Capital misallocation in emerging economies : the origins, the impacts, and a focus on the chinese case.

Summary This thesis investigates the distortions and frictions that create capital misallocation in emerging economies, i.e. heterogeneous capital accumulation between the private and public sectors, excessive savings (by households and firms), and the slowdown of investment in certain sectors. The first chapter shows, through a dynamic general equilibrium model including different types of firms, that in the Chinese economy, the allocation of household savings to state-owned enterprises (SOEs) by the banking system has both a domestic and an international scope. First of all, it helps to explain to a large extent the configuration of capital flows in China: despite the strong growth of its total factor productivity, China observes a strong accumulation of foreign exchange reserves while the inflow of Foreign Direct Investment (FDI) is important. Moreover, by channelling household savings into SOEs, this allocation of capital also explains, in this model, the fall in consumption (which is a major current problem in China's transition). Additional frictions are introduced in the model, such as privatization, capital expropriation, moral hazard and capital controls, also playing a significant role in the appearance of imbalances in the Chinese economy. The second chapter focuses on the distortion that played a key role in the misallocation of capital in the Chinese economy, the credit bias in favor of SOEs, and extends its analysis to other emerging countries by focusing on FDI inflows. The study is empirical with global and sectoral approaches, using different methodologies applied to two samples of emerging countries. The increase in the distribution of credit to SOEs, to the detriment of private firms, slows down the increase of FDI inflows, specifically in the manufacturing sectors. Indeed, the latter have a high dependence on external financing and the share of private enterprises is higher than in the tertiary sectors. In order to correct the imbalances of the Chinese economy analyzed in the theoretical framework of the first chapter, the third chapter proposes a tax system consisting of heterogeneous taxes between the different types of enterprises in China (SOEs, domestic and foreign private firms), as well as taxes on household income and on credit repayments. The reforms aim at reducing overinvestment by most firms, increasing consumption, and maximizing welfare. Some reforms impose higher taxes on state-owned enterprises, allowing for a reallocation of labor to private domestic and foreign firms. In addition, the adjustment of factor costs (labor and capital) between the private and public sectors, and between domestic and foreign firms, is sometimes necessary during the reforms applied in this model. These reforms to increase consumption and decrease investment bring welfare benefits to households, and the rebalancing of domestic demand does not necessarily require an adjustment in the external financial position. Finally, the thesis concludes with an extension of the previous model, with nominal rigidities and taxes on consumption of foreign and domestic goods applied during the consumption-increasing reforms.