Damien CUBIZOL (GATE CNRS, Univ. Lyon et Sciences Po Toulouse) : Rebalancing in China: a taxation approach.

The rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various types of firms across private and public sectors. Based on a two-country dynamic general equilibrium model, the paper applies tax reforms to raise consumption, reduce the investment rate and maintain a high level of welfare.

To rebalance consumption and investment, taxation may allow reallocating a part of the labor force to private domestic and foreign firms. Moreover, the correction of distortions in production factor costs (capital and labor) is necessary during certain reforms applied in the model; that is, on the one hand, higher credit costs for State-Owned Enterprises (SOEs) and, on the other hand, a catch-up of foreign expatriated firms’ wages by domestic firms (public and private).

These consumption and investment reforms bring welfare benefits to households, and the results are close to direct welfare maximization. In this framework, the rebalancing of the domestic demand does not require the readjustment of the external financial position because the aggregate savings rate remains high and the supply of domestic assets is reduced.

Finally, another theoretical framework proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption. The main reform that increases consumption is the tax rebate on the domestic consumption of foreign goods. Moreover, we can notice that the government even more uses taxes on consumption as instruments to enhance consumption when nominal rigidities are high. In this other framework, a rise in firms’ credit cost is still a key channel that both reduces the investment rate and increases the consumption ratio (through returns on savings).

Damien CUBIZOL (GATE-LSE-CNRS, Université Lyon 2) : Unbalanced privatization in emerging economies and capital flows

Some emerging countries face a large privatization during their economic transition. For most of them, particularly in China and ex-Soviet Union countries, the increasing share of private firms is not followed by a sufficient funding by State-Owned-Banks (SOBs).

This empirical study reveals that a higher credit distribution by SOBs to State-Owned Enterprises (SOEs), to the detriment of some highly productive private firms, has an effect on foreign investments in emerging countries experiencing an economic transition. A first approach relying on GMM, Bayesian techniques, and utilizing a sample of 40 emerging countries over the period 1987-2007, demonstrates that the capital misallocation created by SOBs during privatization hinders inward FDI and enhances the accumulation of foreign assets.

Then, to specify the effect on FDI inflows, a sectoral approach is implemented for 1992-2012. The methodology follows Rajan and Zingales (1998), with a global index of sectoral financial dependence (independent of country and time) that enables correcting for country and industry characteristics to preclude any possibility of omitted variables or endogeneity issues. This sectoral analysis strengthens the previous results and allows for quantification: the rise in the credit afforded to SOEs to the detriment of growing private firms is associated with a slowdown of inward FDI stocks by approximately 16 % to 23 % during privatization. This conclusion is valid in manufacturing but not in tertiary sectors, that is, in sectors with more private firms and external finance dependence.

The literature on the Chinese case is partly extended to the main emerging privatizing countries, and the results allow for improvement in policy actions to better allocate capital in transition economies and for international stability. The policy actions can be of two types: reduce the credit bias at its source or limit the negative consequences on investment.