Abstract
This paper is based on a growth model that is consistent with salient features of the recent “New Normal” growth experience in China: slowdown of growth rate, low level of inflation and unemployment, decreasing returns on capital investment, extensive reallocation among agriculture, manufacturing and modern service sectors, rising share of consumption, improvement of wealth distribution, and reduced foreign surplus. The building blocks of the theory are asymmetric technology diffusions from FDI firms among various sectors and nominal wage rigidity in the labor market. Due to the asymmetric technology diffusion among different sectors, manufacturing firms enjoy a more rapid productivity progress via the process of learning by doing in a processing on order economy. Thus manufacturing sectors serve as the engine in the past years’ economic growth in China. Through the competition in labor market, trends of wage equalization drive the migration of residents from agriculture to manufacturing and modern service sectors. Moreover, with a larger share of processing on order firms, China tends to further enlarge her foreign surplus in a faster pace. However, the result of this paper shows that since the exchange rate reform on July 21st 2005, RMB has appreciated accumulatively by 35%, combined with the wage rigidity in labor market, FDI firms in manufacturing sectors face an increasing level of cost in terms of increasing wage expenditure. Incumbent low profitable firms exit and potential entrants with new technology no more settle down. Thus, rapid productivity progress ceases in manufacturing sector. Not only the growth rate slows down, but also large number of unemployed population reallocates back to modern service and agriculture sectors. Dwindling share of manufacturing sectors reduced the foreign surplus by the drops of processing on order infra-firm trade of FDI firms.
Highlights
The Chinese economy steps into a phase of “New Normal” with the slowdown of growth rate and TFP progress, low level of inflation and unemployment, decreasing returns on capital investment, extensive reallocation among agriculture, manufacturing and modern service sectors, rising share of consumption, improvement of wealth distribution, and reduced foreign surplus and trade volume
This paper mainly focuses on the technology diffusion and learning-by-doing effects in the manufacturing sector, which serves as the engine of the economic growth
This paper is based on a growth model augmented with asymmetric technology diffusions from FDI firms among various sectors and wage rigidity in the labor market
Summary
Since the domestic reform and opening-up to the outside world in 1978, trade, like in the nineteenth century, serves as the engine of economic growth in China. With the further participation into the international labor division system, say WTO in 2001, the Chinese economy, in the context of its comparative advantage, went on a path of taking off: sustained acceleration in growth rate, widened ranges of FDI, continued TFP progress, extensive reallocation among agriculture and manufacturing sectors, and constant return to capital investment. The Chinese economy steps into a phase of “New Normal” with the slowdown of growth rate and TFP progress, low level of inflation and unemployment, decreasing returns on capital investment, extensive reallocation among agriculture, manufacturing and modern service sectors, rising share of consumption, improvement of wealth distribution, and reduced foreign surplus and trade volume
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