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A Real Model of Transitional Growth and Competitiveness in China

  • Leslie Lipschitz
  • Geneviève Verdier
  • Céline Rochon

We present a stylized real model of the Chinese economy with the objective of explaining two features: (1) domestic production is highly competitive in the sense that an accumulation of capital that raises the marginal product of labor elicits increases in employment and output rather than only in wages; and (2) even though the domestic saving rate is high, foreign direct investment is also substantial. We explain these features in terms of a conventional neoclassical growth model-with no monetary or nominal exchange rate policy-by including two aspects of the economy explicitly in the model: (1) low production wages are sustained by a large reserve army of rural labor which drives internal migration, and (2) domestic capital is distinct from importable capital and complementary with it in production. The results suggest that underlying real phenomena are important in explaining recent history; while nominal renmimbi appreciation may dampen price and wage increases, it would probably not change the real factors that have sustained rapid growth.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/99.

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Length: 31
Date of creation: 01 Apr 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/99
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  1. Joshua Hojvat Gallin, 2004. "Net Migration and State Labor Market Dynamics," Journal of Labor Economics, University of Chicago Press, vol. 22(1), pages 1-22, January.
  2. Eswar Prasad & Shang-Jin Wei, 2007. "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 421-480 National Bureau of Economic Research, Inc.
  3. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Convergence," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 223-51, April.
  4. Robert J. Barro & N. Gregory Mankiw & Xavier Sala-i-Martin, 1994. "Capital mobility in Neoclassical models of growth," Economics Working Papers 82, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2007. "Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 103-132 National Bureau of Economic Research, Inc.
  6. Morris Goldstein & Nicholas R. Lardy, 2005. "China's Role in the Revived Bretton Woods System: A Case of Mistaken Identity," Working Paper Series WP05-2, Peterson Institute for International Economics.
  7. repec:imf:imfwpa:06/265 is not listed on IDEAS
  8. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
  9. repec:imf:imfwpa:03/210 is not listed on IDEAS
  10. Robert J. Barro & Xavier Sala-i-Martin, 1991. "Convergence across States and Regions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 107-182.
  11. Jordan Rappaport, 1999. "How does labor mobility affect income convergence?," Research Working Paper 99-12, Federal Reserve Bank of Kansas City.
  12. Kuijs, Louis, 2006. "How will China's saving-investment balance evolve ?," Policy Research Working Paper Series 3958, The World Bank.
  13. Ben S. Bernanke & Refet S. Gürkaynak, 2002. "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 11-72 National Bureau of Economic Research, Inc.
  14. Lane, Philip R, 2001. "International Trade and Economic Convergence: The Credit Channel," Oxford Economic Papers, Oxford University Press, vol. 53(2), pages 221-40, April.
  15. Au, Chun-Chung & Henderson, J. Vernon, 2006. "How migration restrictions limit agglomeration and productivity in China," Journal of Development Economics, Elsevier, vol. 80(2), pages 350-388, August.
  16. Eswar S. Prasad & Raghuram G. Rajan, 2006. "Modernizing China's Growth Paradigm," American Economic Review, American Economic Association, vol. 96(2), pages 331-336, May.
  17. Blanchard, Olivier J & Giavazzi, Francesco, 2006. "Rebalancing Growth in China: A Three-Handed Approach," CEPR Discussion Papers 5403, C.E.P.R. Discussion Papers.
  18. Appleton, Simon & Knight, John & Song, Lina & Xia, Qingjie, 2002. "Labor retrenchment in China: Determinants and consequences," China Economic Review, Elsevier, vol. 13(2-3), pages 252-275.
  19. Easterly, William, 1993. "How much do distortions affect growth?," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 187-212, November.
  20. Jahangir Aziz, 2006. "Rebalancing China's Economy: What Does Growth Theory Tell Us?," IMF Working Papers 06/291, International Monetary Fund.
  21. Franco Modigliani & Shi Larry Cao, 2004. "The Chinese Saving Puzzle and the Life-Cycle Hypothesis," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 145-170, March.
  22. John Knight & Jinjun Xue, 2006. "How High is Urban Unemployment in China?," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 4(2), pages 91-107.
  23. Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers 4375, C.E.P.R. Discussion Papers.
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