Analysing the Short Run Effects of China's Economic Reform Agenda
54 Pages Posted: 20 Mar 2014 Last revised: 21 Mar 2014
Date Written: March 1, 2014
China’s size limits its capacity to source further growth from exports and so the inevitable turn inward is in progress, as suggested by declining gross flows on its balance of payments relative to its GDP. Thus far, key home policy drivers have been fiscal expansion and public investment, though provincial indebtedness will constrain these in future and growth will be driven by the government’s reform agenda, which includes further industrial reform and “internationalisation”. The short run effects of these domestic policy and external shocks are examined using a model of the Chinese economy that takes explicit account of oligopoly behaviour. The results confirm that further fiscal expansions, even with large public investment components, will not contribute the major share of new growth, but industrial reform in heavy manufacturing and services would reduce costs and foster growth in output, private consumption and modern sector employment. At the same time, while China’s private investment, and hence its overall performance, will be sensitive to the uncertain effects of internationalisation increased nominal exchange rate flexibility would offer a reliable cushion.
Keywords: China, fiscal policy, industry policy reform, oligopoly, price caps, privatisation, internationalisation, capital account liberalization
JEL Classification: C54, C68, D58, E17, E62, L13, L43
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