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Combating China'S Export Contraction: Fiscal Expansion Or Accelerated Industrial Reform?

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  • Rod Tyers

    ()

  • Ling Huang

Abstract

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 inwardlooking 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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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2009-02.

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Length: 31 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:een:camaaa:2009-02

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References

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  1. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers 3381, C.E.P.R. Discussion Papers.
  2. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
  3. Rod Tyers & Jane Golley & Bu Yongxiang & Ian Bain, 2006. "China's Economic Growth and its Real Exchange Rate," ANU Working Papers in Economics and Econometrics 2006-476, Australian National University, College of Business and Economics, School of Economics.
  4. Vahagn Galstyan and Philip R. Lane, 2008. "The Composition of Government Spending and the Real Exchange Rate," The Institute for International Integration Studies Discussion Paper Series iiisdp257, IIIS.
  5. Rod Tyers, 2008. "Competition Policy, Corporate Saving And China'S Current Account Surplus," CAMA Working Papers 2008-21, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  6. Russell H. Hillberry & Edward J. Balistreri & Thomas F. Rutherford, 2007. "Structural Estimation and Solution of International Trade Models with Heterogeneous Firms," DEGIT Conference Papers c012_038, DEGIT, Dynamics, Economic Growth, and International Trade.
  7. Harris, Richard, 1984. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," American Economic Review, American Economic Association, vol. 74(5), pages 1016-32, December.
  8. Rod Tyers & Iain Bain, 2007. "Appreciating the Renminbi," Departmental Working Papers 2007-09, The Australian National University, Arndt-Corden Department of Economics.
  9. Jose De Gregorio & Alberto Giovannini, 1993. "International Evidence on Tradables and Nontradable Inflation," NBER Working Papers 4438, National Bureau of Economic Research, Inc.
  10. Don Gunasekera & Rod Tyers, 1989. "Imperfect Competition and Returns to Scale in a Newly Industrialising Economy: A General Equilibrium Analysis of Korean Trade Policy," School of Economics Working Papers 1989-04, University of Adelaide, School of Economics.
  11. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-47, June.
  12. Corden, W. Max, 1994. "Economic Policy, Exchange Rates, and the International System," OUP Catalogue, Oxford University Press, number 9780198774099.
  13. Bradley, Ian & Price, Catherine, 1988. "The Economic Regulation of Private Industries by Price Constraints," Journal of Industrial Economics, Wiley Blackwell, vol. 37(1), pages 99-106, September.
  14. Rod Tyers, 2005. "Trade Reform and Manufacturing Pricing Behavior in Four Archetype Asia-Pacific Economies ," Asian Economic Journal, East Asian Economic Association, vol. 19(2), pages 181-203, 06.
  15. Jahangir Aziz & Li Cui, 2007. "Explaining China's Low Consumption," IMF Working Papers 07/181, International Monetary Fund.
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Cited by:
  1. Rod Tyers & Feng Lu, 2009. "Competition Policy, Corporate Saving and China's Current Account Surplus," ANU Working Papers in Economics and Econometrics 2009-496, Australian National University, College of Business and Economics, School of Economics.
  2. Rod Tyers, 2012. "Looking Inward for Transformative Growth in China," CAMA Working Papers 2012-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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