WTO Membership for China and Its Impact on Growth, Investment and Consumption: A New Flexible Keynesian Approach

The November 2001 accession of China to the WTO promises increased investment (already the world’s second in 1998 and third in 1999) particularly from the EU into the country. This investment is crucial to China’s expanding trade with the rest of the world and will contribute significantly to its growth. The paper focuses on this nexus, presents a new and flexible approach to modelling the impact of China’s WTO membership on its investment and growth within the general framework of multi-sectoral economies (Tran Van Hoa, 1992), and applies it to study this anticipated impact using recent World Bank data. Our approach dominates in efficiency the CGE and other neo-classical methods (such as used in GTAP models) in its data-consistent structure. The paper then briefly describes the fundamentals of the new two-stage hierarchical information (2SHI) or empirical Bayes estimation and forecasting theory (Tran Van Hoa, 1985, 1986a, 1993b, Tran Van Hoa and Chaturvedi, 1988, 1990, 1997), summarises its superior MSE properties for forecasts and simulation, and reports substantive empirical findings on China’s investment and growth given its trade enhancement positions. As an illustration of applications of our approach, impact on China’s growth over a 7-year timeframe of a price reduction and increased government spending, assumed as a result of the country’s WTO membership, is also investigated and briefly its policy implications discussed.