A Real Model of Transitional Growth and Competitiveness in China

36 Pages Posted: 1 Jul 2008

See all articles by Leslie Lipschitz

Leslie Lipschitz

IMF Institute

Celine Rochon

University of Oxford; IMF

Genevieve Verdier

International Monetary Fund (IMF) - IMF Institute

Date Written: April 2008

Abstract

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.

Keywords: Working Paper, China, People's Republic of, Economic growth, Competition, Foreign investment, Investment, Savings, Labor supply, Wages, Prices, Exchange rates

Suggested Citation

Lipschitz, Leslie and Rochon, Celine and Verdier, Genevieve, A Real Model of Transitional Growth and Competitiveness in China (April 2008). IMF Working Paper No. 08/99, Available at SSRN: https://ssrn.com/abstract=1153763

Leslie Lipschitz (Contact Author)

IMF Institute ( email )

700 19th St. NW
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202-623-8866 (Phone)

Celine Rochon

University of Oxford ( email )

Park End Street
Oxford, Oxfordshire OX11HP
United Kingdom

IMF ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Genevieve Verdier

International Monetary Fund (IMF) - IMF Institute ( email )

700 19 th Street NW
Washington, DC 20431
United States

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