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External Contradictions of the Chinese Development Model: Export-led Growth and the Dangers of Global Economic Contraction

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  • Thomas I. Palley

Abstract

China’s development model faces an external constraint that could cause an economic hard landing. China has become a global manufacturing powerhouse, and its size now renders its export-led growth strategy unsustainable. China relies on the U.S. market, but the scale of its exports is contributing to the massive U.S. trade deficit, creating financial fragility and undermining the U.S. manufacturing sector. These developments could stall the U.S. economy’s expansion, in turn triggering a global recession that will embrace China. This is the external constraint. These considerations suggest China should transition from export-led growth to domestic demand-led growth. This requires growing the economy’s demand side as well as its supply-side. To avoid stalling the U.S. economic expansion, which is critical to China’s growth, China should significantly revalue its currency as part of a generalized East Asian upward currency revaluation. Longer term, China should raise wages and improve income distribution. Under export-led growth, higher wages undermine employment. Under domestic demand-led growth, they support it. The challenge is to raise wages in an efficient decentralized manner. History shows that this requires independent democratic trade unions. However, such unions are currently unacceptable to Chinese political leadership. Creating a domestic demand-led growth regime therefore requires solving this political roadblock.

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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp101.

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Date of creation: 2005
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Handle: RePEc:uma:periwp:wp101

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Cited by:
  1. Luigi Bonatti & Andrea Fracasso, 2009. "The evolution of the Sino-American Co-dependency: modelling a regime switch in a growth setting," Department of Economics Working Papers 0905, Department of Economics, University of Trento, Italia.
  2. Terry McKinley, 2006. "The monopoly of global capital flows: Who needs structural adjustment now?," Working Papers 12, International Policy Centre for Inclusive Growth.
  3. Thomas I. Palley, 2006. "The Fallacy of the Revised Bretton Woods Hypothesis: Why TodayÕs International Financial System Is Unsustainable," Economics Public Policy Brief Archive ppb_85, Levy Economics Institute.
  4. Viswanathan P K, 2008. "Critical Issues Facing China’s Rubber Industry in the Era of Market Integration: An Analysis in Retrospect and Prospect," Working Papers id:1362, eSocialSciences.
  5. Dic Lo, 2010. "China and World Development beyond the Crisis," Working Papers 167, Department of Economics, SOAS, University of London, UK.
  6. Thomas I. Palley, 2006. "The Fallacy of the Revised Bretton Woods Hypothesis: Why Today’s System is Unsustainable and Suggestions for a Replacement," Working Papers wp114, Political Economy Research Institute, University of Massachusetts at Amherst.

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