External Demand Decline‐caused Industry Collapse in China

Pingyao Lai

China & World Economy, 2010, vol. 18, issue 1, 47-62

Abstract: Industry collapse has become an important phenomenon in China's recent economic growth fluctuation. This paper develops a simple model to analyze this phenomenon. Our analysis focuses on an external demand decline‐caused industry collapse. The model reveals that the combination of large‐scale decline in external demand with a horizontal domestic supply curve causes the domestic export industry to undergo a sharp decrease in output in a short period of time, which further leads to a sharp decline in employment. The conventional stabilization policy is less effective in coping with this sudden industry collapse. The Chinese Government needs to formulate an appropriate structural industry stabilization policy to cope with the sudden industry collapse, and, in particular, to implement a direct employment aid program to deal with unemployment resulting from the industry collapse.

Date: 2010
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