Frontiers of Economics in China

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Export Performance of China: A Constant Market Share Analysis
Nidhi Bagaria, Saba Ismail
Front. Econ. China    2019, 14 (1): 110-130.   https://doi.org/10.3868/s060-008-019-0007-9
Abstract   PDF (3063KB)

In the light of the fact that there has been substantial growth in China’s exports in last three decades, particularly after China joined the WTO in 2001, this article investigates the major sources of China’s export performance during 2002–2014 by using the constant market share (CMS) model. In this study, exports are further decomposed in three categories based on their technological intensity using Lall (2000) classification on 3 digit SITC Revision-3 data provided by UN Comtrade via WITS database. The categories are high technology, medium technology and low technology. It is found that growth of China’s exports has, moreover, remained above world exports growth in all three categories during the period of study. The analysis reveals that export performance is mainly attributed to its competitive strength in the global market, though decreasing trend has been observed in the competitiveness of all three categories. Increasing cost of labor and appreciating RMB could be the causes behind decreasing competitiveness of Chinese exports. Product structure effect, on an average, has turned out to be negative in all the categories which is the most disturbing aspect of China’s export performance. On the other hand, geographical structure effect has positive impact on export performance of high-technology based exports whereas it has negative impact on export performance of low-technology and medium-technology based exports. China being the world’s largest exporter, decreasing competitiveness and wrong product structure effect could adversely influence its export performance in particular and its growth in general.

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Tackle China’s Economic Complexities by Deepening Reform and Opening Up: Macroeconomic Outlook, Policy Simulations, and Reform Implementation—A Summary of the Annual SUFE Macroeconomic Report (2018–2019)
Kevin X.D. Huang, Guoqiang Tian, Yuqin Wang
Front. Econ. China    2019, 14 (1): 80-109.   https://doi.org/10.3868/s060-008-019-0006-2
Abstract   PDF (757KB)

Faced with complicated external and internal challenges, China’s economy continues to see sluggish growth in 2018. Rapid accumulation of household debts, exacerbation in income inequality, tightened real sector liquidity, escalated trade tensions with the US, and weakened external demand pose key problems in China’s macroeconomic landscape. The status quo is exacerbated by soaring uncertainty and weakening confidence in the face of persistent resource misallocations and institutional distortions, which cast more shadow on the already dampened consumer sentiment, sluggish private investment growth, and fallen foreign reserves. This summary report highlights the urgency of deeper structural reforms for tackling the various internal and external problems. Based on the IAR-CMM model, with both cyclical and secular factors taken into consideration, our baseline forecast of real GDP growth rate is 6.4% (6.1% using more reliable instead of the official data) in 2019. Alternative scenario analyses and policy simulations are conducted to assess the consequences of possible downside risks and the corresponding policy options needed to ensure the assumed growth targets. These analyses lead us to conclude that comprehensively deepening reform and opening up, which should be both rule-of-law based and market-oriented, with well-designed and well-conceived strategies that properly weigh short-, medium-, and long-term benefits and costs, should continue to be set as the guidance for China’s transformation into a phase with sustainable and high-quality growth.

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China’s Growth Deceleration: Causes and Future Growth Prospect
Justin Yifu Lin
Front. Econ. China    2019, 14 (1): 26-52.   https://doi.org/10.3868/s060-008-019-0003-1
Abstract   PDF (1314KB)

China’s growth decelerated substantially after 2010. This paper argues that the main cause for the deceleration is external and cyclical, China has a potential growth rate of 8%, the economy has good investment opportunities and resources, and China is likely to achieve a medium-high growth rate of around 6.5% in the coming years. The paper also examines the various structural reforms that can help China to release its growth potential and complete the transition to a well-functioning market economy.

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The Slowdown of China’s Economic Growth in Terms of Statistics
Xianchun Xu
Front. Econ. China    2019, 14 (1): 72-79.   https://doi.org/10.3868/s060-008-019-0005-5
Abstract   PDF (514KB)

The paper discusses the falling back of economic growth from four aspects. From the aspect of production, the traditional industry has the greatest impact on the falling back of economic growth. From the perspective of demand, the consumption demand, investment demand, and export demand have jointly caused the falling back of the economic growth, in which the pulling function of investment demand is more obvious. From the standpoint of cardinality, the growth rate of the economy is restrained by the increase of economic scale. From the perspective of production factors, changes in the supply of labor force affect the falling back of economic growth rate.

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Deceleration of China’s Economic Growth: Causes and Countermeasures
Guoqiang Tian
Front. Econ. China    2019, 14 (1): 3-25.   https://doi.org/10.3868/s060-008-019-0002-4
Abstract   PDF (5250KB)

China’s economic growth has been declining continuously at a rapid rate since 2011. It dropped to 6.7% in 2016 by more than 3% from nearly 10% average growth rate during 1979–2010. As for its causes, there are different interpretations among Chinese economists. One of the interpretations, which is held by some scholars including Justin Yifu Lin, is that external and cyclical factors are the main causes for the decline. The author disagrees with this viewpoint and holds that the root cause of economic deceleration is the delay in deep institutional reforms. An inclusive economy and state coercive capacity are two essential ingredients for sustaining economic prosperity. China must further enhance economic inclusiveness, and accelerate its transition into an efficiency-driven and innovation-driven economy through deepened comprehensive marketization reforms. Meanwhile, it should further strengthen the rule of law to build a limited government that is capable, accountable, effective and caring.

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Coordination Costs, Market Size, and the Choice of Technology
Haiwen Zhou
Front. Econ. China    2019, 14 (1): 131-148.   https://doi.org/10.3868/s060-008-019-0008-6
Abstract   PDF (265KB)

Impact of coordination costs and market size on a firm’s choice of technology is studied in a general equilibrium model in which firms engage in oligopolistic competition. A firm establishes an organizational hierarchy to coordinate its production. First, it is shown that an increase in market size leads a firm to choose a more specialized technology. Second, surprisingly, a robust result is that an increase in the level of coordination efficiency leads a firm to choose a less specialized technology.

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Growth and Cycles in China’s Unbalanced Development: Resource Misallocation, Debt Overhang, Economic Inequality, and the Importance of Structural Reforms
Kevin X.D. Huang
Front. Econ. China    2019, 14 (1): 53-71.   https://doi.org/10.3868/s060-008-019-0004-8
Abstract   PDF (935KB)

The recent China’s growth slowdown is both cyclical and secular, driven by external and internal factors. In this article, I highlight several key internal factors that have hindered China’s growth in recent years. These include worsening misallocation of resources and declining growth of total factor productivity, plus rising household income inequality and debt overhang in the face of tightened liquidity constraint. All of these show the urgency for deepening reforms in China’s key macroeconomic landscapes in order to remove institutional barriers and distortions deep-rooted in the nation’s economic and financial structure, and to correct fundamental imperfections of its social- economic system. I argue that such reforms are of critical importance for China’s pursuit of healthy and sustainable growth and of balanced and adequate development going forward.

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Premature Deindustrialisation in the Developing World
Dani Rodrik
Front. Econ. China    2017, 12 (1): 1-6.   https://doi.org/10.3868/s060-006-017-0001-9
Abstract   PDF (1015KB)

As developed economies have substituted away from manufacturing towards services, so too have developing countries—to an even greater extent. Such sectoral change may be premature for economies that never fully industrialised in the first place. This article presents evidence that countries with smaller manufacturing sectors substitute away from manufacturing to a larger extent, suggesting a trade channel through which falling international relative prices of manufacturing lead price-taking developing economies to substitute accordingly.

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Are Central and Western Chinese Provinces Catching up with the East? An Empirical Analysis of Convergence Processes across China
Marlies Schütz, Han Li, Nicole Palan
Front. Econ. China    2017, 12 (4): 571-606.   https://doi.org/10.3868/s060-006-017-0024-4
Abstract   PDF (1748KB)

Since the Reform and Opening-up policy had been implemented in 1978, mainland China has experienced significant economic growth, with GDP rising on an annual average of about 10%. However, this growth miracle was far from being evenly distributed across space. It is, therefore, the aim of this paper to study the evolution of spatial disparities in economic development across the country between 1993 and 2012, a period which is characterized by all provinces having access to international markets and being open for international investors. We seek to answer the question of whether Central and Western Chinese provinces were catching up with the East. We define ‘catching up’ as a growing similarity among spatial units. Convergence processes might manifest in four dimensions, including (1) the spatial allocation of employment, value added generation and the fixed capital stock, (2) forms of technical change, (3) productivity patterns, and (4) income distribution. Results show that persistent phases of convergence appeared. However, in some cases the catching up of China’s less developed parts with the flourishing East was limited to only a few Western and Central Chinese provinces. A high degree of path-dependency in economic development prevented catching up from taking place in a more uniform manner.

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Industrialized Innovation: The Connection of Science & Technology Innovation with Industrial Innovation
Yinxing Hong, Yao Lu, Jianghuai Zheng
Front. Econ. China    2017, 12 (3): 400-417.   https://doi.org/10.3868/s060-006-017-0017-8
Abstract   PDF (302KB)

In light of the relationship and the current disconnection between science & technology (S&T) innovation and industrial innovation in China, it is necessary to put forward and emphasize the concept of industrialized innovation. Industrialized innovation is the bridge and intermediation between S&T innovation and industrial innovation, which is not only a concept, but also a mechanism and combination force. There are two ways to achieve industrialized innovation: through industry-university-research coordination and through technology entrepreneurship. The meaning of industry-university-research coordination is not about coordination among industry, university and research sectors in an institutional sense; rather it is about the coordination of the functions of cultivation and development in new industries, new technologies, and new talents of industrialized innovation. The incentive mechanism for industrialized innovation should motivate not only innovation but also coordination. Technology entrepreneurship is the industrialization of new technology through business start-ups, which occurs beyond the stage of incubation and development of new technology. The capital of technology entrepreneurship is the set consisting of knowledge capital manifested through technological innovation, human capital manifested through entrepreneurs, and physical capital in the form of venture capital. While physical capital is indispensable, knowledge capital and human capital play the decisive role in technology entrepreneurship. The industrialization of technological innovation involves two requirements: one is to enable the new technology industry to achieve a large scale rapidly, and the other is to fully realize the potential value of the new technology. Both requirements are reliant on effective innovation in business models.

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Examining the Factors Affecting Personal Income: An Empirical Study Based on Survey Data in Chinese Cities
Lihui Wang, Junyi Shen
Front. Econ. China    2017, 12 (4): 515-544.   https://doi.org/10.3868/s060-006-017-0022-0
Abstract   PDF (441KB)

This paper empirically analyzes the factors affecting personal income in urban China using survey data of the “Preference and Life Satisfaction Survey” conducted by the Global COE project of Osaka University from 2009 to 2013. We consider education level as an endogenous variable, and both ordinary least squares (OLS) regression and instrumental variable (IV) regression are performed. We find a number of factors, such as sex, age, education, and marriage that significantly affect personal income. In addition, differences between different occupations are also investigated.

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An Overlapping-Generations Model of Firm Heterogeneity in Economic Development
Yu Chen, Haiwen Zhou
Front. Econ. China    2017, 12 (4): 660-676.   https://doi.org/10.3868/s060-006-017-0027-5
Abstract   PDF (323KB)

We study firm heterogeneity in economic development in an overlapping-generations general equilibrium model in which manufacturing firms engage in oligopolistic competition. Individuals differ in their productivities in the manufacturing sector and choose to become entrepreneurs or workers. The model is surprisingly tractable. In the steady state, an increase in the entry barrier in the manufacturing sector or an increase in the percentage of income spent on the agricultural good decreases the wage rate, but the level of output in the manufacturing sector does not necessarily decrease. An increase in the degree of patience of an individual increases the steady state wage rate and the capital stock. Even with increasing returns in manufacturing and constant returns in agriculture, neither the wage rate nor the output level in the manufacturing sector may increase with population size.

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Audit Competition in Insurance Oligopolies
Nicolas Boccard, Patrick Legros
Front. Econ. China    2017, 12 (3): 371-399.   https://doi.org/10.3868/s060-006-017-0016-1
Abstract   PDF (762KB)

We provide a simple framework for analyzing how competition affects the choice of audit structures in an oligopolistic insurance industry. When the degree of competition increases, fraud increases but the response of the industry in terms of investment in audit quality follows a U-shaped pattern. Following increases in competition, the investment in audit quality will decrease if the industry is initially in a low competition regime while it will increase when the industry is in a high competition regime. We show that firms will benefit from forming a joint audit agency only when the degree of competition is intermediate; in this case, cooperation might improve total welfare and we analyze the effects of contract innovation on the performance of the industry.

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Regional and Sectoral Patterns and Determinants of Comparative Advantage in China
William Charles Sawyer, Kiril Tochkov, Wenting Yu
Front. Econ. China    2017, 12 (1): 7-36.   https://doi.org/10.3868/s060-006-017-0002-6
Abstract   PDF (1244KB)

China’s export performance is marked by large regional disparities which affect trade patterns at the national level. This paper uses data from input-output tables to estimate the comparative advantage of Chinese provinces in the three main economic sectors over the period 1992–2007. In contrast to existing studies, we include the services sector in the analysis and construct not only indices of revealed comparative advantage for overall trade, but also bilateral indices for interprovincial trade. The results indicate that West and Central China have a comparative advantage in agriculture/mining, coastal provinces in manufacturing, and metropolitan provinces in services. However, interprovincial trade exhibits a more complex pattern. Regression analysis identifies labor endowments as the key determinant of comparative advantage in total trade, while physical capital is the driving force in domestic trade. Human capital and government spending have a positive effect, whereas industrial loans and taxes, along with provincial trade barriers, impair comparative advantage.

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Improving the Accuracy of Estimated Returns to Education in China—Based on Employment Rate, Career Length, and Income Growth
Binlei Gong
Front. Econ. China    2017, 12 (1): 113-131.   https://doi.org/10.3868/s060-006-017-0006-4
Abstract   PDF (282KB)

Most empirical studies on the returns to education use current income to proxy for lifetime income due to the lack of longitudinal data. This simplification is found to cause biased estimates and the result is conditional on being employed. This paper quantifies the returns to education with heterogeneity in employment rates, career lengths, and income growth rates. Using data from China, this paper attempts to account for these differences across the life-cycle and estimates the returns to education in terms of lifetime income when actual lifetime earnings data are not available. The model clarifies the mathematical relationship between conditional current returns to education, unconditional current returns to education, and unconditional lifetime returns to education. This new approach explains how employment rates, career lengths, and income growth rates affect the direction and magnitude of the bias in estimating the returns to education.

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“One Belt and One Road” and Free Trade Zones—China’s New Opening-up Initiatives
Justin Yifu Lin
Front. Econ. China    2015, 10 (4): 585-590.   https://doi.org/10.3868/s060-004-015-0026-0
Abstract   PDF (187KB)

“One Belt and One Road” and Free Trade Zones are two of China’s new opening-up strategies developed in response to the changed domestic and international circumstances. Implementation of these strategies can provide China with a sounder market economic system and a better external environment. It can not only help China to further develop into a high income country, but also facilitate the industrialization and modernization of other developing countries.

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Globalization and Voluntary Environmental Management in Developing Countries
Madhu Khannaa,Yuan Liao
Front. Econ. China    2014, 9 (1): 138-163.   https://doi.org/10.3868/s060-003-014-0008-6
Abstract   PDF (255KB)

Weak capacity to enforce regulations and sanction violators, and an emphasis on economic growth in developing countries has led to concerns about worsening environmental conditions and the potential for these countries becoming pollution havens for multinational corporations. International environmental standards, voluntary programs, and public disclosure programs have gained popularity because they engage market participants in providing incentives for self-regulation and have the potential to substitute for the lack of domestic regulatory capacity. This paper analyzes the motivations for firms to undertake voluntary environmental management and reviews the empirical evidence on the type of firms participating in such initiatives and their effectiveness in improving environmental performance. We also consider the special case of China that has witnessed dramatic globalization following its acceptance into the World Trade Organization and participation by its firms in global supply chains. We conclude with a discussion of the effectiveness of these efforts as a substitute for weak regulatory and civic society pressures in these countries.

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International Trade with Increasing Returns in the Transportation Sector
Haiwen Zhou
Front. Econ. China    2014, 9 (4): 606-633.   https://doi.org/10.3868/s060-003-014-0028-0
Abstract   PDF (333KB)

In this general equilibrium framework, the transportation sector is modeled as a distinct sector with increasing returns. A more advanced technology has a higher fixed cost but a lower marginal cost of production. Even with both manufacturing firms and transportation firms engaged in oligopolistic competition and optimally choosing their technologies, the model is tractable and results are derived analytically. Technology adoptions in the manufacturing sector and transportation sector are reinforcing, and multiple equilibria may exist. Firms choose more advanced technologies and the prices decrease when the size of the population is larger.

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China’s Macroeconomic Outlook and Risk Assessment: Counterfactual Analysis, Policy Simulation, and Long-Term Governance — A Summary of Annual Report (2015–2016)
Kevin X. D. Huang,Guoqiang Tian
Front. Econ. China    2016, 11 (2): 173-191.   https://doi.org/10.3868/s060-005-016-0011-2
Abstract   PDF (5436KB)

This summary report highlights the confluence of continued downward pressures and deflation scares in the face of looming uncertainty in China’s key macroeconomic landscapes. Counterfactual analyses and policy simulations are conducted, in addition to benchmark forecasts, based on IAR-CMM model and taking into account both cyclical and secular factors. Economic deceleration is projected to continue in the short to medium term, with real GDP growth declining to 6.3% (5.5% using more reliable instead of official data) in 2016 and facing a significant risk of sliding further down in 2017. Five key factors contributing to the weak outlook, additional to frictions and impediments associated with economic transition/restructuring and lackluster domestic/external demands, are identified, including: lack of new growth/ development engine, exhaustion of government-led driving force, the crowding-out of private sectors by state-owned enterprises (SOEs) with excess capacity\capital overhang, nonperforming government sectors and officials, and twist or misinterpretation of the “New Normal.” A root cause of these problems, lying with sluggishness in China’s transformation into a market based economy, has to do with overpowered government but underpowered market in resource allocation and government underperformance in enforcing integrity and transparency in the marketplace and in providing public goods and services. At the nexus between inclusive growth and institutional transformation are market oriented and rule of law governed structural reforms and harmonious development. As such, fundamental institutional reforms that dialectically balance demand and supply side factors and properly weigh short run stabilization against long run development should be elevated to the top of the agenda.

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Inequality and Crime in China
Jiangli Zhu, Zilian Li
Front. Econ. China    2017, 12 (2): 309-339.   https://doi.org/10.3868/s060-006-017-0014-7
Abstract   PDF (706KB)

This paper attempts to investigate comprehensively, a “U”-shaped relationship between income inequality and crime rates in China after building a cost-benefit analysis model, by using time series data from 1981–2012 and panel data from 1999–2012. The empirical results show that: firstly, in the time series model, the U-shaped relationships between inequality and the total crime rate and rates of various crimes except from smuggling, are very significant in the period of 1981–2012, secondly, the panel threshold models show that inequality and crime tend to be correlated positively with each other during 1999–2012, because the inequality level during this period is much higher than the turning points of inequality estimated in the time series models, although three regions with different development levels are located in different parts of a U-shaped curve between inequality and crime.

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Decision Making and Ability: An Explanation of Elitism in China’s Government
Shiqiang Li
Front. Econ. China    2017, 12 (4): 635-659.   https://doi.org/10.3868/s060-006-017-0026-8
Abstract   PDF (471KB)

This article tries to explain elitism in China’s governmental decision making. Our model shows that the governments’ expected utility increases with a bureaucrat’s ability to make decisions under the flexible framework of delegation and communication (with separated reporting strategy). In the early of 1950s, China’s government choose a flexible decision making framework in order to efficiently manage many affairs in a complex environment. This initial choice started the process of a self-reinforcing demand for ability inside of the flexible decision making framework. With the current reforms of streamlining administrations and retreating from the market, the elitism of China’s government might reverse.

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Technical Progress and the Diffusion of Innovations: Classical and Schumpeterian Perspectives
Heinz D. Kurz
Front. Econ. China    2017, 12 (3): 418-449.   https://doi.org/10.3868/s060-006-017-0018-5
Abstract   PDF (4170KB)

The paper discusses the diffusion of new technologies from the perspective of the classical economists and Schumpeter. After a comparison of the pre- and post-technical change long-period positions of the economy, we illustrate the process of transition between the two in terms of a two-sector model. Next, we turn to a system with joint production. The fact that some products may be “bads” that need to be disposed of leads to a study of systems of production-cum-disposal. Finally, we investigate the selection pressure innovations exert on incumbent firms. An important message is that technical change cannot generally be studied within a partial framework of the analysis.

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Structural Transformation under Trade Imbalances: The Case of the Postwar U.S.
Zongye Huang
Front. Econ. China    2017, 12 (2): 228-267.   https://doi.org/10.3868/s060-006-017-0011-6
Abstract   PDF (3548KB)

A striking feature of the structural change literature is that, even though the U.S. economy is often used as a benchmark for calibration, the traditional models cannot account for the steep decline in manufacturing and rise in services in the U.S. since the late 1970s (Buera and Kaboski, 2009). In order to solve this puzzle, this paper develops a three-sector model to evaluate various factors that could have contributed to the structural transformation process from 1950 to 2005. The results show that, in addition to traditional explanations, such as non-homothetic preference and sector-biased productivity progress, international trade is another major source of structural change and is able to explain about 35.5% of the overall employment share decrease in American manufacturing. The quantitative calibration estimates that the inter-sector trade makes a moderate contribution, while trade imbalances dominate the recent contraction of manufacturing employment share. Our results suggest that calibrated models based on U.S. data have to be adjusted by trade factors.

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Asset Securitization and Welfare Compensation for House Demolition on New-Type Urbanization in China
Fuxiang Wu, Wei Duan
Front. Econ. China    2018, 13 (4): 602-634.   https://doi.org/10.3868/s060-007-018-0028-6
Abstract   PDF (514KB)

In this paper we design a compensation mechanism for the relocated households in the process of New-Type Urbanization in China. Based on the theories of dynamic rent spatial separation, bid-rent and non-renewable resource exploitation, we give a theretical look at how the current compensation mechanism shapes the welfare of relocated households. Firstly, land rent growth has a spatial difference and the growth rate of the marginal location rent is much higher than that of the mature site. Secondly, there is a demolition championship contest under the sole static money compensation, which can easily lead to land urbanization faster than population urbanization. Thirdly, in the long run the welfare loss of the household is mainly due to the absence of a dynamic compensation mechanism. Furthermore, we design a dynamic compensation mechanism based on the establishment of an asset securitization capital pool, which could be an alternative scheme in the process of New-Type Urbanization.

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China’s Investments in Skills
James J. Heckman, Shuaizhang Feng
Front. Econ. China    2018, 13 (4): 531-558.   https://doi.org/10.3868/s060-007-018-0025-5
Abstract   PDF (8146KB)

This paper discusses the benefits of investment in skills in China. We highlight the achievements China has made over time in human capital investments and the new challenges that have emerged as the country develops. To fuel China’s further economic growth and social developments, it is essential to take a more holistic view on skill investments. We suggest policies that promote both economic efficiency and social mobility.

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Local Import Competition in a Lumpy Country
Alan V. Deardorff
Front. Econ. China    2018, 13 (1): 5-14.   https://doi.org/10.3868/s060-007-018-0002-0
Abstract   PDF (441KB)

This paper examines the effects of a fall in the price of an imported good in a region of a country that is specialized in producing that good. The context is a “lumpy country” model in which factors are unable to move between locations, although in this case I assume that only labor is immobile, and that the other factor, capital, is perfectly mobile between regions. With mobile capital, the lumpy-country equilibrium can be anywhere in the factor-price equalization set, but my focus is on a region that initially produces only one good, on the border of that set. When the price of that good falls due to import competition, it would be possible for both factors to reallocate partially into production of the other good, but I assume instead that some capital simply leaves the region, so that it continues to produce only the same good that it did before. The result of this is a fall in the real wage of labor, just as under Stolper-Samuelson assumptions. I then look at production also of a non-traded good, and find that the same import competition that cheapened the traded good also cheapens the nontraded good. The result is that the region shrinks, losing capital and producing less of both goods unless the substitution in favor of the nontraded good expands its consumption out of a smaller income.

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Why Does the World Need a Reserve Asset with a Hard Anchor?
Dongsheng Di, Warren Coats, Yuxuan Zhao
Front. Econ. China    2017, 12 (4): 545-570.   https://doi.org/10.3868/s060-006-017-0023-7
Abstract   PDF (835KB)

From the 1970s, the global currency system has two features: the use of one or a few sovereign currencies as the global reserve asset and the floating exchange rate regime between major currencies. This paper points out that the costs of the dollar’s use as an international reserve currency exceed the benefits for both the US and the rest of the world. These costs include the exporting of American manufacturing as a byproduct of its current account deficit needed to supply its currency to the rest of the world. In addition to the detriment to trade from unpredictable exchange rate fluctuations, the termination of the U.S. obligation to redeem its currency for gold also removed an important restraint on deficit financing for the US and many other countries in the short-run, thus promoting excessive leverage that was a major contributor to the 2008 financial crisis. The paper suggests replacing several main countries’ currencies in international reserves with a real Special Drawing Right (SDR) issued according to currency board rules.

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Hidden Reserve Prices with Risk-Averse Bidders
Huagang Li, Guofu Tan
Front. Econ. China    2017, 12 (3): 341-370.   https://doi.org/10.3868/s060-006-017-0015-4
Abstract   PDF (469KB)

In this paper, we provide an alternative explanation for why auctioneers often keep the reserve price hidden or secret. We consider a standard independent private values environment in which the buyers are risk-averse and the seller has private information about her valuation of the object to be auctioned. The seller uses a first-price sealed-bid auction mechanism combined with either an announced reserve price or a hidden reserve price. We compare the seller’s ex ante expected profits under these two policies and find that the optimal hidden reserve price policy generates higher expected profits for the seller when the buyers are fairly risk-averse under particular restrictions on buyers’ preferences and the distributions of private values. As the number of the buyers increases, the hidden reserve price is more likely to dominate. Numerical methods are used to demonstrate the generality of our main results.

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