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A Real Model of Transitional Growth and Competitiveness in China

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Author Info
Céline Rochon
Geneviève Verdier
Leslie Lipschitz

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Abstract

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 pages
Date of creation: 25 Apr 2008
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Handle: RePEc:imf:imfwpa:08/99

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Related research
Keywords: Working Paper ; China; People's Republic of ; Economic growth ; Competition ; Foreign investment ; Investment ; Savings ; Labor supply ; Wages ; Prices ; Exchange rates ;

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    Other versions:
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    Other versions:
  4. 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. [Downloadable!]
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    Other versions:
  6. Easterly, William & DEC, 1993. "How much do distortions affect growth?," Policy Research Working Paper Series 1215, The World Bank. [Downloadable!]
    Other versions:
  7. John Knight & Jinjun Xue, 2006. "How High is Urban Unemployment in China?," Journal of Chinese Economic and Business Studies, Taylor and Francis Journals, vol. 4(2), pages 91-107, July. [Downloadable!] (restricted)
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  11. Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers 4375, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  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. [Downloadable!]
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  17. 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.
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  19. Ray Brooks & Tao Ran, 2003. "China's Labor Market Performance and Challenges," IMF Working Papers 03/210, International Monetary Fund.
  20. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery," NBER Working Papers 10626, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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