Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

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On Deep-Rooted Problems in China’s Economy
Guoqiang Tian
Front Econ Chin. 2011, 6 (3): 345-358.

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China’s economy is currently at a crossroad leading to two different directions. One is to further deepen the reform, concentrate on crucial aspects and relax control over details, govern by non-intervention and let the market play an increasing role and lead the economy; while the other is to enhance the state sector with weakening the private sector, and let the government play a greater role and lead the economy. Which direction should China head for? The answer would undoubtedly be the former. As such, this paper argues that there does not exist the so-called “China Model” and attributes the deep-seated problems caused by those misconceptions in China’s economy to three pairs of “over-emphasis” versus “under-emphasis”, namely, over-emphasis on the government versus under-emphasis on the market, over-emphasis on enriching state versus under-emphasis on enriching the people, and over-emphasis on development versus under-emphasis on public service. Moreover, in regard to how to solve these problems, the paper proposes to further advance the two fundamental transformations of government functions: (1) to transform from a development-oriented government to a service-oriented government, and (2) to transform from an omnipotent government to a limited government.

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Rationalizing Multiple Consumption-Saving Puzzles in a Unified Framework
Kevin X. D. Huang, Frank Caliendo
Front Econ Chin. 2011, 6 (3): 359-388.

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Empirical evidence suggests that it may cost time, effort, and resources to implement an optimal consumption-saving plan, although the cost may differ across individuals. This paper explores the implications of such friction. We begin by documenting a series of facts on consumption and savings over the life cycle, each of which goes against the prediction of the standard life-cycle model. While the existing studies demonstrate how various permutations of the benchmark model may help resolve one or another of these puzzles, it appears difficult to jointly rationalize even a small subset of these facts within the existing theories. We then incorporate a feature of costly implementation into the benchmark model and show that the addition of this one feature moves in the right direction in jointly resolving all these puzzles. This friction is the sole and common mechanism in our model for rationalizing this series of facts, as we intentionally abstract from the mechanisms explored in the existing literature that are known to help explain one or another of these facts, in order to isolate the role of costly implementation. The implementation costs in the model are small, yet our results show that the mechanism can be important in complementing the existing theories to help account for these consumption and saving facts in a unified framework.

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The Quiet Life of a Monopolist: The Efficiency Losses of Monopoly Reconsidered
Jun Chen, Zhiqi Chen
Front Econ Chin. 2011, 6 (3): 389-412.

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We study the efficiency losses of monopoly in a model where the firm’s total cost of production decreases with the manager’s effort to control cost. In contrast to the existing analyses of oligopolistic and monopolistically competitive markets that find an ambiguous relationship between competition intensity and managerial slack, we demonstrate that, under the same kind of cost condition, monopoly unambiguously reduces effort level and, in the case where ownership and control are separate, magnifies the effects of the moral hazard problem. Furthermore, under an alternative cost condition monopoly raises effort level rather than reducing it. In such a situation the separation of ownership and control may mitigate the productive inefficiency of monopoly.

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The Underdevelopment of Service Industry in China: An Empirical Study of Cities in Yangtze River Delta
Jianghuai Zheng,, Yu Wang
Front Econ Chin. 2011, 6 (3): 413-446.

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The service industry in China is underdeveloped, in comparison with not only the past experience of developed countries at the similar level of GDP per capita, but also other similar developing countries at present. We define this deviation of China’s service industry from the development trend in other countries as the “development deviation puzzle,” and propose a conceptual framework based on the “manufacturing cost disease” hypothesis to understand the reasons behind this puzzle. We test our hypothesis using the data from the urban cluster in Yangtze River Delta. The results indicate that labor productivity growth in service industry is driven by capital investment and the “development deviation puzzle” is indeed rooted in the “manufacturing cost disease.” Our analysis suggests that, to correct the underdevelopment of service industry, the strategy of investment-driven industrialization and urbanization must be changed. Expansion of producer services is important in increasing the intensities of human capital and foreign investment.

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Labor Mobility, Marketization and Urban Income Change: Potential Rural-Urban Harmonization or Not
Kunrong Shen, Jixiang Yu, Jian Li
Front Econ Chin. 2011, 6 (3): 447-463.

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Previous literature omitted marketization process, a distinct phenomenon in transitional China, when the relationship between immigrants and indigenous urban income is investigated. We find that (1) marketization is a key factor of rural-urban harmonization; (2) segmentation of labor market has no real effect on urban income change since it may be evaded partly by rural labor; (3) the key determinants of urban income change are the cross effect between marketization and mobility, openness, and government spending; and (4) the marginal effect of immigrants is positive in some regions although it is averagely negative during the sample period. Rural-urban harmonization is totally possible if marketization process continues.

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International Trade and Technological Progress in China: Evidence from Time Series
Yaojun Yao
Front Econ Chin. 2011, 6 (3): 464-478.

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Using annual time series data (1983-2007), this paper examines the nexus between international trade and technological progress in China. The time series properties of the data are analyzed by bounds testing approach and vector error-correction model. The empirical results show that, it is not international trade volume and export trade volume but the import trade volume that is cointegrated with total factor productivity. The paper also finds that, in the long run, there is a reciprocal Granger causal relationship between the change of import trade volume and the change of total factor productivity, and in the short run, there is no evidence to support the Granger causality between these changes of the two variables.

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The Trade Destruction Effect and Trade Diversion Effect of RMB Appreciation
Hongjin Xiang, Zheng Zhan, Mingyong Lai
Front Econ Chin. 2011, 6 (3): 479-493.

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This paper examines how Chinese RMB appreciation affects China and its competitor’s exports to the third market at industry level. We develop a two-country competition model to analyze the trade destruction effect and trade diversion effect of RMB appreciation. The theoretical analysis shows that the appreciation of RMB has negative impacts on China’s exports and positive impacts on its competitor’s exports. We then empirically test how the appreciation of RMB to the US dollar affects China’s and India’s textiles and apparel exports to the US from 1995Q1 to 2008Q4. The empirical results show that an 1% appreciation of RMB to US dollar will reduce China’s exports of textiles & apparel to the U.S. by 2.63% and raise the India’s exports of textiles & apparel to the U.S. by 2.71%.

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