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Is the Chinese Growth Miracle Built to Last?

41 Pages Posted: 6 Sep 2007  

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

Date Written: August 2007

Abstract

Is the Chinese growth miracle - a remarkably high growth rate sustained for over two decades - likely to persist or are the seeds of its eventual demise contained in the policies that have boosted growth? For all its presumed flaws, the particular approach to macroeconomic and structural policies that has been adopted by the Chinese government has helped to deliver high productivity and output growth, along with a reasonable degree of macroeconomic stability. In tandem with a benign international environment, this approach makes it unlikely that the economy will face a collapse in growth. But there comes a point when the policy distortions needed to maintain this approach could generate imbalances, impose potentially large welfare costs, and themselves become a source of instability. The traditional risks faced by emerging market economies, especially those related to having an open capital account, do not loom large in the case of China. In the process of securing protection against external risks, however, Chinese policymakers may have increased the risks of internal instability. There are a number of factors that could trigger unfavorable economic dynamics that, even if they don't rise to the level of a crisis, could have serious adverse repercussions on growth and welfare. The flexibility and potency of macroeconomic tools to deal with such negative shocks is constrained by the panoply of policies that has supported growth so far.

Keywords: macroeconomic policies, exchange rate flexibility, capital account liberalization, financial sector reforms

JEL Classification: F3, E5, O1

Suggested Citation

Prasad, Eswar S., Is the Chinese Growth Miracle Built to Last? (August 2007). IZA Discussion Paper No. 2995. Available at SSRN: https://ssrn.com/abstract=1012561

Eswar S. Prasad (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

440 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

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Ithaca, NY 14853-7601
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Brookings Institution ( email )

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Washington, DC 20036
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NBER ( email )

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Cambridge, MA 02138
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IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
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