A Real Model of Transitional Growth and Competitiveness in China
IMF Working Papers, April 1, 2008
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- A Real Model of Transitional Growth and Competitiveness in China
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Bibliographic details
- Authors: Leslie Lipschitz, Celine Rochon
- Published: April 1, 2008
- Series: IMF Working Papers
Model overview
- Stylized real model of the Chinese economy built on a conventional neoclassical growth framework (no monetary or nominal exchange rate policy).
- Two explicit aspects incorporated into the model:
- Low production wages are sustained by a large reserve army of rural labor which drives internal migration.
- Domestic capital is distinct from importable capital and complementary with it in production.
Key findings
- The model explains two observed features:
- Domestic production is highly competitive: an accumulation of capital that raises the marginal product of labor elicits increases in employment and output rather than only in wages.
- Despite a high domestic saving rate, foreign direct investment is also substantial.
- The results suggest that underlying real phenomena are important in explaining recent history in China.
- While nominal renmimbi appreciation may dampen price and wage increases, it would probably not change the real factors that have sustained rapid growth.
Policy implications and interpretation
- Emphasis on real (structural) factors—labor mobility from rural to urban areas and the complementarity between domestic and importable capital—rather than nominal exchange rate policy alone to explain competitiveness and growth dynamics.
- Nominal renminbi appreciation could moderate inflationary pressures (price and wage increases) but is unlikely to alter the fundamental real drivers of rapid growth identified by the model.