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Combating China’s Export Contraction: Fiscal Expansion or Accelerated Industrial Reform?

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  • Rod Tyers

    (UWA Business School, The University of Western Australia)

  • Ling Huang

    (School of Economics, Peking University)

Abstract

Initially, the global financial crisis caused a surge of financial inflows to China, raising investment, but this abated in 2008, leaving a substantial contraction in export demand. The government’s key response was to commit to an unprecedented fiscal expansion. Two oftignored 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. On the other hand, notwithstanding the export contraction further industrial reform, emphasising the largely state-owned sectors, would reduce costs and foster growth in both output and modern sector employment.

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Bibliographic Info

Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 09-15.

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Length: 35 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:uwa:wpaper:09-15

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Keywords: China; financial crisis; fiscal expansion; oligopoly; price caps; privatisation;

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References

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  1. Richard Harris, 1983. "Applied General Equilibrium Analysis of Small Open Economies with Scale Economies and Imperfect Competition," Working Papers 524, Queen's University, Department of Economics.
  2. Don, H. & Gunasekera, B. H. & Tyers, Rod, 1990. "Imperfect competition and returns to scale in a newly industrialising economy : A general equilibrium analysis of Korean trade policy," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 223-247, November.
  3. 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.
  4. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-47, June.
  5. Holger C. Wolf & Alberto Giovannini & Jose De Gregorio, 1994. "International Evidenceon Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
  6. 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.
  7. 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.
  8. Galstyan, Vahagn A. & Lane, Philip R., 2008. "The Composition of Government Spending and the Real Exchange Rate," CEPR Discussion Papers 6903, C.E.P.R. Discussion Papers.
  9. Rod Tyers, 2008. "Competition Policy, Corporate Saving and China's Current Account Surplus," ANU Working Papers in Economics and Econometrics 2008-496, Australian National University, College of Business and Economics, School of Economics.
  10. Rod Tyers & Iain Bain, 2007. "Appreciating the Renminbi," Departmental Working Papers 2007-09, The Australian National University, Arndt-Corden Department of Economics.
  11. Robert J. Barro, 1980. "Output Effects of Government Purchases," NBER Working Papers 0432, National Bureau of Economic Research, Inc.
  12. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2011. "Structural estimation and solution of international trade models with heterogeneous firms," Journal of International Economics, Elsevier, vol. 83(2), pages 95-108, March.
  13. Jahangir Aziz & Li Cui, 2007. "Explaining China's Low Consumption," IMF Working Papers 07/181, International Monetary Fund.
  14. 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.
  15. Corden, W. Max, 1994. "Economic Policy, Exchange Rates, and the International System," OUP Catalogue, Oxford University Press, number 9780198774099, September.
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Cited by:
  1. 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.
  2. Rod Tyers, 2013. "Looking Inward for Transformative Growth in China," CAMA Working Papers 2013-48, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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