Combating China's export contraction: Fiscal expansion or accelerated industrial reform?

Rodney Tyers and Ling Huang

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Initially, the global financial crisis caused a surge of financial inflows to China, raising investment, but this abated in 2008, leaving a substantial contraction in export demand. The government’s key response was to commit to an unprecedented fiscal expansion. Two often ignored consequences are, first that government spending is on non-traded goods and services and so enlarges the consequent real appreciation and, second, that a more inward-looking economy causes firms to face less elastic demand and hence to increase oligopoly rents, further enlarging the real appreciation. Both are important for China because of the contribution of its real-exchange-rate sensitive, low-margin labour-intensive export sector to total employment. An economy-wide analysis is offered, using a model that takes explicit account of oligopoly behaviour. The results suggest that a conventional fiscal expansion would further contract the Chinese economy. On the other hand, notwithstanding the export contraction further industrial reform, emphasising the largely state-owned sectors, would reduce costs and foster growth in both output and modern sector employment.

JEL-codes: D43 D58 F32 L13 L43 L51 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2009-01
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Combating China's Export Contraction: Fiscal Expansion or Accelerated Industrial Reform? (2009)
Working Paper: Combating China’s Export Contraction: Fiscal Expansion or Accelerated Industrial Reform? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2009-02

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