in the fourth quarter of 2011-12 (i.e. first quarter of 2012). The speed and extent of the recovery from the trough will depend not only on economic reforms but also on the speed of adjustment in the fiscal-monetary policy mix. A quick shift towards a fiscal contraction coupled with monetary loosening, and a serious effort to address supply constraints is essential for a non-inflationary recovery. However, the fiscal contraction must be such that it reinforces growth sustainability, by reversing the recent trends in consumption, transfers and subsidies and micro tuning of tax policy. Such a fiscal-monetary policy stance will also help reduce the current account deficit and insulate the Balance of payments against external shocks such as a liquidity crises emanating from the Euro area or an oil price surge emanating from the Gulf region.


The author thanks Amar Bhattacharya, Anwar Shah, Charan Singh, Homi Kharas, Jonathan Ostry, Laura Papi, Olivier Blanchard and Shahid Yusuf for their comments. Earlier versions of this paper are on the website,


Virmani (2004), which showed that there were two stages in the growth history of India between 1950 and 1991. See also Virmani(2006a). Many analysts still believe that there were barely any reforms during the eighties.


Virmani (2005a) predicted that the 1990s economic reforms would put the economy on higher growth path.


Most studies of fast growing economies, use 5 per cent average growth in per capita GDP to identify fast growing economies. Jerzmanowski (2006) defines, “a regime of fast, miracle-like growth with an average long run growth of 6 per cent. Durlauf, Johnson and Temple (2005) use average GDP per worker from 1960 to 2000 to identify 15 ‘miracle growth’ economies, 3/5th of which are in Asia with the top two [Taiwan Province of China (6.25 per cent) and Botswana (6.1)] averaging over 6 per cent and the 15th (Indonesia) averaging 3.3 per cent, (Table 2). They also show a significant acceleration in growth between the 1st and 2nd half of this period, for China, India, Mauritius and Bangladesh among others (Table 4).


The growth period T is calculated through a combination of informal judgment and formal procedure as follows: The start of the period is the year (-10) in which the ten year moving average equals or exceeds 6 per cent (Yf). The end of the period is the year in which MA10 falls below 6 per cent. Then we take a simple average of the growth of per capita GDP over this period (AvgGr(T)) and calculate the index as Ix = (1 + AvgGr(T))˄ T. If T > ten years, negative and very low growth rates at the end points are eliminated resulting in a lower T.


In contrast, investment rates tend to be significantly more persistent over time [Rodrik(1999)].


Taiwan Province of China, was identified as an HGE in an earlier paper that used IMF data. The WB, WDI data set does not have any data on this economy and is therefore absent from this paper.


Resource(oil) rich countries are those that have a resource (oil) rents to GDP ratio greater than the mean of the sample of countries for which this variable is available in the WDI data set.


Since 1965 (Iran), 1968 (Saudi Arabia) or 1960 (Gabon and Oman).


Myanmar has been tentatively put in the resource category though no data on resource rents is available.


According to PWT7.0 data, Japan crossed the 10 year 7 per cent growth threshold for HGE in 1964. It became a pHGE (6 per cent) four years earlier in 1960. It therefore remained an HGE for ten years till 1973 and a pHGE for another 2 years till 1975 (Table A1a).


For instance the Town and Village Enterprises (TVEs) were (in our view) special purpose vehicles, created and run by provincial party members and the relatives, friends or associates of party bosses. Similarly, virtually all large “private companies’ are directly or indirectly, guided, controlled or managed by party bosses and/or party members. Some of these come under the rubric of “Red Capitalism”. An alternative, more appropriate term is “Party Capitalism,,” which is the use of capitalist institutions (markets) for promoting the party, its leaders and its supporters. Like other successful versions of capitalism, it also successfully accelerated growth but also had negative side effects in the form of adverse changes in income distribution and allegations of cronyism [“cromy capitalism”(sic)].


This does not include economies like S. Korea and Hong Kong SAR which had episodes of 6 to 7 per cent growth and less than 6 per cent growth inters persed between 7 per cent+ growth, as they have been included in the HGE category.


The term ‘Middle Income Trap’ was first used in a World Bank paper on East Asia by Indermit Gill and Homi Kharas.


Durlauf et al (2008) confirm the importance of the Neoclassical model (NCM) in explaining growth. The neo-classical model assumes that savings and investment are equal and conventionally focuses on the saving rate. The authors’ model tests affirm the importance of an investment version of the NCM.


Demographic variables should very weak co-relation with per capita growth. Somewhat surprisingly, neither export nor import growth per se is correlated with growth of per capita GDP.


The cost of credit/capital is also an element in the overall price of investment. Thus a rise in the interest rates or a decline in the supply of risk capital will also affect investment.


See Virmani (2005d) for the political economy of reforms vis-avis the bureaucracy.


Distilled from the world Bank’s “Asian Growth Miracle” study and subsequent case studies on successful Asian countries.


Thailand also used the opportunity to accelerate its per capita growth to 6.2 per cent during the decade to 1991, peaking at 8.2 per cent in the decade to 1996 (table A2).


Malaysia fell from its peak decadal growth rate of 6.4 per cent (recovery, ineligible for pHGE status) in 1997 to less than 4 per cent. Indonesia’s ex perience was similar (per capita decadal 5.9 per cent to less than 4 per cent), as was that of Taiwan Province of China, China and Singapore.


Virmani (2009) and Economic Division (2009) warned that higher Indian growth potential does not ensure higher actual growth. Because of the complacency induced by the V shaped growth recovery in India, these warnings were barely noticed by the economic actors, the organs of government, academics, business organizations and the media.


Arvind Virmani, “Real Issues vs. Straw Men”, Policy Paper No. WsPp2011/ 2, June 2011


The theoretically correct fiscal measure is Debt net of (physical) assets (to GDP). Recent IMF research has shown that the only significant factor in predicting financial crises is a country’s net foreign debt to GDP ratio.


As conceptualized by the professionals associated with it. India was perhaps less successful with respect to Berg et al’s last conclusion, “Furthermore we find that export composition matters.. The manufacturing share in exports and more generally, export product sophistication tend to predict prolonged growth spells.”


See appendix of Virmani (2005a) for a comprehensive list of 1980s and 1990s reforms.


Wacziarg and Welch(2003) show that only 1/5th of the effect of import liberalization on growth comes through its effect on investment. The rest could be TFP etc.. Some of their time patterns also support J curve effects.


Interestingly the polices that continued to worsen during the 1980s were also static in nature and therefore did not undermine the positive dynamic effects of decontrol policies.


The entry of private banks, both domestic and foreign, has been considerably liberalized, resulting in increased competition in consumer loans. However, the fact that 70 per cent of banking assets are still in Public sector banks (≥51 per cent of equity) may have constrained competition in innovative lending.


Porter (1990) had emphasized the importance of competition in developing and sustaining the competitiveness of firms on which the competitive strength of countries was built.


See Virmani and Hashim (2011) for empirical evidence of the effect of phasing and timing of import liberalization in different sub-sectors and industries and of public sector reform on the time pattern of output and total factor productivity growth of 2 digit industry.


It may however also bias the modern sector towards excessive capital-skill intensive technology because the “tunneling effect” of frontier technology that is more appropriate to the factor endowments of rich/advanced countries.


See Virmani (2005) or Virmani (2006b, c) for empirical details of productivity enhancing effects of FDI.


See Virmani and Hashim(2011) for empirical evidence.


It is also speculated that their actual capacity was higher than the licensed and declared capacity.


See Virmani and Hashim(2011) for empirical evidence.


FDI in internet and other parts of the communication and news media is also restricted for social and security reasons. FDI in crop agriculture and parts of the plantation sector remain prohibited because of issues connected with livelihood and land ownership by peasants.


See Virmani (1995) and Virmani (1996). The markets for Education and Health also require unbiased and effective regulation to function efficiently, because of asymmetric information and related problems.


Virmani (2005a, 2006a b c)


See appendix 3. The base model shows a statistically insignificant effect of reforms (coefficient on dum1 & dum2) on the investment: GDP ratio.


This is consistent with the fact that in the base model interest rates reduced growth by 0.54 per cent points, 0.61 per cent (8 per cent of predicted) points and 0.22 per cent points during 1980-1 to 1991-2, 1992-3 to 2002-3 and 2003-4 to 2011-12 respectively. An increase in fiscal deficit reduces growth, but is not-significant at 10 per cent level.


As the author has made clear in numerous interactions with the media, speeches and in writings since 1995, the 1990s reforms raised Growth Potential of India to 8.5 per cent to 9 per cent.


Because of local and regional tastes, there is a stronger inherent/natural incentive for large marketers to build domestic supply chains for food/grocery items. Thus it may be better to focus initially on allowing 74 per cent FDI in grocery/food retail as against 51 per cent FDI in general retail (including grocery), if the primary objective is to build an efficient food supply chain that benefits farmers and consumers.


E.g. delisting of perishable commodities like fruits and vegetables and new nutritional items like soya, from schedule 1 of APMC Acts. For poorer/less developed States/regions to benefit fully we also need a road grid connecting every village and a sustainable water/irrigation grid in every block.


The simplest, most effective way to promote inclusive growth is by building a permanent road network that connects every habitation in India, a drinking water and sewage/sanitation grid that provides every town and all its residents a healthy environment and an irrigation-drainage (water sustainability) grid covering every block/village. More than finance, the greatest limitation is the lack of understanding and appreciation of the vital role that these simple public goods have played in the transformation of USA and Europe form poor unequal societies to rich and relatively equal ones (at least till 1980).


The instruments used are growth of World GDP, World export and World commodity prices, time and lagged values of all variables. Of the 8 per cent average growth since 1970, FDI and Exports contributed 1.7 per cent and 0.8 per cent point respectively to the 8 per cent point during the fast growth period.

Accelerating And Sustaining Growth: Economic and Political Lessons
Author: Mr. Arvind Virmani