A Real Model of Transitional Growth and Competitiveness in China

By Leslie Lipschitz, Genevieve Verdier, Celine Rochon

April 1, 2008

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Leslie Lipschitz, Genevieve Verdier, and Celine Rochon. A Real Model of Transitional Growth and Competitiveness in China, (USA: International Monetary Fund, 2008) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Foreign direct investment, Income, Labor, Labor mobility, Wages

Keywords: Exchange rate, Open economy, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/099
Stock No:

WPIEA2008099
ISBN:

9781451869606
ISSN:

1018-5941

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