Initially, the global financial crisis caused a surge of financial inflows, raising Chinese investment but this abated in 2008, to be replaced by a slowdown in export demand. The government's key response has been to commit to an unprecedented fiscal expansion. Two oft-ignored consequences are, first that government spending is on non-traded goods and services and so enlarges the consequent real appreciation and, second, that a more inward-looking economy causes firms to face less elastic demand and hence to increase oligopoly rents, further enlarging the real appreciation. Both are important for China because of the contribution of its real-exchange-rate sensitive, low-margin labour-intensive export sector to total employment. An economy-wide analysis is offered, using a model that takes explicit account of oligopoly behaviour. The results suggest that a conventional fiscal expansion would further contract the Chinese economy and, moreover, that the structural changes required would be considerable and painful. On the other hand, accelerated industrial reform, emphasising the sectors that remain dominated by state-owned oligopoly firms, would reduce costs and foster further export led growth in both output and modern sector employment.
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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANUCBE School of Economics Working Papers with number
2009-501.
Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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